CFTC not to appeal NY Court ruling in market manipulation case

After taking its time to carefully consider whether to challenge the New York Southern District Court’s ruling in a market manipulation case, the Commodity Futures Trading Commission (CFTC) has decided not to appeal from the ruling.

The case in question targeted Donald R. Wilson and his company DRW Investments, LLC, alleging that the defendants manipulated or attempted to manipulate the price of a commodity of the Commodity Exchange Act. The CFTC had claimed violations of the CEA as it existed during the period relevant to this action, which extended to August 12, 2011.

On Wednesday, February 27, 2019, a spokesperson for the CFTC said that:

“After careful consideration of the issues, as well as discussions with agency staff and Commissioners, Chairman Giancarlo has decided that the agency will not appeal the district court’s decision in CFTC v. Wilson et al. While the agency will not move forward with this case, it will continue to vigorously enforce the Commission’s anti-manipulation provisions and prosecute cases through trial where necessary.”

Let’s recall that the CFTC alleged that the defendants “unlawfully placed orders for certain futures contracts with the intent to move the prices of the contracts in their favor” and “to increase the value of the futures contract positions they held in their portfolio.” In essence, the CFTC had argued that the defendants attempted to manipulate, and in fact did manipulate, the market for various interest rate swaps. According to the CFTC, this price manipulation scheme took place over an approximately seven-month period between January 24, 2011 and August 12, 2011, involved over 1,000 electronic bids, and netted Defendants approximately $20 million in ill-gotten gains.

In December 2018, the Court dashed the CFTC claims. In explaining his decision, the Judge noted that throughout the depositions and trial in this case, the defendants credibly described their trading strategy.

• “At all times, … we bid below what we believed to be the Three-Month Contract’s fair value, so any trade would have positive expected value.”
• “Our trading strategy continued to be to acquire fixed-rate long positions in the Three-Month Contract … below our assessment of its fair value”.
• “The basic principle for our bidding was always the same: we wanted to acquire long positions . . . at rates below our estimate of fair value.”

The CFTC offered no evidence to refute this testimony, the Judge stressed.

The Court notes that there are several gaps – concessions, almost – in the CFTC’s case. First, there is no evidence that DRW ever made a bid that it thought might be unprofitable. Also, there is no credible evidence that DRW ever made a bid that it thought could not be accepted by a counterparty. Furthermore, the CFTC provided no credible evidence as to what the fair value of the contract actually was at the time DRW was making its bids. On top of that, there is no credible evidence that DRW’s bidding practices ever scared off would-be market participants. And finally, there is no evidence that DRW ever made a bid that violated any rule of the exchange – a fact the CFTC conceded in its closing argument.

Finally, in his ruling, Judge Sullivan found that the defendants made bids with an honest desire to transact at those posted prices, and that they fully believed the resulting settlement prices to be reflective of the forces of supply and demand. Given that the defendants’ trading pattern is supported by a legitimate economic rationale, it “cannot be the basis for liability under the CEA.”

Accordingly, the Court found for the defendants, and against the CFTC, on the CFTC’s attempted market manipulation claim.

In conclusion, the Judge stated:

“It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product”.