Hillary Rodham cattle futures controversy

In 1978 and 1979, lawyer and First Lady of Arkansas Hillary Rodham engaged in a series of trades of cattle futures contracts. Her initial $1,000 investment had generated nearly $100,000 when she stopped trading after ten months. In 1994, after Hillary Rodham Clinton had become First Lady of the United States, the trading became the subject of considerable controversy regarding the likelihood of such a spectacular rate of return, possible conflict of interest, and allegations of disguised bribery, allegations that Clinton strongly denied. There were no official investigations of the trading and Clinton was never charged with any wrongdoing.

Trades and first exposure

Hillary Rodham and Bill Clinton lived in this house in the Hillcrest neighborhood of Little Rock from 1977 to 1979 while he was Arkansas Attorney General. The couple's modest circumstances led Rodham to seek investment income.

Rodham had no experience in such financial instruments. Bill Clinton's salary as Arkansas Attorney General and then Governor of Arkansas was modest and Rodham later said she had been interested in building a financial cushion for the future (the ill-fated Whitewater Development Corporation would be another such effort from this time). Starting in October 1978, when Bill Clinton was Attorney General and on the verge of being elected Governor, she was guided by James Blair, a friend, lawyer, outside counsel to Tyson Foods, Arkansas' largest employer, and, since 1977, a futures trader who was doing so well he encouraged friends and family to enter the commodity markets as well. Blair in turn traded through, and relied upon cattle markets expertise from, broker Robert L. "Red" Bone of Refco, a former Tyson executive and professional poker player who was a World Series of Poker semifinalist.

Rodham later wrote that she educated herself about the market and followed it closely, winning and losing money. By January 1979, she was up $26,000; but later, she would lose $16,000 in a single trade. At one point she owed in excess of $100,000 to Refco as part of covering losses, but no margin calls were made by Refco against her. Near the end of the trading, Blair correctly sold short and gave her a $40,000 gain in one afternoon. In July 1979, once she became pregnant with Chelsea Clinton, "I lost my nerve for gambling [and] walked away from the table $100,000 ahead." She briefly traded sugar futures contracts and other non-cattle commodities in October 1979, but more conservatively, through Stephens Inc. During this period she made about $6,500 in gains (which she failed to pay taxes on at the time, consequently later paying some $14,600 in federal and state tax penalties in the 1990s). Once her daughter was born in February 1980, she moved all her commodities gains into U.S. Treasury Bonds.

The profits made during the cattle trading first came to public light in a March 18, 1994 report by The New York Times, which had been reviewing the Clintons' financial records for two months. It immediately gained considerable press attention, and coincided with the beginning of congressional hearings over the Whitewater controversy. Media pressure continued to build, and on April 22, 1994, Hillary Clinton gave an unusual press conference under a portrait of Abraham Lincoln in the State Dining Room of the White House, to address questions on both matters; it was broadcast live by CBS, NBC, ABC, and CNN. In it she said she had done the trading, but often relying upon the advice of Blair, and having him place orders for her; she said she did not believe she had received preferential treatment in the process. She also downplayed the dangers of such trading: "I didn't think it was that big a risk. [Blair] and the people he was talking with knew what they were doing." Afterwards she won media praise for the manner in which she conducted herself during this, her first adversarial press conference; Time called her "open, candid, but above all unflappable ... the real message was her attitude and her poise. The confiding tone and relaxed body language ... immediately drew approving reviews."

Likelihood of results

Various publications sought to analyze the likelihood of Rodham's successful results. The editor of the Journal of Futures Markets said in April 1994, "This is like buying ice skates one day and entering the Olympics a day later. She took some extraordinary risks." USA Today concluded in April 1994 after a four-week study that "Hillary Rodham Clinton had some special treatment while winning a small fortune in commodities." According to The Washington Post's May 1994 analysis, "while Clinton's account was wildly successful to an outsider, it was small compared to what others were making in the cattle futures market in the 1978–79 period." However, the Post's comparison was of absolute profits, not necessarily percentage rate of return. In a Fall 1994 paper for the Journal of Economics and Finance, economists from the University of North Florida and Auburn University investigated the odds of gaining a hundred-fold return in the cattle futures market during the period in question. Using a model that was stated to give the hypothetical investor the benefit of the doubt, they concluded that the odds of such a return happening were at best 1 in 31 trillion.

Financial writer Edward Chancellor noted in 1999 that Clinton made her money by betting "on the short side at a time when cattle prices doubled." Bloomberg News columnist Caroline Baum and hedge fund manager Victor Niederhoffer published a detailed 1995 analysis in National Review that found typical patterns and behaviors in commodities trading not met and concluded that her explanations for her results were highly implausible. Possibilities were raised that broker actions such as front running of trades, or a long straddle with the winning positions thereof assigned to a favored client, had taken place.

In a 1998 article, Marshall Magazine, a publication of the Marshall School of Business, sought to frame the trading, the nature of the results, and possible explanations for them:

These results are quite remarkable. Two-thirds of her trades showed a profit by the end of the day she made them and 80 percent were ultimately profitable. Many of her trades took place at or near the best prices of the day.
Only four explanations can account for these remarkable results. Blair may have been an exceptionally good trader. Hillary Clinton may have been exceptionally lucky. Blair may have been front-running other orders. Or Blair may have arranged to have a broker fraudulently assign trades to benefit Clinton's account.

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 reached an 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 later 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 benefited. 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.

Clinton responses

Hillary Clinton's defenders, including White House Counsel Lloyd Cutler, maintained throughout that she had made her own decisions, that her own money was constantly at risk, and that she made both winning and losing trades throughout the ten months. Regarding suggestions that Blair had favored Clinton so that Tyson Foods could gain influence with Governor Clinton, they pointed out that Tyson had, in fact, later opposed Clinton during his 1980 re-election bid, an observation the First Lady had also made at her news conference.

Clinton's defenders also stressed that Blair and others stayed in the market longer than Rodham and lost a good amount of what they had earlier made later that summer and fall, showing that the risk was real. Indeed, some reports had Blair losing $15 million and Bone was reported as bankrupt.

Official findings

There never was any official governmental investigation into, or findings about, or charges brought regarding Hillary Rodham's cattle futures trading (as opposed to Refco practices overall); furthermore, by the time her trading results became known, 15 years had passed and statute of limitations issues may have been pertinent. Melamed's statements were sometimes used as a proxy "official" finding by the Merc, although he was a private consultant by then and was brought in by the White House.