Simple Scams+Trading Pits=Indictments
TRADING on Chicago's futures exchanges is fast-paced and chaotic-looking. But the illegal trades alleged in federal indictments this week detail ingeniously simple scams, involving brokers and traders willing to break the rules to skim customer profits. On Wednesday, United States Attorney General Dick Thornburgh announced that a federal grand jury had returned indictments against 46 brokers and traders at the Chicago Board of Trade and the Chicago Mercantile Exchange. Among the charges: racketeering, mail fraud, and commodities fraud.
The charges provide the clearest picture yet of the kinds of trading scams that the Federal Bureau of Investigation has been investigating here for more than two years. The scams include:
Pre-arranged sales. According to the exchanges' rules, trading is supposed to be done by open outcry, allowing anybody to buy or sell contracts in trading areas, known as pits. But on thousands of trades from March 1984 to January 1989, brokers apparently directed their purchase and sale orders to particular traders. The schemes worked in a number of ways. For example, when a broker got a customer's order to buy, he first alerted a trader before filling the order. The trader would also make a buy, wait for the original order to boost the market price, then sell his contract - sometimes channeling some of his profits back to the broker.
At other times, according to federal documents, brokers would put a trader in the middle of two customers' orders: The trader bought a contract from a customer, then sold it at a higher price to another of the broker's customers.
``Taking a loser.'' If brokers make a mistake, they are liable under the exchanges' rules for the amount of money that their mistake costs their customer. But federal authorities charge that a broker sometimes avoided liability for a mistake by getting traders to accept the losing trade, or ``take a loser,'' then channeling profitable trades to them later on.
Falsifying evidence. To record transactions at the exchanges, traders either endorse an order form or fill out a trading card. Federal authorities charge that exchange members trading primarily for their own accounts (or ``locals'' as they are called) would scratch out an earlier price and put in a new price on their trading cards - or simply destroy the card and make up a new one - in order to ensure a profit.
``The idea is to increase the profits of the `local' at the cost of the customer,'' said Anton Valukas, US attorney for Illinois, who announced the federal action in Chicago along with Mr. Thornburgh, FBI Director William Sessions, and Wendy Gramm, chairwoman of the Commodities Futures Trading Commission.
Ms. Gramm said the FBI's undercover probe was needed because such trading scams could not have been detected through traditional regulatory methods. Karsten Mahlmann, chairman of the Chicago Board of Trade, said in a later press conference that the exchange's new computer upgrading would be able to track all trades and detect unusual trading activity.