The Commodity Futures Trading Commission filed three actions against companies and one action against an individual for engaging in spoofing in violation of law. (Click here to access Commodity Exchange Act § 4c(a)(5)(C), 7 US Code § 6c(a)(5)(C).) Some CFTC actions appeared to parallel or at least draw-on, at least in part, concurrent or past exchanges' disciplinary proceedings.
Victory Asset, Michael Franko
In the enforcement action resulting in the largest fines, the CFTC claimed that, from May 2013 to July 2014, Victory Asset, Inc. engaged in spoofing on the Commodity Exchange, Inc. and the New York Mercantile Exchange, as well as cross-market spoofing on COMEX and the London Metal Exchange through Michael Franko, its Director of Commodities Trading at the relevant time.
The CFTC said when Mr. Franko engaged in spoofing solely on domestic markets, he would place a small order on one side of a particular futures market, and then place a larger order on the other side of the same market to create or augment order book imbalances. Mr. Franko purportedly would cancel his large order as soon as his small order was executed. When Mr. Franko engaged in cross-market spoofing, he would allegedly place an order to buy or sell copper futures on either the COMEX or LME market, and attempt to effectuate the order’s execution by non-bona fide trading activity on the other market. Again, after his desired execution, Mr. Franko would cancel his spoofing order.
According to the CFTC, Mr. Franko engaged in his purported spoofing activity “frequently, on almost [a] daily basis.”
Both Victory Asset and Mr. Franko were charged with violating prohibitions against spoofing and engaging in a manipulative scheme. (Click here to access CEA § 6(c)(1), 7 U.S.C § 9(1) and here for CFTC Rule 180.1.)Victory Asset was charged with being liable for Mr. Franko’s wrongful conduct as he was its agent. (Click here to access CEA § 2(a)(1)(B), 7 U.S.C. § 2(a)(1)(B).)
To resolve this matter Victory Asset agreed to pay a fine of US $1.8 million, while Mr. Franko consented to a penalty of US $500,000 as well as a six-month trading prohibition on all US futures markets. In August 2015, Mr. Franko settled a disciplinary action in connection with alleged spoofing activity involving COMEX copper futures contracts during the same relevant time period by payment of a US $100,00o fine and a 15-business-day all CME Group exchanges’ trading prohibition. (Click here for background in the article “CME Group Files Disciplinary Actions for Trading Ahead of Block Trades and Failure to Supervise an Employee Engaging in Disruptive Trading Activities” in the August 23, 2015 edition of Bridging the Week.)
Geneva Trading USA, LLC agreed to pay a fine of US $1.5 million to the CFTC for alleged spoofing trading by three of its employees in various CME Group exchanges’ futures contracts from January 1, through December 31, 2013, and from June 1, 2015, through October 21, 2016. According to the CFTC, each of the traders’ spoofing activity entailed placing a smaller order on one side of a market, and larger orders on the other side to induce execution. Purportedly, the larger orders were often modified to avoid execution and ultimately canceled.
In accepting Geneva Trading’s offer of settlement, the CFTC acknowledged the firm’s cooperation throughout staff’s investigation and proactive conduct to enhance its compliance systems and policies regarding manipulative trading and spoofing. Geneva was charged with spoofing under applicable law and was held liable for the actions of its employees.
The three employees were: Garrett Connery, Robert Kimmons, and Krzysztof Marzec.
In parallel actions, Chicago Board of Trade and Chicago Mercantile Exchange business conduct committees also resolved disciplinary actions against Geneva Trading for alleged spoofing activity from September 1, 2015, through May 23, 2016, by Mr. Connery. Geneva Trading agreed to disgorge total profits of US $12,035, but was not required to pay a fine. Mr. Connery was also subject to disciplinary actions by the two BCCs and resolved his matters by agreeing to pay an aggregate fine of US $75,000 and to be banned from trading on all CME Group markets for six weeks.
In October 2016, Geneva Trading, Mr. Kimmons and Mr. Marzec resolved COMEX and NYMEX disciplinary actions for purported spoofing activities from March through July 2013. In connection with this matter, Geneva Trading also agreed solely to disgorge profits but was assessed no fine. (Click here for background in the article “CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits” in the October 9, 2016 edition of Bridging the Week.)
Mizuho Bank also agreed to settle allegations of spoofing brought by the CFTC. The Commission alleged that, from May 2016 through May 2017, one of the firm’s traders placed spoofing orders on the CBOT to test the market in anticipation of placing hedging orders at a later time. However, said the CFTC, the trader had no intention for the test orders to be executed.
Mizuho resolved the CFTC enforcement’s action by agreeing to pay a fine of US $250,000.
The CFTC noted that Mizuho suspended the trader promptly after being made aware of its trader’s purported misconduct. The Commission said Mizuho additionally conducted its own investigation into its trader’s activities, provided Commission staff with regular updates, and enhanced its systems and controls to detect and prevent similar misconduct.
ICE Futures U.S.
Also last week, a BCC of ICE Futures U.S. settled a disciplinary action against Traditum Group LLC for spoofing trading by one of the firm’s employees on multiple occasions from September 2016 through March 2017. The exchange charged Traditum with failing to supervise the employee. Traditum agreed to pay a fine of US $90,000. In a parallel disciplinary action, the relevant employee, Shay Caherly, agreed to pay a fine of US $25,000 and be banned from trading on IFUS for two weeks.
My View: Was the glass half full or half empty?
In 2016 and last week, when CME Group exchanges brought and settled disciplinary actions against Geneva Trading for purported spoofing by three of its employees, it solely required the firm to disgorge profits. Geneva Trading was not charged with failure to supervise and it was not assessed a fine. By these actions, the CME Group exchanges implied that the firm implemented and enforced reasonable policies and procedures regarding spoofing, but, notwithstanding, wrongful conduct occurred.
Last week in settling with Geneva Trading, the CFTC also implicitly acknowledged that, at the time of the alleged spoofing by its employees, the firm had compliance systems and procedures related to manipulative trading and spoofing. However, following the conduct, it “proactively worked to remediate and enhance” these systems and procedures and updated its training.
Notwithstanding, the CFTC assessed a fine of US $1.5 million on Geneva Trading to resolve its enforcement action.
Unfortunately, despite reasonable policies, procedures, and systems, firms cannot detect and prevent all instances of wrongful conduct by their employees. Although the CFTC said it afforded Geneva Trading a “reduced civil monetary penalty” for its early resolution of the enforcement action, it is not clear that even this reduced penalty is fair under the circumstances, let alone proportionate with trading conduct that resulted in US $105,000 of total profits to the firm – all of which was required to be disgorged by CME Group exchanges.
A civil penalty against an employer is not warranted in connection with every circumstance where employees or agents allegedly violate applicable requirements, particularly where a firm has taken reasonable measures to deter the wrongful employee conduct. As a result, the CME Group’s approach to handling this matter seems more reasonable. It appears the CME Group saw the glass as half full, while the CFTC viewed it as half empty.