Feb

16

Chicago, from Gary Phillips

February 16, 2015 |

I always felt that Chicago is one of the most exciting cities to call home. Vibrant and sophisticated, yet friendly and very manageable; it's culturally diverse residents have a Midwest sensibility and a blue collar work ethic that complements the resilient economy. While it is often referred to as the city that works, it's politicians and patronage style government have historically, been corrupt. In turn, this doctrine of deceit has spawned many over-zealous and overly ambitious prosecutors, who have used the office as a springboard to higher political office.

I would imagine then, that Chicago would have seemed like the perfect setting for the producers of the "The Sting", a caper film that involved a complicated plot by two professional grifters, Robert Redford and Paul Newman, to con a mob boss, Robert Shaw. They were shooting scenes for the movie, in Chicago's Union Station, whose tracks ran below the Chicago Mercantile Exchange (CME) while I still worked as a clerk, during the summer of 1973. While taking a break from shooting, the cast was given a tour of the CME trading floor by Leo Melamed and other Merc officials. Trading literally came to halt, as Paul Newman, Robert Redford, and Robert Shaw, et al, walked from pit to pit. As they walked by me, I overheard Alan Freeman, a quintessential Merc trader, remark in typical Merc-Jerk fashion, " Well, I might not be as good looking as Newman or Redford, but I bet you I have as much money as they do."15 years later, the same hubris on display that day, would come back to haunt many of the members of Chicago's exchanges, as they became the target of a very similar sting operation.

Chicago had always "enjoyed" a much publicized bad-boy reputation, which some Chicagoans felt, was better than no reputation at all. Before MJ, Oprah, and Obama, Chicago was best known for being the home to the Mob and Al Capone. If you screwed the wrong people they would get back at you one way or another - either physically, or if they were powerful and had friends in the government, they would find a way to seek retribution through the court system. Duane Andreas was the chairman of Archer Daniels Midland, one of the largest food processors in the world. He was also one of the largest and most prominent campaign donors in the country, contributing millions of dollars to both parties. ADM had been investigated for price-fixing and would eventually be assessed the largest antitrust fine in United States history. Nevertheless, it was Andreas who complained to Federal prosecutors, that the Chicago futures exchanges were ripping him and the public off for millions of dollars.

The Federal governments response was to launch an undercover probe of floor trading practices at both the CME and the CBOT. The sting operation would not be easy to pull off. The floors of both exchanges were like a boy's club. Guided by a set unwritten rules and a bond of trust, we were able to make trades with each other, sometimes risking millions of dollars, on nothing more than our word. The FBI agents would have to infiltrate our tight- knit group, and then fool us into becoming their trusted friends. The best way to break into our fraternity, they reasoned, was to become one of us.The FBI sting was to become as intricate and complex as the 1973 movie. Four FBI agents, 2 at the CME and 2 at the CBOT, posed as traders, and taped conversations, both on and off the floor, with the real floor traders and brokers. They created lives for the agents that duplicated the typical trader lifestyle. The agents dressed like us, lived in luxury apartments, drove exotic cars, ate at the same restaurants, joined the same health clubs, and bought memberships on the 2 exchanges. Each agent traded in a different pit. At the CBOT, one agent was trading Beans and another was in the Bond pit. At the Merc, it was the Yen pit and the S&P's. Over a two year period, the agents befriended traders and brokers, going out for meals with us, playing basketball at the East Bank Club, and partying with us. At all times, however, the agents were wired; recording every word of every conversation they had with the real traders.

By the time the sting operation was terminated, the FBI had spent millions of dollars. The agent/traders lost an undisclosed amount of money attempting to trade, but were alleged to have made a profit when they sold back their memberships. In all there were 47 indictments; a small fraction of that number actually resulted in convictions.The alleged millions of dollars in customer losses, turned out to be in the thousands, One trader was indicted for trading after the closing bell and another for changing the price on an order, which turned out to cost the customer $62.50. Of course, the government response was:

"No infraction or loss is too small when it comes to protecting the public. The message has to be sent, that these kinds of actions will not be tolerated, and in the final analysis, operations like these save customers millions of dollars."

It was a classic Chi-town example of hypocrisy, and misuse of power and influence. But, Duane Andreas had gotten what he wanted. He convinced a politically ambitious prosecutor to spend millions of taxpayer dollars to investigate Chicago's "corrupt" futures exchanges, while at the same time, he manipulated the markets on such a large scale that he was eventually fined a $100MM. And in order for the exchanges to maintain their self-regulatory status, the exchanges tightened up their audit trail and increased the penalties for breaking their rules. But, nothing really changed as far as the way business was transacted on daily basis in the pits; we were just more careful about whom we trusted.


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