The Commodity Futures Trading Commission, the Chicago Mercantile Exchange, and the North American Derivatives Exchange brought and resolved charges against an individual claiming he engaged in a cross-market manipulation scheme involving trading on two CME Group exchanges to impact prices to benefit his binary contracts positions on NADEX. Additionally, two persons associated with a grain merchandising firm previously sanctioned by the CFTC for attempted manipulation of wheat futures and options settled separate charges brought against them individually by the CFTC and the Chicago Board of Trade.

Davis Ramsey

The CFTC filed and settled an enforcement action against Davis Ramsey, claiming that, from at least April 2015 through May 2017, he traded futures on two CME Group exchanges on multiple occasions to artificially impact prices in order to benefit binary contracts positions he owned or controlled on NADEX.

The CFTC alleged that, during the relevant time period, Mr. Ramsey purchased NADEX binary contracts that allowed him to make money if the prices of certain Commodity Exchange, Inc. or CME futures contracts traded above or below designated prices at specific times. To determine whether a particular binary contract was in the money (and thus earned winnings for its holder), NADEX calculated the binary contract’s expiration value on a formula that relied on the 25 executions on COMEX or CME (no matter what size), as relevant,  just prior to the designated time.

According to the CFTC, to make money on his NADEX positions, Mr. Ramsey would place multiple small lot orders in the relevant COMEX or CME futures contract just prior to the relevant expiration time of his binary contract, and immediately after such time, liquidate in a single transaction all his open CME Group exchanges’ position. Mr. Ramsey’s objective, claimed the CFTC, was to make more money on his NADEX positions than he might lose on his closed-out COMEX or CME positions.

The CFTC charged Mr. Ramsey with manipulation and attempted manipulation, as well as engaging in a prohibited manipulative or deceptive device or contrivance.

Both NADEX and CME filed separate disciplinary actions against Mr. Ramsey based on his purported wrongdoing. To resolve the CFTC enforcement matter, Mr. Ramsey agreed to pay a fine of US $325,000 and disgorge profits of US $250,636. He also agreed that, for five years, he would not directly or indirectly trade or be involved in any transaction for any commodity interest (e.g., futures contract or swap) regulated by the CFTC and permanently be prohibited from trading on NADEX. Separately, Mr. Ramsey agreed to pay a fine of US $135,000 to CME and US $140,000 to NADEX.

NADEX's binary contracts are considered swaps under the Commodity Exchange Act. (Click here to access CEA § 1a(47)(A)(ii), 7 U.S.C. § 1a(47)(A)(ii).) COMEX, CME, and NADEX are all registered with the CFTC as designated contract markets.

Adam Flavin and Peter Grady

Separately, the CFTC brought and settled two enforcement actions against traders associated with Lansing Trade Group, LLC – a grain merchandising firm – for their role in an attempted manipulation of the prices of certain wheat futures and options contracts from March 3 to 11, 2015. The two traders were Adam Flavin and Peter Grady.

Both the CFTC and the Chicago Board of Trade charged Lansing with attempted manipulation to benefit its own futures and options positions in enforcement actions filed in July 2018. Lansing resolved these matters by agreeing to pay aggregate fines of US $6.55 million. (Click here for background in the article ”Commodity Merchandising Firm Agrees to Pay US $6.55 Million in Fines to CFTC and CBOT for Attempted Manipulation of Wheat Futures” in the July 15, 2018 edition of Bridging the Week.)

The CFTC charged that Mr. Flavin and Mr. Grady orchestrated the attempted manipulation on behalf of Lansing. To resolve their enforcement actions, Mr. Grady agreed to pay a US $250,000 fine and Mr., Flavin, a US $125,000 penalty. Mr. Flavin also agreed to a four-year trading ban, and Mr. Grady, a nine-month trading ban on all CFTC-supervised trading facilities.

Both Mr. Flavin and Mr. Grady were also subject to parallel Chicago Board of Trade disciplinary actions for their roles in Lansing’s attempted manipulation. Each settled by agreeing to pay additional fines equal to the amount of their fines to the CFTC, as well as other sanctions.

Legal Weeds1: The CFTC enforcement action against Mr. Ramsey does not represent the first time the CFTC has prosecuted cross-market activity that it alleged violated applicable law or its rules.

During September, the CFTC brought and settled an enforcement action against Victory Asset, Inc. and Michael Franko, its Director of Commodities Trading, for spoofing on individual CFTC-regulated exchanges, as well as cross-market spoofing on the COMEX and the London Metal Exchange.

The CFTC claimed 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. (Click here for details in the article “CFTC and Exchanges Layer on Multiple Spoofing Cases” in the September 23, 2018 edition of Bridging the Week.)

More famously, in July 2013, the CFTC, the UK Financial Conduct Authority, and the four CME Group exchanges announced enforcement actions and settlements for disruptive trading practices involving various commodity futures traded on CME Group exchanges and ICE Futures Europe utilizing algorithmic trading by Panther Energy Trading LLC and its manager and sole owner, Michael Coscia. According to the CFTC, the nature of the disruptive practices – spoofing (or layering, as the FCA called it) – occurred from August 8 through October 18, 2011.

The CFTC Order required Panther and Coscia to pay a fine of US $1.4 million and disgorge an identical amount in trading profits, and banned both respondents from trading on any CFTC-registered entity for one year.  The FCA's order imposed a fine of GBP 597,993 while the CME imposed a fine of US $800,000 and disgorgement of US $1.3 million. The CME also banned Coscia from trading on CME exchanges for six months.

Later, Mr. Coscia was indicted and convicted for matters related to the same offenses.

The enforcement action against Mr. Ramsey involved a claim of cross-market manipulation and attempted manipulation. The CFTC relied on both its traditional anti-manipulation authority, as well as its newer fraud-based manipulation authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act in leveling its charges.

Legal Weeds2: Generally, to prove traditional manipulation, the CFTC must show that a person has the ability to influence the relevant prices, that the person specifically intended to create or effect a market price or prices that do not reflect legitimate forces of supply and demand, that an artificial price or prices existed, and that the person caused the artificial price or prices. To prove attempted manipulation, the CFTC only has to evidence an intent to affect market price and an overt act in furtherance of that intent. (Click here for a discussion of the elements to show traditional manipulation in the CFTC’s discussion of Commodity Exchange Act § 6(c)(3) and CFTC Rule 180.2 in the Federal Register Release Related to the Commission’s 2011 adoption of CFTC Rules 180.1 and 180.2. Click here for a discussion of attempted manipulation in In re Hohenberg Bros. Co. (CFTC 1977).)

Under its newer Dodd-Frank authority, the CFTC does not need to demonstrate an intent to affect prices or an actual impact on prices. The Commission must only evidence an intentional or reckless employment of a manipulative or deceptive device, scheme or artifice to defraud. (Click here to access CEA § 6(c)(1), 7 U.S.C. § 9(1); click here to see CFTC Rule 180.1.)