BUSINESS, Page 52Crackdown on the Chicago BoysAn undercover FBI sting rounds up evidence of widespread fraud inthe city's freewheeling commodities markets
In the controlled chaos of Chicago's commodities pits, there
is no time to reflect, only time to react, to buy when the market
heads north, to sell the instant it flounders. Thus the busy
traders never really stopped to wonder about the unusual behavior
of several new colleagues who regularly lost thousands of dollars
but kept coming back for more, day after day for two years. Tom
Hicks, a trader on the Chicago Mercantile Exchange, remembers one
in particular named Peter Vogel: "He was real clean-cut -- wing
tips, clipped hair, tie always knotted tightly. He didn't dress
like the rest of us. They called him `the accountant.'"
The traders were right on one count: the man named Vogel was
keeping tabs on everyone. Last week it was disclosed that several
FBI undercover agents carrying hidden tape recorders had penetrated
the pits as part of the largest criminal investigation ever to hit
the Chicago commodities markets. The sting operation, designed to
catch unscrupulous commodities traders who were defrauding
customers of millions of dollars, broke into the open when the
Justice Department reportedly began issuing subpoenas to at least
40 people connected with the Chicago markets. By the time they
finish gathering evidence in the next few weeks, federal
prosecutors may be able to indict 100 or more commodities brokers
and traders on felony charges of fraud and racketeering.
Word of the sting prompted widespread soul-searching on the
normally ebullient trading floors of the Merc and the Chicago Board
of Trade. "There's paranoia in the pits today," said a futures
trader. "Nobody knows just how much the feds have got and against
whom." Several panicky traders who reportedly had been subpoenaed
sold their exchange seats, including one on the Merc that went for
only $330,500, a sharp drop from the previous sale at $380,000 only
a week earlier. Many traders worried about what the scandal might
cost Chicago's booming markets in terms of lost prestige and new
Government regulation. Says a broker: "It shows once and for all
that we're not capable of regulating ourselves honestly."
On Wall Street some traders noted with satisfaction that the
rival Chicago markets, which many New York investors blamed for
aggravating the stock-market crash of '87, were getting a dose of
the scrutiny that the stock markets have long endured. Said the
president of a Big Board firm: "There is some quiet delight that
the Chicago boys are finally getting their comeuppance."
Originally set up more than 70 years ago to help farmers hedge
their bets on the future of their crops, the Merc and the Board of
Trade grew explosively during the 1980s by offering futures
contracts on everything from foreign currencies to precious metals.
But for all their sophisticated new financial products, the
exchanges still use the old-fashioned, face-to-face auction system
of making trades. The leader of the investigation, Anton Valukas,
the U.S. Attorney for the Northern District of Illinois, apparently
decided that the system left plenty of room for rip-offs of
commodities buyers.
Federal law requires that traders and brokers must try to get
the best possible price for their customers when executing trades.
But because the deals are conducted orally, illegal trades are
difficult to catch. When four FBI agents masqueraded as commodities
dealers, however, they were able to secretly tape-record the
transactions taking place at the Board of Trade and the Mercantile
Exchange.
One typical shady deal they are believed to have detected is
the "bucket trade," in which a broker slices an extra profit margin
by buying a contract from a confederate at a bit more than the
going price in the pit, or selling one for a bit less. For example,
if a customer asks the broker to sell a soybean contract of 5,000
bushels and the market price is $7.50 per bushel, the crooked
broker may sell the contract to a colleague for $7.40. That gives
the colleague a discount of 10 cents per bushel, or $500, some of
which he kicks back to his partner. The customer probably cannot
challenge the price because there is no record of precisely when
the deal occurred.
The undercover agents recorded their information not just in
the hurlyburly of the pits but on social occasions as well. Two
feds working the Board of Trade solicited stories about illegal
trades by throwing lavish parties in their high-rise apartments and
by joining the posh East Bank Club, a gym popular with commodities
brokers. One agent who called himself Richard Carlson claimed that
he specialized in soybean contracts and was a native New Yorker;
the other, who called himself Michael McLoughlin, said he worked
the Treasury-bond pit and was from Florida. "Both were nice guys,
pleasant, friendly," recalls a trader. "Now that I think of it,
they asked an awful lot of questions, but I thought it was just
eagerness to learn."
The biggest fear among law-abiding Chicago traders and brokers
is that evidence of shady dealings will inspire Washington to clamp
down on the freewheeling markets. Already Texas Democrat Kika de
la Garza, chairman of the House Agriculture Committee, plans to
investigate the Chicago exchanges. Congress could decide to beef
up the relatively tiny agency that oversees the Chicago markets,
the Commodity Futures Trading Commission, or transfer the authority
to the Securities and Exchange Commission. "Figuratively speaking,
at least," laments a futures broker, "there'll be police in the
