TFS-ICAP LLC and TFS-ICAP Ltd find deficiencies in CFTC complaint

About two months after the United States Commodity Futures Trading Commission (CFTC) brought charges against TFS-ICAP LLC and TFS-ICAP Ltd. over alleged fraud and supervision failures, the companies have turned to Court requesting that the regulator amends its Complaint against them.

Let’s recall that, in the Complaint filed in the New York Southern District Court, the CFTC alleges that, from approximately 2008 through 2015, brokers at TFS-ICAP offices in the United States and the United Kingdom attempted to deceive and deceived their clients by engaging in the practices of communicating to them fake bids and offers and fake trades in the foreign exchange options market.

The Complaint alleges that the practices, known as “flying prices” and “printing trades”, were a core part of TFS-ICAP’s broking business. It alleges that brokers flew prices and printed trades to clients over the phone, in instant message chats, and on TFS-ICAP’s proprietary electronic trading platform, Volbroker. According to the Complaint, the purpose of “flying” fake bids and offers and “printing” fictitious trades was to give clients the impression that there was more liquidity on TFS-ICAP’s platform than there actually was and to induce traders to transact at times and at prices that they would not otherwise have transacted. The Complaint also claims that when a client attempted to trade with a fake bid or offer and the TFS-ICAP broker could not find a real counterparty to step into the trade, the broker would lie – making up an excuse as to why the bid or offer was not available.

In a document filed with the Court earlier this week, counsel for TFS-ICAP LLC and TFS-ICAP Ltd sets forth a raft of deficiencies in the CFTC Complaint and request that these are corrected.

Some of these deficiencies are purely formal. For instance, the defendants argue that amendments should be made with regard to time frames. Thus, they note that the provisions of the Dodd-Frank Act that referenced the term “swap” were not effective until October 12, 2012, the effective date of the final rule further defining the term “swap”. As each of the CFTC’s claims in this case is based solely on the swap activity of TFS-ICAP LLC and TFS-ICAP Ltd, the CFTC has no authority to seek relief against either company for the failure to register or for any swap activities occurring prior to October 12, 2012, the defendants say. Hence, the Complaint should be amended to limit the time frame for which relief is sought.

Furthermore, the defendants insist that the Complaint is deficient to the extent it seeks relief for activities engaged in by TFS-ICAP Ltd outside of the United States, as it fails to allege facts showing that any of the company’s communications with non-US market participants had a direct and significant connection with activities in, or effect on, commerce of the United States. The only specific allegations relating to such a transaction describe a single occurrence of printing relating to a Turkish lira transaction occurring outside the US by non-US actors with no apparent connection whatsoever to the U.S. In these circumstances, the CEA has no extra-territorial application, the defense argues.

The Complaint is also seen to have failed to plead fraud with particularity in respect of various claims brought pursuant to the anti-fraud provisions of the CEA.The Complaint is said to be deficient because

• it improperly conflates the allegations of fraud against TFS-ICAP LLC and TFS-ICAP Ltd;
• fails to identify the who, what, when, where, and why of the fraud at issue; and
• fails to allege clearly the geographical and temporal scope of the claims against TFS-ICAP Ltd, a foreign entity.

Furthermore, the defense argues that the CFTC must allege that the purportedly false communications were made “in connection with” a swap and were material but the Complaint fails in both regards.

The “in connection with” element is satisfied where the alleged fraud coincides with a swap transaction. In the securities context, fraud has been found to be in connection with the purchase or sale of a security where the victim is induced by the fraud to take, try to take, divest himself of, try to divest himself of, or maintain an ownership position in a security. Here, the defense says, there is no such connection – at least no plausible one-between the alleged fraud and a swap is alleged.

While TFS-ICAP brokers through their false communications allegedly intended to induce clients to transact via TFS-ICAP’s platform at times and prices they would not otherwise have transacted and did in fact “often successfully induce traders to enter into real ‘follow-on’ trades”, the Complaint alleges only a single example of such follow-on trading, the defense notes. There, it is alleged that an actual trade was consummated at the same volatility level as a printed trade communicated by TFS-ICAP brokers 12 minutes earlier, and this somehow “indicates” that the communication of the false trade induced traders to enter a real one. Yet the Complaint does not even allege that the counterparties who supposedly transacted this “follow-on” trade ever saw the communication of the alleged false trade or that either party considered it in making a trade at that level.

Concerning materiality, the defense stresses that the Complaint does not allege any facts as to any transaction or event showing that the false communications were material to a trader’s decision to trade via TFS-ICAP at times and at prices when they otherwise would not have. In fact, the allegation that brokers “would get upset” if a price they aggressed on turned out not to be available, would plausibly suggest the opposite reaction – that traders would engage less with TFS-ICAP LLC or TFS-ICAP Ltd because they could not count on a bid or offer offered through them to be tradeable.

The case is captioned Commodity Futures Trading Commission v. TFS-ICAP, LLC et al (1:18-cv-08914).