Hillary Rodham Cattle Futures Controversy - Merc and Melamed Investigations

Merc and Melamed Investigations

Chicago Mercantile Exchange records indicated that $40,000 of her profits came from larger trades initiated by James Blair. According to exchange records, "Red" Bone, the commodities broker that facilitated the trades on behalf of Refco, reportedly because Blair was a good client, allowed Rodham to maintain her positions even though she did not have enough money in her account to cover her activity. For example, she was allowed to order 10 cattle futures contracts, normally a $12,000 investment, in her first commodity trade in 1978 although she had only $1,000 in her account at the time. Bone denied any wrongdoing in conjunction with Rodham's trading and said he did not recall ever dealing with Rodham personally.

As it happened, during the period of Rodham's trading, Refco was under investigation by the Mercantile Exchange for systematic violations of its margin trading rules and reporting requirements regarding cattle trading. In December 1979, the exchange issued a three-year suspension to Bone and a $250,000 fine of Refco (at the time, the largest such penalty imposed by the exchange).

The trading practices in Refco's Springdale, Arkansas, office, which Bone was the manager of, came under investigation following the October 1979 collapse of cattle prices, which caused traders with that office to lose close to $20 million. A number of the traders, including Blair, sued Refco and its chair, Thomas Dittmer, as well as Bone, on grounds of having manipulated prices and thus precipitating the collapse. Blair and Refco reach and out-of-court settlement. In a case that went to trial, an Arkansas jury found in favor of some of the traders and against Refco and Dittmer, but that verdict was latter overturned by a federal appellate court. Court documents detailed some of the alleged trading practices at Refco, including block trading, end-of-day allocation, backdating of trades, and waived margin calls. Two brokers at Springdale, Bill McCurdy and Steven Johns, testifying about another trader's case, said they participated in a cover-up of block trading on a day in June 1979 that happens to coincide with the opening of what would become Rodham's single most profitable trade.

After the Rodham trading matter became public, Leo Melamed, a former chairman of the Mercantile Exchange, was brought in by request of the White House to review the trading records. On April 11, 1994, he said that the whole matter was "a tempest in a teapot" and that while her brokers had not required her to provide typical margin cushions, she had not knowingly benefitted. On May 26, 1994, after the new records concerning the larger Blair trades came to light, he said "I have no reason to change my original assessment. Mrs. Clinton violated no rules in the course of her transactions." But as to the question of whether she had been allocated profits from larger block trades, he said of the new accounting, "It doesn't suggest that there was allocation, and it doesn't prove there wasn't," an assessment of uncertainty shared by Merton Miller, a Nobel Prize-winning economist at the University of Chicago Graduate School of Business.