Who Guards Whom at the Commodity Exchange? (Fortune, 1980)

Something about the Hunt brothers just doesn't inspire public sympathy. After taking a financial drubbing in their recent struggle to hang on to $4 billion worth of silver, both Nelson Bunker and brother William Herbert cried foul before congressional committees. They charged the New York Commodity Exchange's Board of Governors with "manipulative actions" that had crippled them. Stoically, both Congress and public managed to suppress any tiny quiver of compassion.

The Hunts' accusations were nevertheless quite pertinent and accurate. The chummy board members of the Comex -- as the New York exchange is called -- make up a club that had a powerful, personal, and collective interest in sending the price of silver into a tumble. They are still trying hard to mask their role as double agents-as governors and traders; rulers and ruled-in the seething Comex arena. All through silver's upward flight, they had stubbornly clung to their own short positions, binding them to being sellers at fixed future prices; and the carrying charges had come close to ruining them. But they found their remedy-by putting on their governors' robes in the exchange boardroom, switching regulations on their own trading, and neatly turning a misbegotten gamble into an assured success.

The performance of these acrobatics is no new stunt, of course. In the treacherous world of commodity trading, the alarm has long and often been sounded: "The foxes are guarding the chicken coop." To this, the typical retort is echoed anew by the 36-year-old Comex president, Lee Berendt: "Nonsense. The Hunts have been participating in this marketplace a long time. They know we are self-regulated and the rules can change."

Technically, according to lawyer Berendt, the rules weren't tampered with: "We merely executed our authority within parameters that we always had a right to do."

In the Hunts' ordeal, these conveniently elastic parameters were stretched by a Comex emergency edict decreeing that silver futures (contracts to receive or deliver at a specified date and price) could be traded only for the purpose of liquidating speculative positions. There was one cunning exception: the short sellers, a key power faction on the exchange, could sell for purposes of effecting delivery, thus reducing their own bullion inventories—and risk. In other words, as of last January 21, the Hunts and their Saudi partners-and all the smaller fry caught by this sudden rule change-could unload as many silver contracts as they wanted to on the New York Commodity Exchange, but they couldn't buy into any new positions. A market thus comprising only sellers' obviously could only collapse. It did on March 27, in the crash soon christened Silver Thursday.

A strut in the pit

The plunge did not follow, of course, entirely and exclusively from a single rule change. In commodities, even more than in stocks, the hypnotic skill of the seller, as well as the greed or ignorance of the buyer, can cause its own grief. Dexterity—or duplicity—can reign here.

A clear case in point arises with the controversy surrounding ContiCommodity Services Inc. and more particularly the activities of Norton Waltuch, its flamboyant vice president in New York. If it hadn't been for a quick $80-million capital infusion from its parent company, Continental Grain Co., Conti would have gone bankrupt by Silver Thursday. Yet Waltuch himself emerged from the crash with a personal profit believed to be more than $10 million. Two weeks ago, Waltuch was summoned before Senator Donald Stewart's agriculture subcommittee, which is investigating the commodity futures market (see the box on page 42). Conti's lawyers originally sought to prevent Waltuch's appearance, hazily claiming "it wouldn't be appropriate."

Norton Waltuch

During the big run-up in silver, Waltuch had traded mainly for Arab clients. The biggest, Naji Nahas, at one time owed Conti $51 million. According to Waltuch's office colleagues, it was his ceremonial custom, late in trading sessions, to don his yellow Conti jacket and strut confidently into the Comex silver pit, where his mere presence would buoy the market. "The major silver long is in the ring," an audio hot line would report to all Conti offices around the world. "Someday they'll make a movie about this," Waltuch announced to his coterie in the pit one day as silver continued to soar. Short of making a film, he proceeded to make a fortune, bailing out in time-not at the top, perhaps, but still a big winner. He didn't share his belated queasiness about silver with his customers. In the blunt judgment of one of his associates: "Norton betrayed us."

There have been complicated repercussions. A Chicago commodities lawyer retained by Nahas, Philip Bloom; does not expect to sue Waltuch, but he does contemplate suing Comex. He claims that late last year a series of purportedly confidential meetings with Comex induced his client to roll forward his silver contracts, instead of taking delivery. As Nahas cooperated, he relieved the squeeze on the traders to come up with, the scarce silver bullion. According to Bloom, however, word of his client's intentions leaked onto the trading floor, making the cost of rolling forward prohibitive. Bloom further assails Comex for issuing its "liquidation trading only" edict, on the ground that a true emergency did not exist. "The only emergency," he says, "was the financial crisis incurred by the shorts."

To buttress his charges, Bloom has demanded the minutes of the Comex board meetings held on January 7, 8, and 21. He particularly wants to determine if the members who were short disqualified themselves from the voting, as Chairman Ralph Peters did at the Chicago Board of Trade (CBOT). So far Comex has refused to release the minutes. "The information is confidential," Comex President Lee Berendt has told Bloom. Meanwhile, a number of other suits threaten-quite possibly including one, of course, by the Hunts.