The FBI launched the most sweeping investigation ever of Chicago`s futures exchanges after a Downstate agricultural conglomerate complained it was being victimized by corrupt traders, according to sources familiar with the inquiry.
The firm, Archer-Daniels-Midland Co. of Decatur, and several other traders upset by the alleged abuses then helped the FBI provide cover for at least four agents who posed as commodities traders, the sources said.
They also helped train the operatives in the complexities of the futures markets, and their patronage gave the agents the status to forge relationships with traders thought to less scrupulous.
Executives of Archer-Daniels-Midland, the world`s largest processor of farm commodities, made the allegations of pervasive fraud in the markets more than two years ago in meetings with prosecutors under U.S. Atty. Anton Valukas.
The company`s complaint indicates that the victims of the alleged commodities fraud included some of the largest institutional traders, who deal in tens of millions of dollars worth of futures contracts each year.
Shortly after making the complaint, the company gave at least two of the agents entry-level jobs at its commodities-trading subsidiary, ADM Investors Inc. Sources said other traders vouched for the agents when they sought to open trading accounts at firms, called clearing firms, that guaranteed and processed trades.
An executive at one such firm recalled that a broker vouched for one of the agents by saying he had met the agent`s uncle on a vacation in Peru. The broker then introduced the agent and a second operative to the executive.
The disclosure of Archer-Daniels-Midland`s role in the case provides one explanation of why federal authorities started such an ambitious and costly investigation and pursued it for so long.
The influential company`s complaint also came at a time when federal prosecutors in New York were cracking down on insider trading on Wall Street in highly visible cases. The seriousness of the company`s allegations gave Valukas, who specialized in commodities when he was a lawyer in private practice, a reason to combat financial fraud in his own back yard.
One law-enforcement official said that in view of the company`s allegations and other evidence of possible corruption, ”The FBI concluded it had to do a long-range thing.”
The FBI investigation is centering on allegations that as many as 100 traders at the two exchanges systematically cheated customers out of millions of dollars in executing their orders to buy and sell futures contracts for commodities from soybeans to Japanese yen.
Investigators believe that many of the brokers rigged trades to rake off part of the profits that should have belonged to their customers.
Sources said the FBI spent $1 million to buy at least three seats at the exchanges to give the agents more status and extend their contacts to a greater number of possibly corrupt traders.
The investigation became public last week after FBI agents began delivering grand jury subpoenas to the homes of dozens of suspects, ranging from independent traders to executives at some commodity firms. After these late night and early morning confrontations, the sources said, several of the suspects agreed to wear concealed tape recorders and have been recording conversations in which their employers and other traders might make incriminating statements.
Archer-Daniels set up ADM Investors about four years ago and put its own broker on the floor of the exchange to control execution of its order filling and to reduce costs. By putting its own broker on the floor, Archer-Daniels avoids paying huge commissions to an independent broker, said a source close to the firm.
But within a year of setting up ADM, company officials ”came to the U.S. attorney`s office in Chicago with allegations of improprieties in the markets,” said one investigator familiar with the inquiry.
In December, 1986, FBI agents Richard Carlson and Michael McLoughlin began working as trainees at ADM Investors, the sources said. Carlson went quickly through ADM`s training program and traded for the company for several months, a company spokesman has confirmed.
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Carlson then leased a seat on the Board of Trade, before buying his own seat for $335,000 in December, 1987, board officials said. McLoughlin also leased a seat on the Board of Trade for a time, some traders said.
”The government got a real bargain, because the price of a seat is back up around $500,000 from the post-market-crash lows,” one trader noted.
Carlson boasted that he used the seat to make more than $100,000 trading last year, according to one defense attorney.
One trader who worked with the balding, slightly overweight Carlson, who appeared to be in his late 30s, said Carlson drove a Mercedes-Benz and wore a Rolex watch.
”We`d all go out drinking,” said a trader acquainted with Carlson.
”Carlson would pound down the scotch. We`d have dinner. And he`d quietly reach for the check. That`s it. Quiet class. Soon he had endeared himself to the spreaders, the biggest of the big traders in the pit.”
While Carlson and McLoughlin were infiltrating the Board of Trade`s soybean and Treasury bond pits, two other agents, Peter Vogel and Randy Jackson, began trading contracts for Japanese yen and Swiss francs at the Chicago Mercantile Exchange. Merc officials said the agents each bought seats for $300,000 to $400,000.
At the time Archer-Daniels made its complaints in 1986, the FBI and other law-enforcement agencies had been accumulating evidence of alleged corruption in the commodities markets for several months, according to one law-enforcement official.
A number of successful prosecutions of unrelated financial crimes also had produced evidence of corruption in the markets, the official said.
”An analysis of the cases the FBI and U.S. attorney`s office were working showed there was a problem on LaSalle Street,” this official said.
”These cases showed there was an attitude of corruption at the exchanges that gets your attention.”
One of those cases was an investigation in 1983-84 of illegal campaign contributions made by the Board of Trade Clearing Corp., an independent corporation that matches trades and handles margin deposits for members of the nation`s largest commodities exchange.
The corporation was fined $100,000 after pleading guilty to funneling nearly $20,000 in illegal campaign contributions to four congressmen. Top executives of the corporation also pleaded guilty to making illegal financial contributions to various Democratic political candidates, including then-President Jimmy Carter, in 1980.
But specific allegations such as those brought in by Archer-Daniels are essential for the government to operate an undercover investigation. Strict U.S. Department of Justice guidelines require ”some indication that criminal activities are going on. You can`t just go on a fishing expedition,” a former prosecutor said.
Archer-Daniels is headed by Dwayne Andreas, a politically influential businessman whose friends range from Gov. James Thompson, a mentor of Valukas, to Richard Nixon.
The company is a large user of grain. As such, it hedges its grain needs by buying futures contracts on the Board of Trade. By purchasing a futures contract, Archer-Daniels is able to lock in a price for its grain several months before it takes delivery, thus ensuring itself against dramatic price increases.
In working for ADM Investors, therefore, Carlson and McLoughlin conducted trades primarily for Archer-Daniels.
By obtaining their own seats on the exchange, the agents became independent traders free to execute orders for any customers.
A group of orders is called a ”deck,” and traders get their decks from a variety of floor brokers. An independent trader builds his deck in a variety of ways, including by building friendships with brokers and seeking favors from them.
As independent traders, the agents also could legally make trades for their own accounts and illicitly agree to act as ”bagmen” for brokers seeking confederates to help them skim profits that belonged to their customers.
Carlson withdrew the $150,000 remaining in his trading account at USA Trading last week before he disappeared, the company`s president, Jacob Morowitz, said. The agent told USA, the company through which Carlson cleared his trades, that he needed the money because he and his wife were building a new home in the suburbs. ”It was his money and he wanted it, so we wired the $150,000 to a local bank he designated,” Morowitz said.