CFTC Enforcement Matters

CFTC Obtains Order against Commodity Pool Operator and Commodity Trading Advisor Alleging Misappropriation of Pool Funds and Sending Misleading Statements


The CFTC filed a complaint against AlphaMetrix, LLC, a CPO and CTA.  The complaint alleges that AlphaMetrix misappropriated funds belonging to commodity pools it operated and sent false or misleading account statements to some of the pool participants.  In early November, a federal court issued a consent restraining order that freezes AlphaMetrix’s assets, protects books and records, and appoints a corporate monitor to oversee the distribution of pool funds to participants.

According to the complaint, AlphaMetrix entered into agreements with some participants in which AlphaMetrix agreed to rebate certain fees by reinvesting the funds in the pools for the participants.  However, the CFTC contends that AlphaMetrix did not reinvest at least $2.8 million of the rebates owed to participants and instead transferred the funds to its parent company, AlphaMetrix Group, LLC, which allegedly had no legitimate claim to those funds. The complaint states that AlphaMetrix nonetheless sent the participants account statements, which included the funds that were supposed to have been invested in calculating the net asset value of their interests, and, as a result, misstated to participants the true value of their investments.

The CFTC seeks preliminary and permanent injunctions against AlphaMetrix, enjoining AlphaMetrix from committing further violations of the Commodity Exchange Act, as charged, and ordering it to pay restitution, disgorgement, and a civil monetary penalty, among other appropriate relief. The CFTC also seeks an Order requiring AlphaMetrix Group, LLC, to disgorge funds it received as a result of AlphaMetrix’s unlawful conduct.

CFTC Charges Trading Firm with Price Manipulation

The CFTC has filed a civil enforcement action against Donald R. Wilson and DRW Investments, LLC.  The CFTC’s complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract (the IDEX USD Three-Month Interest Rate Swap Futures Contract) in 2011.  Prior to filing the suit, DRW had filed a lawsuit against the CFTC, in which it sought to enjoin the CFTC from moving forward with its enforcement action.  In the suit, DRW sought a preliminary injunction to stop an alleged “unconstitutional enforcement action” by the CFTC.

According to the CFTC’s complaint, Wilson and DRW believed that they could trade the IDEX USD Three-Month Interest Rate Swap Futures Contract for a profit based on their analysis of the contract.  Wilson thus caused DRW to acquire a large long (fixed rate) position in the contract with a net notional value in excess of $350 million.  The daily value of DRW’s position was dependent upon the daily settlement price of the contract.  The methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day.  In the absence of such bids, the exchange used prices from OTC markets to determine its settlement prices.  According to the CFTC, Wilson and DRW anticipated that the value of their position would rise over time.  The market prices did not, however, reach the level that Wilson and DRW had expected, according to the Complaint.  Thus, Wilson and DRW allegedly executed a manipulative strategy to move the contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly canceled the bids.  Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.

The CFTC is seeking permanent injunctive relief, disgorgement, restitution, civil monetary penalties, trading suspensions and bans, and payment of costs and fees.

CFTC Orders FCM to Pay a $425,000 Penalty for Unlawfully Commingling Customer Funds with Funds in Non-Customer Accounts

The CFTC issued an order filing and settling charges against ADM Investor Services, Inc., an FCM, for commingling customer funds with funds held in its non-customer accounts.  The CFTC order requires ADMIS to pay a civil monetary penalty of $425,000, to cease and desist from future violations, and to implement improved procedures to ensure the proper classification of such accounts.

Generally, FCMs are required to segregate funds held on behalf of customers and are not permitted to commingle customer funds with the funds of any other person.  As described in the CFTC order, ADMIS treated the accounts of multiple of its affiliates as customer accounts, notwithstanding that ADMIS’s parent corporation, Archer Daniels Midland Company, had ownership interests in the affiliates ranging from 16% to 100%, and voting interests in each of the affiliates.

NFA Enforcement Matters

NFA Permanently Bars CTA and CPO

The NFA barred Light Tower Investments, Inc., a CTA and CPO Member of NFA, from NFA membership, and also barred a principal from NFA membership.  NFA's Business Conduct Committee found that Light Tower and its principal failed to cooperate with NFA during NFA's investigation of their activities. In addition, the Committee found that Light Tower failed to file a pool disclosure document or annual financial statement with NFA; failed to provide pool participants with a disclosure document or a financial statement; and failed to provide new CTA customers with an updated disclosure document. The Committee also found that Light Tower failed to list an individual as a principal.

NFA Fines FCM/FX Firm $600,000 for Failure to Report Trade Data and Failure to Keep Accurate Books and Records

The NFA has issued a $600,000 fine against Interbank FX LLC, a FCM, Forex Dealer Member and retail foreign exchange dealer Member of NFA.  NFA's Business Conduct Committee found that Interbank failed to report certain trade execution data to NFA through the Forex Transaction Reporting Execution Surveillance System (Fortress).

The Committee also found that during an NFA investigation focused on Interbank's activities throughout 2010 and 2011, NFA was unable to fully evaluate the firm's trade execution practices due to record keeping deficiencies at Interbank.

NFA Fines FCM/FX Firm $300,000 in Settlement of Two Complaints

The NFA has issued a $300,000 fine against Interactive Brokers, a FCM and Forex Dealer Member of NFA.  NFA's Business Conduct Committee found that Interactive violated NFA Bylaw 1101 by conducting futures business with non-NFA Members and violated NFA Compliance Rule 2-4 by allowing an introducing broker to act as a de facto FCM. In addition, the 2012 Complaint alleged that Interactive violated NFA Compliance Rule 2-9(a) by failing to diligently supervise its operations.

In addition to agreeing to pay a fine of $300,000, Interactive agreed to adopt and implement enhanced written procedures to ensure compliance with NFA Bylaw 1101. Further, the firm agreed to undertake a review of its open futures and retail forex accounts to determine whether Interactive is in full compliance with NFA Bylaw 1101 with respect to the account holders of all accounts opened prior to the date of Interactive's settlement offer and take prompt and appropriate action in those instances where the firm finds that it did not fully comply with the requirement of NFA Bylaw 1101.

CME Group Enforcement Matters

Position Limit Violations

The CBOT Business Conduct Committee found that AQR exceeded the single month speculative position limit of 15,000 contracts in May 2013 Soybean futures by 323 contracts or approximately 2%.  AQR realized a profit of $925 when it liquidated those contracts carried over the limit.  This was AQR’s third position limit violation in a seven month period.  Under a settlement offer, the Committee ordered AQR to pay a fine to the exchange in the amount of $70,000 and disgorge profits in the amount of $925.

Block Trade Reporting Violations and Failure to Supervise

The CME Business Conduct Committee found that Merrill Lynch executed block trades for customers in the Eurodollar futures market that were not reported to CME within the applicable time limit following execution.  Further, the Committee found that Merrill Lynch misreported the true and accurate time of execution of block trades to CME.  The Committee further found that Merrill Lynch failed to maintain accurate written or electronic records of the block trade transactions.  The order tickets and other records Merrill Lynch employed to record block trades contained inaccurate timing information, and Merrill Lynch did not have accurate and reliable time-keeping mechanisms in place upon which to base the time of execution. The Committee concluded that by failing to diligently supervise its employees or agents in the conduct of their business relating to CME, Merrill Lynch violated CME Rule 432.W.  In accordance with the settlement offer, the Panel fined Merrill Lynch $60,000.

Spoofing Orders and Impacting the IOP

The CBOT Business Conduct Committee found that on multiple occasions, Indus Derivatives’ traders entered orders in various agricultural contracts on during the pre-opening session that were not made in good faith for the purpose of executing bona fide transactions.  According to the settlement, the entry and cancellation of these orders caused fluctuations in the publicly displayed Indicative Opening Price.  In accordance with the settlement offer, the Panel fined Indus Derivatives $150,000.