TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/081489/08148900.011

Text File | 1990-09-17 | 6KB | 98 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."