A Hot Tip For Chicago's Exchanges: Clean House

It was initially compared to the crusade against Michael R. Milken. Yet while the junk-bond czar is now behind bars, the government's effort to clean up Chicago's futures markets has bogged down. On Mar. 13, a jury declined to convict 12 Japanese-yen futures traders on the Chicago Mercantile Exchange on any of 240 counts of defrauding customers. The traders were acquitted on 139 counts, and the jury deadlocked on the remainder. Exchange officials were only too eager to crow. "We never believed we had gone wrong," exclaimed Chicago Merc Chairman John F. "Jack" Sandner.

Chicago exchange officials have little grounds for pride. Earlier convictions of 12 traders and guilty pleas from 20 others--for offenses ranging from trading ahead of customer orders to fixing prices--demonstrate that the exchanges can use some serious policing. But from the start, the reaction of the exchanges' leadership has ranged from testy defensiveness to outright denial. They have behaved like proprietors of private clubs--not public trusts.

The exchanges' inaction stems partly from the indifference of their customers, who often regard small-scale rip-offs as a cost of doing business. Trading volume has increased since the probe became public in January, 1989. Lawmakers have been put off by the abstruse nature of most of the alleged violations. There was initially an outcry, but proposed legislative reforms were quickly forgotten. The Commodity Futures Trading Commission has been too busy fighting for its life in Congress to square off against crime in the pits.

Perhaps lawmakers would have been more outraged if the Justice Dept. had produced more compelling evidence of wrongdoing. The feds first placed a Federal Bureau of Investigation agent on the Chicago Board of Trade floor in late 1986. The idea was to nab workaday floor traders filching small "ticks" from customers, then have them rat on bigger traders. But the arcane pit milieu often proved impenetrable. Much-ballyhooed audiotapes made by agents in the pits were all but indecipherable. The technicalities of trading at times eluded FBI agents, government lawyers--and, not surprisingly, jurors. Looking at alleged rip-offs of as little as $12.50, many jurors seemed to feel that the feds were overreaching.

At times, the exchanges have been their own worst enemies. When the government two years ago first leaked news about the probe, the Merc's first response was to do a computer run on activities by the two undercover traders on the Merc floor. The Merc later mrganized what purported to be a blue-ribbon reform committee composed largely of "outsiders." Yet it included only a single individual who had not served as an exchange board member. The Board of Trade simply defended the concept of self-regulation and announced the hiring of an outside expert on racketeering law.

LITTLE ACTION. What meager reformist drives the exchanges did mount soon faded in the face of resistance from floor traders and apathy from customers. The exchanges, for instance, did little to deal with the activities of so-called broker groups, whose members share customers and which have long been suspected of profiteering by exchanging information and manipulating markets.

The exchanges continue to claim they police themselves better than outsiders. "These trials that took six months at untold cost could have been handled internally in a matter of hours," claims Merc lawyer Jerrold Salzman. Maybe. But there are plenty of reasons to question the exchanges' vigilance and good intentions. When 10 soybean traders were convicted in January, the Board of Trade blithely maintained that wrongdoers comprised less than half of 1% of the floor population. But according to court testimony, an FBI agent violated federal and exchange rules for two years in the soybean pit--including acting as a bagman for brokers who were stealing from customers--without being detected by exchange surveillance.

Government prosecutors say they plan to continue their crackdown on fraud in the pits. Instead of sitting on the sidelines and heckling, it's high time the exchanges rolled up their sleeves and cleaned up their act.


JAPANESE YEN PIT Chicago Mercantile Exchange Mar. 1991

Twelve traders were found not guilty of 139 of 240 counts of mail, wire, and commodity fraud. Jury hung on 101 counts, including racketeering charges. Two traders cleared; seven pleaded guilty

SWISS FRANC PIT Chicago Mercantile Exchange July 1990

Two traders were convicted only of minor rule violations. Another trader was acquitted. Settlement near on other charges

SOYBEAN PIT Chicago Board of Trade Jan. 1990

A jury convicted all 10 soybean traders who stood trial for fraud, with seven found guilty of racketeering. Eight traders pleaded guilty to fraud charges

TREASURY BOND PIT Chicago Board of Trade Sept. 1989 - Jan. 1990

Three traders pleaded guilty to mail fraud and prearranged trading. One admitted racketeering charges


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