Congressional investigators on Thursday criticized the state of commodity futures regulation in testimony that prompted one senator to complain that Chicago`s largest exchanges have made ”pitiful responses” to signs of serious trading abuses.
Sen. Bob Kerrey (D., Neb.) said the Chicago Board of Trade and Chicago Mercantile Exchange should follow the example of merchants battling shoplifting and crack down more vigorously on the kinds of trading abuses that prompted a two-year FBI undercover investigation.
”The lesson of shopkeepers, as applied to the Merc and the Board of Trade,” Kerrey said, ”is that (exchange executives) ought to just set their sights higher” in policing 6,000 members who trade contracts for the future delivery of goods ranging from soybeans to foreign currencies.
Kerrey criticized the exchanges` self-policing programs at the end of a two-hour hearing at which the General Accounting Office, an investigative arm of Congress, released new statistics calling into question the number and severity of disciplinary actions at the exchanges.
Richard Fogel, a high-ranking GAO official, said the number of citations issued by the Board of Trade for violations of trading rules has fluctuated during the last five years from a low of 8 in 1985 to a high of 32 in 1986. In the same period, the yearly total of fines levied against people cited for illegal trading ranged from $64,500 to $225,000.
Last year, the Board of Trade`s records show, it cited 13 individuals for violating trading rules and fined them a total of $143,500.
Fogel said the number of similar citations issued by the Merc increased fairly steadily, to 105 in 1988 from 13 in 1984, while the fines levied against members climbed to $811,250 in 1988 from $155,275 in 1984.
The total length of suspensions of members at both exchanges also fluctuated sharply from year to year, Fogel said, and the number of members expelled averaged about two per year at each exchange.
The GAO official said it is too early for investigators to determine whether the number of citations at the Merc is higher because it has done a better policing job than the Board of Trade or because more of its members are engaged in wrongdoing.
But, he said, referring to both exchanges, ”I wasn`t overly impressed with what I`ve heard on how they decide” whether to sanction members.
Executives at both exchanges have acknowledged that penalties for the same offenses vary depending on a trader`s disciplinary history and other factors.
Exchange officials also said, according to Fogel, ”that most investigations of trade practice abuse, regardless of source, are closed without action because the subject is innocent or evidence is insufficient.” Fogel said a team of GAO investigators in Chicago also is questioning
”what is the attitude of people on the exchanges toward regulating their own” colleagues. He said the Board of Trade began only 16 investigations last year as a result of complaints by one member against another.
Board of Trade President Thomas R. Donovan said in a statement Thursday:
”We have always responded well to constructive criticism and are fully committed to an intensive effort to enforce the rules and regulations of our exchange.”
Earlier this week, in response to a critical report by the Commodity Futures Trading Commission, the CBOT noted that it had upgraded its surveillance and audit systems and planned another $1 million in improvements. During the CBOT annual meeting Thursday, Donovan and Chairman Karsten Mahlmann said the exchange was studying whether more changes are necessary.
The GAO presented what Fogel described as preliminary findings to the Senate Agriculture Committee, which must decide this year whether Congress should extend the life of the CFTC.
The House Agriculture Committee began a similar inquiry after news reports last month that FBI agents posing as commodity traders tape-recorded evidence suggesting that 50 to 100 brokers had systematically cheated customers out of millions of dollars.
Fogel said that so far the GAO is ”overall not displeased” with the CFTC`s performance in monitoring the exchanges. But, he said, ”We`d like to see . . . (the agency) be a little more aggressive.”
The GAO official also complained that the CFTC ”doesn`t have a lot of documentation” to support its findings in audits of the exchange`s self-policing systems. The agency last week issued a report saying the Board of Trade`s policing system has been ”deficient” in spotting the kinds of abuses under investigation by the FBI.
Separately, one source familiar with the drafting of that report confirmed in an interview that CFTC officials revised some sections to make it more critical after news of the FBI investigation broke.
Fogel said that multimillion-dollar moves by both exchanges since 1986 to create computer systems to reconstruct trading sequences had ”greatly improved” their abilities to uncover certain abuses.
