TIME: Almanac 1993/TIME Almanac 1993.iso/time/081489/08148900.011

Text File | 1992-09-23 | 5.6 KB | 109 lines

                                                                                BUSINESS, Page 52

Snakes in the Pits


The FBI busts 46 commodities traders in Chicago


    For six months Chicago's commodities traders had been
nervously waiting for the big shoe to drop. The FBI announced
last January that its agents had quietly penetrated the trading
pits at the Chicago Board of Trade and the Mercantile Exchange
and found them to be full of snakes. Since then the bureau's
investigation -- the most extensive ever conducted into any
financial market -- has been proceeding, not so quietly, as more
than a dozen traders have been pressed into cooperating with the
Government. Last week, with FBI director William Sessions and
U.S. Attorney General Dick Thornburgh in Chicago for the
occasion, the results were finally announced: 46 traders (out
of some 6,000) at the two institutions were indicted on charges
ranging from defrauding customers to tax evasion to
racketeering.

    And there's more to come, warned Thornburgh, saying, "This
probe is part of an expanding Department of Justice crackdown
on white-collar crime in all its various guises, from Wall
Street to LaSalle Street to Main Street. The activities
uncovered at these exchanges, the largest of their type in the
world, cannot be tolerated."

    Significantly, 18 of the traders were charged under the
often criticized Racketeer Influenced and Corrupt Organizations
Act. Originally passed by Congress in 1970 to combat organized
crime, RICO is increasingly being used as a battering ram
against the clubby defenses of financial institutions. Because
it allows prosecutors to seize all assets -- including homes,
salaries and pensions -- of those indicted, many people facing
a RICO count offer to inform on their former colleagues in
exchange for leniency. Last week Anton Valukas, the U.S.
Attorney who supervised the 2 1/2-year probe, advised both
Chicago exchanges that if the RICO-charged traders are
convicted, the prosecution intends to lay claim to their
membership seats, a $7.5 million prize.

    Although FBI agents masquerading as brokers spotted some
wrongdoing in the pits where U.S. Treasury bonds and Swiss
francs are traded, the bulk of the charges are directed at the
Board of Trade's soybean pit and the Merc's Japanese yen pit.
The yen traders have long been viewed with suspicion by other
brokers, while the old clique of soybean traders had a
reputation for playing by their own, traditional rules and
resisting interference, even from their exchange officials. The
Government has accused no fewer than 19 of the 50 soybean
brokers and 21 of the 70 yen traders of running their
commodities pits like special clubs that illegally fixed their
prices and profits, to the detriment of hundreds of customers.

    One type of shady deal was "front-running," in which a
broker profits from advance information by trading ahead of a
customer's order. A crooked broker might receive an order, for
example, to buy 250,000 bu. of soybeans at $5.85 a bu. He could
easily execute his own order to buy 50,000 bu. first. Later,
when the market reacted to the larger order by pushing prices
up to $5.95, the trader could sell his contracts, pocketing
$5,000 in profits. A second illicit practice uncovered by the
feds was "curb trading," in which brokers conspired to
consummate deals outside legal market hours "on the curb." Many
brokers even "busted" losing trades by simply destroying
evidence of the transaction. Such practices represent "more
stupidity than conspiracy," says a Board of Trade official.
"It's scratch my back and I'll scratch yours, but it's done
with the customer's money. You might as well have a gun and a
mask."

    Since the federal sting was disclosed in January, the
exchanges have scrambled to put their houses in order.
Disciplinary actions at the Board of Trade have jumped to 119
so far this year, from 55 in the same period last year. During
that time, member fines at the Merc have increased eightfold --
to $1.9 million. The day after the indictments were published,
the Board of Trade announced it would initiate a $1 million
upgrade in its computerized surveillance program as well as
triple its minimum fines to $250,000. The Merc's chief, Leo
Melamed, pledged "to put the fear of God" into traders.

    But eleventh-hour amends are unlikely to save the exchanges
from increased regulatory scrutiny. Last week the House
Agriculture Committee voted to boost the budget of the Commodity
Futures Trading Commission, which oversees the Chicago markets,
from $34.7 million to $44.5 million by 1991. And in a step
designed to prevent front-running, the committee moved to partly
restrict brokers from trading for their own and their clients'
accounts at the same time.

    Some of the exchanges' critics want to go further. They
recommend that Chicago's quaint system of making deals with
shouts and hand signals be replaced with automated computerized
trading, as has been done in Tokyo and London. "It is time to
jettison this Rube Goldberg . . . system and replace it with a
sophisticated electronic system that records trades as they
happen," said Massachusetts Democrat Edward J. Markey, chairman
of the House subcommittee on telecommunications and finance.

    What will the future of the futures market be? Valukas says
the Government's investigation has just begun. At least one
guilty plea is expected this week, and new cases may be opened.
"We have made a substantial and long-term commitment to ensure
the integrity of the markets," says Valukas. "I'll let the
convictions do the talking."