The Mystery of Hillary’s Trades
(Wall Street Journal, April 7, 1994)
By David L. Brandon
From my standpoint as a former government staff attorney with extensive experience in these matters, Mrs. Clinton’s windfall in the late 1970s has all the trappings of pre-arranged trades.
As former head of the IRS chief counsel’s Commodities Industry Specialization Team in the mid-1980s, I have followed with great interest the media stories on Hillary Clinton’s excellent adventures in the commodities markets. As a proud capitalist and free market proponent (and an avid beef eater), I would be the first in line to salute this woman’s success with cattle futures. But based on my years of experience with these markets, her story just doesn’t add up. In fact, the chances of someone making almost $100,000 in the futures markets on her first try are about as great as walking into a casino in Las Vegas, hitting the million-dollar jackpot on your first try at the slots, then walking out never to play again. It just doesn’t happen that way.
For those unfamiliar with the details of Mrs. Clinton’s remarkable venture into the commodities markets, she allegedly made more than $99,000 in cattle futures (and other commodities) in late 1978 and 1979, withdrawing from trading just before the markets went bust. No explanation has been offered of how Mrs. Clinton managed to satisfy state laws that require futures investors to demonstrate a minimum net income and net worth, nor how a novice could have such uncanny timing.
There is, in fact, a much more probable explanation for Mrs. Clinton’s good fortune. The media have already suggested that trades may have been moved to Mrs. Clinton’s account after gains had been realized. However, the stories thus far have not clearly focused on a common trading strategy called a “straddle” that was very much in vogue at the time.
Straddles have the unique ability to produce exactly equal and offsetting gains and losses that can be transferred or used by the straddle trader for a variety of purposes. During the late 1970s and early 1980s, straddles were used for all kinds of illegal activities, ranging from tax evasion to money-laundering and bribes. In fact, this activity prompted a number of legal and regulatory changes by the Reagan administration to curb the abuses. Although it sounds somewhat esoteric, a commodities straddle is a relatively simple trading device. A commodities futures contract is nothing more than an agreement between two parties to buy or sell a certain type of commodity (in Mrs. Clinton’s case, cattle) for a stated price on some date in the future. If the price of the commodity goes up before the contract delivery date, the individual who agreed to buy the commodity will realize a gain equal to the difference between the current price and the contract price. The individual who agreed to sell will realize a loss in an equal amount. Conversely, if the price goes down, the buyer will lose and the seller will gain.
A straddle is created when an investor enters into contracts to both buy and sell the same commodity. In this case, any gain on one contract will be exactly offset by a loss on the opposite contract. While straddle trading today is used in a variety of legitimate ways, these transactions lend themselves to all sorts of abuses as well. Before regulatory changes in the 1980s, it was common to enter into straddles to wipe out large capital gains for tax purposes. For example, an investor who realized a $100,000 capital gain in the stock market might enter into a large straddle in the commodities market. When the commodity price moved, the investor would close the loss leg of the straddle and realize a $100,000 loss, which offset his gain in the stock market. The investor was not required to report the unrealized $100,000 gain in the opposite leg of the straddle until that leg was closed in the following year. Typically, the investor entered into another straddle in the following year, thereby indefinitely rolling over the capital gain into subsequent years.
Another ploy common during that time required the assistance of a friendly broker. An investor could create a straddle using two separate investment accounts with his broker. After the straddle had moved, so that a gain and an offsetting loss had been created, the friendly broker simply wrote in the name of the investor’s tax-exempt retirement fund on the account that held the gain leg of the straddle. The result was that a loss was realized that was reported on the investor’s tax return, while the gain went unreported in the tax-exempt retirement account.
This is not a matter of partisan politics. Even if the public had never heard of Hillary Rodham Clinton, the circumstances surrounding her unusual good fortune would still appear suspicious to anyone awake to abuses of the commodities markets.
In the late 1970s and early 1980s, the IRS began noticing large numbers of individual tax returns that curiously showed commodities losses just big enough to wipe out unrelated capital gains; no corresponding commodities gains, which would suggest a straddle, ever appeared on subsequent returns. Even more curiously, the profile of these investors always had one thing in common, which was limited experience or no prior experience in commodities trading. In the early 1980s, an IRS agent in Chicago thought to look into one taxpayer’s retirement fund and, of course, found the hidden gain leg of the straddle.
After that experience, the IRS redoubled its efforts to seek out thousands of missing straddle gains. It found them in retirement accounts, in London, in the Cayman Islands-almost anywhere a taxpayer thought he might hide them from the IRS. With respect to these thousands of mysterious, isolated commodities transactions that showed up on tax returns, the IRS uncovered some form of questionable trading in virtually 100% of the cases it investigated. Well before the close of the 1980s, the IRS had assessed more than $7 billion in delinquent taxes and penalties attributable to these transactions and eventually settled these cases out of court for approximately $3.5 billion.
While most of the IRS’s efforts were directed at finding hidden gains of the ubiquitous straddle, the trading device could just as easily be used to openly transfer gains while hiding the offsetting loss. If someone desired to make an illicit payment to another party, a straddle could be used to accomplish this purpose with no incriminating or suspicious-looking bank withdrawals or deposits. In fact, the IRS found numerous incidents of straddles being used for money-laundering purposes.
Does Mrs. Clinton’s trading activity fit the profile of the illegitimate straddle trader? She was a novice in the commodities markets who, against all odds, realized large gains. Although she intermittently realized losses, it does not appear that she ever had to risk her own capital beyond her initial $1,000 deposit, which itself may have been insufficient to cover even her first transaction (which netted her $5,300). According to the trading records released by the White House, most of Mrs. Clinton’s gains were recorded as intra-month transactions. This means that these records include no information regarding key elements of the trade, such as the type and quantity of the contracts, acquisition dates, acquisition prices, etc. Such information is needed to determine whether trades were part of a prearranged straddle.
It also appears that Mrs. Clinton’s broker, Robert L. “Red” Bone, was no stranger to the spicier practices of commodities trading, according to The Wall Street Journal’s front-page article last Friday.
It seems more than coincidental that Mr. Bone was a former employee of Tyson Foods and that Mrs. Clinton’s investment adviser, James Blair, was the company’s legal counsel. Tyson, the poultry concern, is one of the largest employers in the state of Arkansas. The fact that the Clintons withheld disclosing only those tax returns that included their commodities gains until the transactions were reported by the New York Times in February also appears quite suspicious. From my standpoint as a former government staff attorney with extensive experience in these matters, Mrs. Clinton’s windfall in the late 1970s has all the trappings of pre-arranged trades.
How would a straddle have been used in Mrs. Clinton’s case? The Journal has already reported that gains theoretically could have been transferred to Mrs. Clinton’s account, while “others” may have absorbed losses. Such a transaction could be accomplished with a straddle.
A party desiring to transfer cash to another’s personal account for legal or illegal purposes could enter into a straddle in a particularly volatile commodity, such as cattle futures in the late 1970s. After gains and losses were generated in the opposite sides of the straddle, the gain side would be marked to the beneficiary’s account, while the loss side would remain in the account of the contributor. The contributor might even be entitled to use the loss to offset other gains. Such a transaction would be not only well-hidden from government authorities but potentially tax-deductible.
No direct evidence of wrongdoing has been produced in the case of Mrs. Clinton’s trading activity. In fact, no conclusive evidence of anything has been produced. In order to settle the legitimate questions surrounding her trades, a satisfactory explanation is needed for her apparently low initial margin deposit and whether the requirements relating to an investor’s minimum net income and net worth were satisfied. In addition, the details of her numerous intra-month trades should be provided, as well as the details of the trades of persons who may have had a special interest in how well she did. If it is discovered that certain interested parties happened to realize losses in cattle futures at the same time, and they were comparable in size to the gains reported by Mrs. Clinton, this would amount to a “smoking gun.”
This is not a matter of partisan politics. Even if the public had never heard of Hillary Rodham Clinton, the circumstances surrounding her unusual good fortune would still appear suspicious to anyone awake to abuses of the commodities markets. In this writer’s experience, the normal trading world just doesn’t work that way.
Mr. Brandon was a career attorney in the Office of Chief Counsel of the Internal Revenue Service from 1983 to 1989. During that time he also served as head of that department’s Commodity Industry Specialization Team, which was responsible for coordinating and developing the IRS’s legal positions on tax issues arising in connection with commodities transactions.