A hearing committee of the Chicago Mercantile Exchange held that Aaron Wilkey and Melissa Wilkey, husband and wife, violated exchange rules when, on multiple occasions between December 2012 and April 2013, they entered into futures transactions to transfer equity from accounts controlled by Mr. Wilkey to an account controlled by Ms. Wilkey. Some of the trades were supposedly executed non-competitively on Globex, while others were allegedly done in the open market. Mr. Wilkey was also found to have engaged in 42 prearranged transactions from June 1, 2011, to August 31, 2011, to transfer equity from his mother’s account to his wife’s account. As sanctions, Mr. and Ms. Wilkey were each permanently barred from trading CME Group products and ordered to pay a US $100,000 fine and, jointly and severally, to pay US $23,000 in restitution and US $40,925 in disgorgement. Separately, Case Gabel and Zachary May each agreed to pay a fine of US $30,000 and be suspended from trading CME Group products for five days to resolve charges brought by CME that, on multiple occasions in 2012, they matched buy and sell orders for Live Cattle futures contracts for accounts with common beneficial ownership to freshen delivery dates.
Compliance Weeds: For products settling by physical delivery against the oldest open long position (e.g., Live Cattle futures contracts), both the CBOT and CME permit the liquidation and re-establishment of futures positions intraday to defer physical delivery. However, relevant trades for a single account or accounts with common beneficial ownership must be competitively executed and must be independent transactions subject to market risk. CME Group will regard pre-arranged purchases and sales or buys and sells executed as part of an express or implied agreement for a single account or accounts with common beneficial ownership to constitute prohibited wash trades. (Click here to access CME Group Market Regulation Advisory Notice RA1411-5RR (January 6, 2015), question and answer 8.)
Legal Weeds: In the relatively early days of the Commodity Futures Trading Commission, the CFTC sought to ban the practice of freshening positions to defer delivery through an enforcement action against Manning Stoller, who had engaged in such practice to avoid taking delivery of potatoes on his New York Mercantile Exchange futures contracts in May 1976. He did this because he believed potato prices were artificially depressed. However, this marked the first time that the CFTC, or its predecessor agency, the Commodity Exchange Authority, had formally suggested that freshening –a then common industry practice– constituted prohibited wash sales. Ultimately the US Court of Appeals in New York held that, although the CFTC could take this position, it could not do so for the first time in an enforcement action against defendant. According to the court, “if the Commission suddenly changes its view …with respect to what transactions are ‘bona fide trading transactions,’ it may not charge a knowing violation of that revised standard and thereby cause undue prejudice to a litigant who may have relied on the agency's prior policy or interpretation.” (Click here to access the decision in Stoller v. Commodity Futures Trading Commission, 834 F2d 262 (2d Cir 1987).)