Eighteen months ago, federal prosecutors in Chicago had the futures industry quaking.
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At a crowded press conference, an all-star lineup of government officials, including the U.S. attorney general and the head of the FBI, unveiled felony indictments against 46 individuals from the city`s two big commodity exchanges. One newspaper described the event as ”the futures industry`s worst nightmare,” and many observers likened the alleged customer- cheating scheme to Wall Street`s insider-trading scandal.
Prosecutors also used sweeping terms to describe the allegations, which stemmed from an unprecedented, 2 1/2-year undercover FBI investigation.
But the multimillion-dollar federal probe has hardly lived up to its billing, and the mixed jury results may make other traders less eager to cooperate.
”They`ve lost momentum,” said defense attorney Charles Sklarsky. ”New sources of information dry up on you when you have these kind of results.”
Sklarsky is a former federal prosecutor who has been called one of the architects of the highly successful Operation Greylord investigation into court corruption in Cook County.
Though the final score isn`t in, defense attorneys are pointing to what they regard as a host of government errors, including an early hard line on plea agreements and the misuse of federal racketeering laws. The uneven results may prompt the Justice Department to reconsider megatrials-the more defendants and charges the better-in complex financial fraud cases.
In the three trials based on the indictments, only one, involving 10 soybean futures traders at the Chicago Board of Trade, has resulted in a resounding government victory. A trial of three Chicago Mercantile Exchange Swiss franc traders ended with convictions, acquittals and hung jury counts, though one of the traders pleaded guilty to a lesser charge last week.
The biggest blow came this month, when a federal jury failed to convict any of a dozen Merc traders charged with some 250 counts of bilking customers. Two Japanese yen futures traders were acquitted of all charges; the jury was deadlocked on some 80 counts against the other defendants and found them not guilty of the rest.
”The whole investigation is tainted by the mixed verdicts,” said Stephen Senderowitz, a defense lawyer and former assistant U.S. attorney here. ”There`s an image in the markets` and public`s mind that this wasn`t all it was cracked up to be. The deterrent effect is substantially less than it would have been otherwise.”
The verdict led to a display of chest-thumping by the Merc, which called a celebratory press conference at the industry`s annual conference in Boca Raton, Fla. ”After two years of investigation and two years of trial and trial preparation, our members have been-in large measure-exonerated,” Merc Chairman John F. Sandner said in a statement issued at the meeting.
That conclusion seems hasty. After the yen verdict, federal prosecutors said they would retry the traders on the deadlocked counts. Jurors said a lopsided majority favored conviction on those charges, but that one or two holdouts blocked guilty verdicts.
The traders ”were lucky,” said yen juror Daniel Rodriguez, a financial counselor at Loyola University Medical Center near Maywood. ”If we had 12 reasonable people in there, we wouldn`t have had a hung verdict,” he said, adding that one juror read a magazine and ”did her nails” at times, rather than participate in deliberations.
Many defense lawyers expect the government to allow some defendants to plead guilty to reduced charges rather than stand trial again. In an interview last week, U.S. Atty. Fred Foreman acknowledged that ”if (the charges) can be resolved with a reasonable resolution we will do so.”
Meanwhile, two yen traders whose cases were split off are awaiting trial. And many defense attorneys predict a second round of indictments covering some trading pits, such as the Merc`s Standard & Poor`s 500 stock-index futures market, that weren`t hit in the original charges.
Of the 48 people indicted in 1989 (two were added later that year), only the two yen traders have been found innocent of all charges. Twenty-two individuals, including all three traders charged in the Board of Trade`s Treasury bond pit, have pleaded guilty. Eleven were convicted, including eight soybean traders found guilty of racketeering charges. Thirteen had hung-jury verdicts or are awaiting trial.
”We got a large number of defendants pleading guilty or being found guilty of major felonies,” said Thomas Durkin, first assistant U.S. attorney and one of the soybean prosecutors. ”By anyone`s estimate, it was a successful first round.”
Foreman, who succeeded Anton R. Valukas last year, said the investigation ”still remains not only a very high priority of this office but of the Justice Department.”
There is wide agreement that the threat of prosecution has prevented some cheating of customers. Misbehavior uncovered in the probe also has helped regulators sharpen their surveillance program.
”We feel we have a better picture” of what happens on the exchange floors, said Dennis Klejna, enforcement director at the Commodity Futures Trading Commission in Washington.
The probe spurred efforts to crack down on controversial trading practices, such as dual trading, in which a floor broker trades for his own account and for customer accounts. In addition, the Chicago markets are jointly developing a hand-held electronic device to time trades more precisely, a move long urged by exchange critics.
”The investigation was a tremendous success because it brought attention to the questionable, if not illegal, practices on the exchanges,” said Ronald Allen, a Northwestern University law professor.
But the jury verdicts have disappointed the goverment and may force the U.S. attorney`s office to change its tactics.
”If the government had done things differently, they could have achieved a great deal more and at the same time been fairer to the people they were investigating,” said Senderowitz, who nevertheless gives high marks to the FBI agents and assistant U.S. attorneys in the case.
Observers contend the hoopla surrounding the probe may have pressured prosecutors to make a splash with the first indictments, which totaled nearly 1,300 pages. What wasn`t clear at the time was that the total amount of money involved in the alleged wrongdoings was less than $1 million, according to defense estimates.
Some defense attorneys said the government might have fared better if it had offered more favorable deals to defendants charged with lesser crimes, thus avoiding lengthy trials.
Prosecutors may have underestimated traders` resolve. Sources said government officials were surprised that more traders didn`t cooperate after 18 were hit with onerous racketeering charges, which could result in the seizure of exchange memberships and other assets.
”They believed these guys were very weak-willed, that they would turn on the guy standing next to them,” said another former prosecutor, who declined to be identified. ”That didn`t happen.”
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”When they started, I don`t think they believed as many people would go to trial or that the cases would be as difficult to prove to the jury,” said Joseph Duffy, a former federal prosecutor who represented a yen broker charged with racketeering violations. The yen jury was deadlocked on all racketeering charges.
The outcome in the yen case has renewed debate about juries` ability to deal with complicated financial fraud cases involving a large number of defendants.
Traditionally, prosecutors are said to favor megatrials. Generally, the rules are looser about what evidence of conspiracy is allowed to be presented, and jurors find it difficult to separate the evidence about individuals so everyone gets convicted.
The conventional wisdom, though, may not stand up to recent events.
Allen said jurors don`t have the same sort of visceral reaction to complex securities-law violations or other financial frauds as to other crimes.
”What happens is that the jury gets confused, and juror confusion can be turned into reasonable doubt,” said Dan Webb, a former U.S. attorney here and now partner at legal giant Winston & Strawn.
Webb said past experience of the U.S. attorney`s office ”clearly proves that multidefendant cases can be won. The difficulty is when you combine a mass trial and multiple defendants with complicated and intricate financial fraud.”
In the wake of the yen verdicts, ”the Justice Department has got to take a hard look at massive, multidefendant cases,” Webb said.
At least one yen juror agrees. ”This is just too much for everybody,”
said Joanne Brown, who favored conviction on the hung counts. ”You need to try people separately or on a lesser scale.”
Valukas, now an attorney at Jenner & Block, suggested that it`s unfair to generalize about the tactics in the commodities investigation based on the trial outcomes. And he dismissed any suggestion that prosecutors` methods were influenced by public relations concerns.
”We made the deals we felt were reasonable in light of the crimes,” he said. Any suggestion that he was competing with his New York counterpart, then-U.S. Atty. Rudolph Giuliani, who led the federal government`s early assault on insider trading, is ”idle speculation,” he said.
”After soybeans, you could say the approach that was taken was obviously brilliant,” said Valukas. ”At the conclusion of the yen trial, you could say it was obviously flawed.”