Wedbush Securities Inc. agreed to pay a fine of US $55,000 to resolve a disciplinary action brought by the Chicago Mercantile Exchange for failing to respond timely to numerous requests for records, documents and other information related to exchange inquiries from March 2015 through January 2016. CME said that the firm acted “principally through its former Chief Compliance Officer” in connection with these failures.
Separately, Isaiah Kingston and Alexander Perelberg were charged with unrelated instances of engaging in disruptive trading practices. According to a business conduct committee of the New York Mercantile Exchange, Mr. Kingston, a non-member, placed a series of large stops orders in the NY Harbor low sulfur heating oil futures contracts on several trade dates in June and July 2015 “in close proximity to each other.” When executed, said the BCC, the orders caused “a disruptive and rapid price movement” in the futures contract and prompted an automatic temporary suspension of trading – known as a stop logic event. To resolve this matter, Mr. Kingston agreed to pay a fine of US $100,000 and be suspended from trading any CME Group contract for six months.
Similarly, CME BCC claimed that, from December 12, 2014, through January 31, 2015, Mr. Perelberg, a CME member, “engaged in a pattern of activity” on several dates where he manually entered large orders for March 2015 E-Mini NASDAQ 100 futures contracts solely to observe the market’s response and to induce market participants to trade opposite his smaller iceberg orders on the other side of the market. After receiving fills on his iceberg orders, Mr. Perelberg allegedly cancelled his resting large orders. Mr. Perelberg resolved his CME disciplinary action by agreeing to pay US $7,329 in disgorgement and a fine of US $5,000, and to serve a three-month CME Group trading ban.
Unrelatedly, Consolidated Trading Futures agreed to pay a fine of US $40,000 for purportedly violating Chicago Board of Trade position limits on parts of two days, while Two Sigma Investments, LP consented to pay a fine of US $25,000 for also violating CBOT positions limits for parts of two days. Frere Hall Capital Management LLP agreed to pay a fine of US $25,000 for allegedly exceeding NYMEX position limits on multiple days.
Additionally, Oakley Fuels Inc. on NYMEX and Flow Traders on CBOT agreed to resolve disciplinary actions charging that they engaged in exchange for related position transactions without an exchange of a related position; while National Bank of Canada consented to paying a fine of US $75,000 for allegedly entering into a “series of trades” opposite each other for accounts the firm owned and controlled. These constituted impermissible wash trades said the NYMEX BCC.
Finally, Guosheng Li, a non-member, agreed to pay the Commodity Exchange, Inc. US $25,000 and serve a one-year CME Group trading ban for allegedly pre-arranging round-turn transactions on two days in May 2015 between an account he traded for his employer and an account over which he exercised discretion, whereby his account made US $8,350 and his employer’s account lost US $10,738. Mr. Li previously reimbursed his employee for this trading, acknowledged the Comex BCC.
Compliance Weeds: It is unusual for self-regulatory organizations to file charges claiming that a member firm failed to produce documents or cooperate during an examination or as part of a regulatory inquiry. But it happens. Just recently, two firms were barred from membership with the National Futures Association for not cooperating with an examination by staff. (Click here to access the article “CTA and Principal Barred from NFA Membership for Failing to Cooperate in Examination” in the March 12, 2017 edition of Bridging the Week and here to access the article “CTA and Principal Barred as NFA Members for Not Cooperating With NFA Examination” in the March 5, 2017 edition ofBridging the Week.) Although SRO rules typically require production of documents upon request within certain time periods (e.g., 10 days or less for CME Group; click here to access CME Group Rule 432(L)(3)), SRO staff will usually grant reasonable extensions upon advance request – absent exigent circumstances. Ordinarily, broad requests can also be narrowed down too. However, it is always best to identify the need for a delay or narrowing of scope as soon as possible after an SRO request and to ask for the delay or a more fine-tuned request prior to the deadline for the response. You don’t have to send flowers (indeed, you shouldn't), but don’t ignore regulators’ demands for documents or other information!
Legal Weeds: The Guosheng Li fact pattern resonates of two recent enforcement actions by the Commodity Futures Trading Commission charging persons with insider trading for misappropriating trading information. In the first action brought in 2015, the CFTC alleged that Arya Motazedi, a gasoline trader for an unnamed large, publicly traded corporation, similarly misappropriated trading information of his employer for his own benefit. In the second action, CFTC brought and settled charges against Jon Ruggles, a former trader for Delta Airlines, for trading accounts in his wife’s name based on his knowledge of trades he anticipated placing for his employer. Both actions were grounded in a provision of law under the Dodd-Frank Wall Street Reform and Consumer Protection Act and a CFTC rule that prohibit use of a manipulative or deceptive device or contrivance in connection with futures or swaps trading. (Clickhere to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1. Clickhere for background on these CFTC enforcement actions in the article “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.)