CFTC ISSUES ADVISORY REGARDING COMMODITY TRADING ADVISORS AND SWAPS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC’s Division of Swap Dealer and Intermediary Oversight Issues Advisory Concerning Commodity Trading Advisors and Swaps

Washington, DC — The U.S. Commodity Futures Trading Commission’s (CFTC or Commission) Division of Swap Dealer and Intermediary Oversight (DSIO) today issued an advisory that provides guidance regarding requirements imposed on commodity trading advisors (CTAs) resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The Dodd-Frank Act amended the statutory definition of CTA to include any person who engages in the business of advising others on swaps. Additionally, certain CTAs who were previously exempt from registration with the CFTC are now required to register because of the CFTC’s rescission of Commission Regulation 4.13(a)(4) and amendments to Commission Regulation 4.5. As a result, provisions of the Commodity Exchange Act (CEA) and CFTC regulations applicable to CTAs might, depending on the circumstances, result in new advisory obligations.

This advisory provides guidance on the potential new advisory obligations of CTAs arising from the Dodd-Frank Act. It also informs the newly expanded class of CTAs and those previously exempt CTAs as to the general regulatory framework, including: (1) provisions of the CEA and CFTC regulations applicable generally to CTA activities; (2) CTA advisory obligations with respect to swap risk disclosures; and (3) requirements relevant to CTAs that advise Special Entities on swap transactions.

CFTC, MONETARY AUTHORITY OF SINGAPORE AGREE TO BETTER REGULATE CROSS-BORDER ENTITIES

FROM:  COMMODITY FUTURES TRADING COMMISSION 
December 27, 2013

U.S. Commodity Futures Trading Commission and Monetary Authority of Singapore Sign Memorandum of Understanding to Enhance Supervision of Cross-Border Regulated Entities

Washington, DC – Today, leaders of the U.S. Commodity Futures Trading Commission (Commission) and the Monetary Authority of Singapore (MAS) signed a Memorandum of Understanding (MOU) regarding cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in the United States and Singapore.

Through the MOU, the Commission and MAS express their willingness to cooperate with each other in the interest of fulfilling their respective regulatory mandates regarding derivatives markets. The scope of the MOU includes markets and organized trading platforms, central counterparties, trade repositories, and intermediaries, dealers, and other market participants.

The MOU was signed by Commission Chairman Gary Gensler and MAS Deputy Managing Director, Financial Supervision, Ong Chong Tee.

CFTC CHAIRMAN GENSLER SPEECH AT FAREWELL EVENT

FROM:  U.S. COMMODITIES FUTURE TRADING COMMISSION 
Remarks of Chairman Gary Gensler at Farewell Event
December 19, 2013

John F. Kennedy once said: “Let the public service be a proud and lively career.”

What I’ve been most struck by these last five years is how all of you – the exceptional people of the Commodity Futures Trading Commission (CFTC) really embody this sense of public service as expressed by President Kennedy.

Being with you at our last “town hall” meeting, I wish to thank all of you for welcoming me into the CFTC family these last five years.

I’d like to thank Secretary Jack Lew, Senator Elizabeth Warren, Commissioner Mark Wetjen, former Chairs Sheila Bair and Brooksley Born, and our former Director of Enforcement David Meister for your kind words.

I’m humbled to see Secretary Lew; Director of the National Economic Council and Assistant to the President for Economic Policy Gene Sperling; the Chairman of the Federal Reserve Ben Bernanke; the Chair of the Securities and Exchange Commission (SEC) Mary Jo White; the Chairman of the Federal Deposit Insurance Corporation Marty Gruenberg, the Director of the Federal Housing Finance Agency Ed DeMarco, the Chair of the National Credit Union Administration Debbie Matz, and so many others here at our town hall meeting.

In addition, it’s wonderful to welcome back seven former Chairs of this agency – in addition to Sheila and Brooksley – Jim Newsome, Mary Schapiro, Mike Dunn, Walt Lukken, and Sharon Brown-Hruska.

Five years ago, when the President was formulating his financial reform proposals, he placed tremendous confidence in this small agency, which for eight decades had overseen the futures market.

This confidence in the CFTC was well placed.

And I’m so honored that the President asked me to serve at this agency, particularly at this moment in history.

This amazingly talented staff along with Commissioners – Mike Dunn, Jill Sommers, Bart Chilton, Scott O’Malia and Mark Wetjen – has transformed a market.

As President Kennedy said, you all have much to be proud of. And no doubt, it’s been pretty darn lively.

Based on your work, bright lights of transparency now shine on the nearly $400 trillion swaps market.

You’ve made central clearing of swaps a reality and comprehensively reform the customer protection regimes in our markets.

You brought oversight to the world’s largest swap dealers.

You’ve changed the world’s conversation about LIBOR and Euribor and the real need to bring integrity to benchmark rates.

You’ve worked tirelessly to coordinate with our fellow regulators here at home and abroad.

And to boot, you’ve gotten us through five clean audits, restructured the agency, started a new Weekly Swaps Report, all while reviewing 60,000 public comments, and taking over 2,200 meetings with the public.

You’ve helped the Commission sort through over 170 Dodd-Frank actions – nearly one a week since it was signed into law.

And I want to thank you for those wonderful murderboards for the 54 congressional testimonies. More seriously, I do want to thank Congress and so many members and their staffs for their leadership on reform and supporting the efforts of this agency.

I have worked with some remarkable people in my career – when on Wall Street, at the Treasury Department, and on political campaigns.

The CFTC staff is among some of the most professional and productive that I’ve worked with in my life.

You’ve shown how when faced with real challenges – we can come together as a nation to solve them.

None of this would have been possible without the help and collaboration from others across the Administration and the regulatory community.

Thanks to the leadership of Mary Schapiro and Mary Jo White, we’ve formed a true partnership between our nation’s two market regulators.

Just to mention one of many areas of collaboration – it was no small feat for the staffs of our two agencies came together on joint definitional rules.

Financial reform would not have been possible without the leadership of Treasury and the Federal Reserve. In the wake of the nation’s worst financial crisis in 80 years, Secretary Geithner, Chairman Bernanke and their teams deserve our debt of gratitude. Looking back now, you have to wonder how they made it through their days ... livelier maybe than President Kennedy hoped for any public servant.

I particularly want to thank Secretaries Geithner and Lew, Neal Wolin, Mary Miller, Lael Brainard and Michael Barr at Treasury. In addition to Chairman Bernanke, I want to thank Dan Tarullo, Scott Alvarez and Pat Parkinson.

As the crisis was global, so too has been our reform journey. I want to give a warm thank you to Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board; Martin Wheatley, Chief Executive of the Financial Conduct Authority; Commissioner Michel Barnier, European Commissioner for Internal Market and Services; Jonathan Faull, Director General of the European Commission; and Masamichi Kono, Vice Commissioner for International Affairs of Japan’s Financial Services Agency.

I also know how hard market participants have worked – with real costs and against deadlines – to implement reforms that truly are transforming the markets.

Looking forward, the public is very fortunate to have such talented and dedicated public servants as Mark Wetjen and, subject to Senate confirmation, Tim Massad taking the helm here at the CFTC.

Much will be in your hands my friends, and the journey will continue to evolve. Just one thing beyond the personal note I’m going to leave in the top drawer: this agency really does need more resources.

Lastly, I want to introduce and thank each one of my daughters: Anna, Lee and Isabel.

I am so proud of each of you growing up to be such beautiful and accomplished young ladies. It’s a testament to each of you that not only have you put up with me but also allowed me to devote so much time to my professional life these last five years. I know how much your mom would be beaming at the three of you today, though she certainly would be laughing a bit at your dad.

I would not be here today if it weren’t for Francesca’s encouragement to follow my dreams and to pursue public service.

Your mom and your Captain Grandpa, a Pearl Harbor survivor and appointee of President Johnson, taught us about public service.

Once again, I want to thank President Obama for the opportunity to serve at such a lively time.

And I just want tell everybody, once again, how darn proud I am of all of you.

FLORIDA COURTS ORDERS OVER $ 8 MILLION IN SANCTIONS IN COMMODITY POOL FRAUD CASE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Federal Court in Florida Orders More than $8 Million in Sanctions against Defendants Philip Leon and Paul Rangel for Commodity Pool Fraud and Misappropriation

In a Parallel Criminal Action, Leon Pleaded Guilty to Mail and Wire Fraud

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) obtained federal court Orders requiring Defendants Philip Leon, of Altamonte Springs, Florida, to pay a $4 million civil monetary penalty and $1,598,343 in disgorgement and Paul Rangel, of Apopka, Florida, to pay a $1.7 million civil monetary penalty and $819,781 in disgorgement to settle CFTC charges related to a fraudulent commodity pool scheme. The consent Orders of permanent injunction, both entered on December 17, 2013 by Judge Gregory A. Presnell of the U.S. District Court for the Middle District of Florida, also impose permanent trading and registration bans against Leon and Rangel and prohibit them from violating provisions of the Commodity Exchange Act and a CFTC Regulation, as charged.

The Orders stem from a CFTC Complaint filed on July 16, 2012 against Leon and Rangel, as well as Defendants John G. Wilkins and their company Altamont Global Partners LLC (see CFTC Press Release 6315-12).

The Orders find that, from approximately March 2009 to at least June 22, 2012, Leon and Rangel operated a fraudulent scheme that solicited at least $18 million from approximately 241 commodity pool participants to trade, among other things, commodity futures contracts, options on futures, and off-exchange foreign currency contracts. The Orders further find that Leon and Rangel misappropriated a combined total of more than $2.4 million of pool participants’ funds and issued false statements to pool participants regarding the profitability and value of their accounts. Specifically, Leon misappropriated nearly $1.6 million and Rangel nearly $819,000 of pool participants’ funds as “loans” and “advances” from the commodity pools, designed to disguise their misappropriation, the Orders find.

In a related criminal action, on November 6, 2013, Leon pleaded guilty to one count of conspiracy to commit mail fraud and wire fraud (see United States v. Leon, No. 13-cr-249 (M.D. Fla. Oct. 2, 2013)). Leon has not yet been sentenced.

The CFTC’s litigation continues against Altamont Global Partners and Wilkins.

The CFTC thanks the National Futures Association for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Rachel Hayes, Peter Riggs, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.

CALIFORNIA COMPANY AND PRINCIPAL CHARGED WITH COMMODITY POOL FRAUD AND MISAPPROPRIATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges Direct Investment Products, Inc. and Its Principal, Alexander Glytenko, with Commodity Pool Fraud and Misappropriation

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement action charging Carlsbad, California-based Direct Investment Products, Inc. (DIP) and its principal, Alexander Glytenko, with fraudulently soliciting approximately $3.9 million from approximately 761 individuals residing in Russia and various former republics of the former Soviet Union to trade futures, among other products, through a commodity pool known as DIP Capital Partners (the Pool) and misappropriating at least $464,000 of the pool participant funds.

The CFTC Complaint alleges that, from approximately 2005 until approximately 2010, the Defendants, either directly or through their agents, knowingly misrepresented the Pool’s performance history to both prospective and actual participants by a) presenting profitable performance figures for various of the Pool’s funds for years in which they knew the Pool did not exist, b) presenting hypothetical trading performance without labeling it as such, and c) presenting at least two years of profitable performance results for one of the Pool’s funds when, in fact, that fund had experienced losses during those years.

Specifically, the CFTC Complaint alleges, among other things, that, in the course of soliciting prospective participants for the Pool, the Defendants fraudulently claimed that the Pool made annual profits from 2003 through 2008 ranging from 12.60% to 47.20%, and that two of the Pool’s individual funds made annual profits from 2004 through 2008 ranging from 12.01% to 41.12% and 10.16% to 49.79%, respectively. The Complaint also alleges that the Defendants made similarly fraudulent profit claims in statements provided to actual participants, with some showing historical profits going back as far as 2002.

In fact, according to the Complaint, the Pool did not even exist until 2005, the profit figures claimed by the Defendants were not reflective of actual trading, but were based on the hypothetical performance of Defendant’s proprietary trading strategy, and certified financial statements of one of the Pool’s funds showed actual losses in 2007 and 2008.

The Complaint further alleges that in 2009, at a time when the Defendants had imposed a freeze on the withdrawal of participants’ funds as a result of substantial losses incurred by the Pool, Glytenko used participants’ funds to make a loan of $464,000 from DIP to himself. This loan has never been repaid, according to the Complaint.

DIP has been registered with the CFTC as a Commodity Trading Advisor (CTA) and as a Commodity Pool Operator (CPO) since April 2007. Glytenko has been registered as an Associated Person (AP) of DIP since April 2007.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, disgorgement of ill-gotten gains, trading and registration bans, and a permanent injunction against further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Alan I. Edelman, James H. Holl, III, Michelle Bougas, Dmitriy Vilenskiy, and Gretchen L. Lowe.

CFTC CHAIRMAN GENSLER'S STATEMENT BEFORE FINANCIAL STABILITY OVERSIGHT COUNCIL

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Gary Gensler before the Financial Stability Oversight Council

December 9, 2013

I want to thank Secretary Lew for his kind words.

Five years ago when President-elect Obama asked me to serve, the economy was in a free fall. Americans were paying for the crisis with their jobs, their pensions and their homes.

Our financial system and our financial regulatory system had failed the American public.

Since then, the dedicated staffs of the Financial Stability Oversight Council’s (FSOC) member agencies have been hard at work to ensure finance better serves the economy.

Finance is but one part of our interconnected economy. The vast majority of opportunity, growth and innovation are outside of finance. In fact, 94 percent of private sector jobs are not in finance.

Finance best serves the economy when markets operate under common-sense rules of the road.

President Roosevelt understood this when he, along with Congress, transformed markets. Their reforms – enhancing transparency, access, and competition in the futures and securities markets and overhauling the nation’s banking laws – established the foundation for the U.S. economic growth engine for decades.

Five years ago President Obama and Congress faced similar challenges in the aftermath of this era’s financial crisis – how to modernize finance’s rules of the road so they work best for the public.

Through Dodd-Frank reforms, many of which now have been implemented by FSOC member agencies, much progress has been made.

First, at the heart of reform is ensuring that the largest financial institutions in our free-market system have the freedom to fail. That was true for my dad’s small family business in Baltimore. Nobody would have bailed him out if he didn’t make payroll each Friday.

That’s why I was pleased last month when Moody’s removed the uplift in credit ratings of the largest bank holding companies that had come from perceived government support. This is a real testament to the work of the Federal Deposit Insurance Corporation and the Federal Reserve, under the leadership of Chairmen Martin Gruenberg and Ben Bernanke and Governor Daniel Tarullo.

Second, due to the U.S. banking regulators working hand-in-hand with international regulators, tougher capital and liquidity standards are becoming a reality. Further, annual stress tests of large banks determine if capital levels are sufficient.

Third, we now have an agency – with the energetic leadership of Richard Cordray – whose key mission is ensuring consumers are protected from predatory lending practices and get a fair deal on financial products from mortgages to credit cards.

Fourth, thanks to the leadership of Chairs Mary Schapiro and Mary Jo White at the Securities and Exchange Commission (SEC), we now have real transparency into the hedge fund world and are addressing the risks of potential runs on money market funds.

Fifth, the swaps market, which was at the heart of the crisis, has been completely transformed. Bright lights of transparency now are shining on the $380 trillion market. The public can see the price and volume of every transaction, like a modern-day tickertape. Regulated trading platforms are trading a quarter of a trillion dollars in swaps each day. And more than 70 percent of the interest rate swaps market is now in central clearing – lowering risk and bringing access to everyone wishing to compete.

Sixth, each of us has been vigorous cops on the beat going after bad actors in the markets. The CFTC, working with the Department of Justice and the SEC, exposed the pervasive rigging of interest rate benchmarks and changed the entire public debate regarding LIBOR and other benchmarks.

I particularly want to thank the members of this council for the strong public policy statements included in the FSOC annual report calling for international regulators and market participants to find and transition to a replacement for LIBOR.

Lastly, is the benefit of this council. Through the leadership of Secretaries Geithner and Lew, and the collaboration of everyone around this table, we have become a real deliberative body. We have enhanced the lines of communication between the agencies, whether it’s the day to day assessing of risks in our financial system or working through the reform agenda. This week, for example, the Volcker Rule will be finalized based on our collaborative work.

Taken as a whole, the Dodd-Frank common-sense rules of the road have been truly transformative. These reforms are helping finance better serve the rest of the economy.

Once again, I want to thank all of you. It has been a real honor to serve with each of you on this council. It’s also an honor to share my last FSOC meeting with my fellow outgoing council member and seatmate, Ben Bernanke.

COURT ORDERS MAN TO PAY NFA $1.5 MILLION FOR MISREPRESENTATIONS AND SOLICITATION FRAUD

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
November 27, 2013

Federal Court in California Orders James D. Crombie to Pay over $1.5 Million for Misrepresentations to the National Futures Association and for Solicitation Fraud

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court Order against defendant James D. Crombie of Virginia, requiring him to pay $789,540.47 in restitution to defrauded customers and a civil monetary penalty of $750,000. Crombie’s fraudulent scheme involved making false statements and providing false documents to the National Futures Association (NFA) and fraudulently soliciting funds for his former company, Paron Capital Management, LLC (Paron). The Order also imposes permanent trading and registration bans against Crombie and prohibits him from violating the Commodity Exchange Act, as charged.

The Order, entered on November 21, 2013 by the Honorable Claudia Wilken of the U.S. District Court for the Northern District of California, stems from a CFTC Complaint filed against Crombie and Paron on September 15, 2011 (see CFTC Press Release 6112-11). On September 5, 2012, the court entered a consent Order of permanent injunction against Crombie’s former company, Paron; that Order imposed no monetary penalties against Paron and noted its cooperation with the CFTC’s investigation.

The November 21, 2013 Order against Crombie incorporated the findings of fact and conclusions of law set forth in the court’s July 26, 2013 partial grant of the CFTC’s motion for summary judgment against Crombie, in which the court found that Crombie willfully provided false documents to the NFA and lied to the NFA during the course of a subsequent investigation of Paron. The court also found on summary judgment that Crombie caused Paron to use fraudulent promotional materials in order to solicit clients to trade commodity futures.

The CFTC appreciates the cooperation and assistance of the NFA in this matter.

The CFTC Division of Enforcement staff members responsible for this case are Jonathan Robell, Danielle Karst, John Einstman, Dmitriy Vilenskiy, Joan Manley, and Paul Hayeck.

COURT ORDERS MF GLOBAL TO PAY OVER $1 BILLION TO CUSTOMERS

FROM:  U.S. COMMODITY FUTURES EXCHANGE COMMISSION
Federal Court in New York Orders MF Global Inc. to Pay over $1 Billion in Restitution to Customers of MF Global Inc.

The court’s Order also imposes a $100 million penalty on MF Global

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent Order against Defendant MF Global Inc. (MF Global) requiring it to pay $1.212 billion in restitution to customers of MF Global to ensure customers recover their losses sustained when MF Global failed in 2011.

The consent Order, entered on November 8, 2013 by U.S. District Court Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MF Global, to be paid after MF Global has fully paid customers and certain other creditors entitled to priority under bankruptcy law. The Trustee for MF Global obtained permission from the bankruptcy court to pay restitution in full to customers to remedy any shortfall with funds of the MF Global general estate.

The consent Order arises out of the CFTC’s complaint, filed on June 27, 2013, charging MF Global and the other Defendants with unlawful use of customer funds (see CFTC Press Release 6626-13, June 27, 2013). In the consent Order, MF Global admits to the allegations pertaining to its liability based on the acts and omissions of its employees as set forth in the consent Order and the Complaint. The CFTC’s litigation continues against the remaining defendants: MF Global Holdings Ltd., Jon S. Corzine, and Edith O’Brien.

Gretchen Lowe, Acting Director of the CFTC’s Division of Enforcement, stated, “Division staff have worked tirelessly to ensure that 100 percent restitution be awarded to satisfy customer losses. The CFTC will continue to ensure that those who violate U.S. commodity laws and regulations designed to protect customer funds will be vigorously prosecuted.”

The CFTC’s Complaint charged MF Global, a registered Futures Commission Merchant (FCM), with violating provisions of the Commodity Exchange Act and CFTC Regulations intended to protect FCM customer funds and requiring diligent supervision by registrants. Specifically, the Complaint charged that during the last week of October 2011, MF Global unlawfully used customer segregated funds to support its own proprietary operations and the operations of its affiliates. In addition to the misuse of customer funds, the Complaint alleged that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) made false statements in reports it filed with the CFTC that failed to show the deficits in the customer accounts, (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation, and (iv) failed to diligently supervise the handling of commodity interest accounts carried by MF Global and the activities of its partners, officers, employees, and agents.

The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.

The consent Order recognizes the cooperation of the Trustee for MF Global and requires the Trustee’s continued cooperation with the CFTC.

CFTC Division of Enforcement staff members responsible for this case are Sheila Marhamati, David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, and Manal Sultan. Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology also assisted in this matter.

COURT ORDERS CALIFORNIA MAN TO PAY MORE THAN $1.6 MILLION IN COMMODITY POOL FRAUD CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders California Man Jeffrey Gustaveson to Pay over $1.6 Million for Fraud, Misappropriation, and False Account Statements in Commodity Pool Scheme

Washington, DC –The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court Order awarding restitution for defrauded commodity customers and a civil monetary penalty against Defendant Jeffrey Gustaveson of Morgan Hill, California, in connection with a commodity pool investment scheme. The Order requires Gustaveson to pay a civil monetary penalty of $1,230,000 and $410,000 in restitution. The Order also imposes permanent trading and registration bans against Gustaveson and prohibits him from violating the Commodity Exchange Act, as charged.

The Order resolves the CFTC’s Complaint, filed on August 29, 2012, charging Gustaveson with fraud, misappropriation, and issuing false account statements in a multi-million dollar commodity pool scheme (see CFTC Press Release 6341-12).

Magistrate Judge Howard Lloyd of the U.S. District Court for the Northern District of California issued a Report and Recommendation for default judgment and permanent injunction on August 19, 2013, and District Judge Lucy Koh entered an Order adopting Judge Lloyd’s Report and Recommendation on October 23, 2013.

The Order finds that Gustaveson received $2,495,000 from customers to trade commodity futures in a pool. But, rather than trade the pool participants’ funds as promised, Gustaveson used only approximately $400,000 of the funds to trade commodity futures, and he kept at least $400,000 the remaining funds to pay his personal expenses, the Order finds. To conceal his misappropriation, Gustaveson distributed false trading account statements to the pool participants that misrepresented the value of the pool, reported false profits, and failed to disclose his misappropriation of pool participants’ funds. When his fraud was exposed, Gustaveson returned a significant portion of the pool participants’ funds, leaving $410,000 of the customers’ funds unpaid, the Order finds. As to the amount still owed, Gustaveson admitted that he spent the money on personal expenses, past-due taxes, and repaying a previous investor, according to the Order.

CFTC Division of Enforcement staff members responsible for this case are Lindsey Evans, Mary Beth Spear, Diane Romaniuk, Ava M. Gould, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner

COMEX FLOOR BROKER CHARGED BY CFTC WITH FAILING TO PRODUCE REGISTERED DOCUMENTS

FROM:  COMMODITY FUTURES TRADING COMMISSIONS 
CFTC Charges Registered COMEX Floor Broker Dominick Anthony Cognata with Failing to Produce Required Documents in Response to a CFTC Subpoena and Seeks to Revoke His Registration

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed two separate administrative proceedings against Dominick Anthony Cognata, a registered COMEX floor broker. In one proceeding, a Complaint charges Cognata with failing to produce, or otherwise make available, to the CFTC certain records relating to his brokerage activities, in violation of Section 4g of the Commodity Exchange Act (CEA) and CFTC Regulations 1.31(a) and 1.35(a). In the other proceeding, a Notice of Intent to Revoke (Notice) seeks to revoke Cognata’s registration as a floor broker, under Sections 8a(3)(M) and 8a(4) of the CEA.

As alleged in the CFTC Complaint, on or about August 14, 2012, the CFTC’s Division of Enforcement, as part of an ongoing investigation, issued a lawfully-authorized subpoena to Cognata for the production of documents, including trading cards, order tickets, and other documents relating to his trading of gold or silver futures or options on futures, which were required to be made, kept and produced by floor brokers pursuant to the CEA and CFTC Regulations. To date, Cognata has failed to produce any documents in response to the subpoena, according to the Complaint. As a result of Cognata’s violations, the CFTC is seeking a civil monetary penalty and an Order that Cognata cease and desist from violating the provisions of the CEA and CFTC Regulations, as charged.

In the Notice, the CFTC is seeking the revocation of Cognata’s registration as a floor broker for “good cause.” It is alleged that the facts constituting “good cause” include, in addition to Cognata’s failure to produce records to the CFTC, the settlements and findings in two exchange disciplinary actions against Cognata since 2011. In one exchange disciplinary action, the Notice alleges, pursuant to an offer of settlement, a panel of the COMEX Business Conduct Committee (the Panel) found that on various dates from October through December 2008, Cognata engaged in noncompetitive, prearranged trades of silver and gold options. In the other exchange disciplinary action, the Notice alleges, pursuant to an offer of settlement, the Panel found that on three occasions in June and July 2011, Cognata prearranged trades in silver options for the purpose of receiving money passes from other COMEX members. In both disciplinary actions, Cognata neither admitted nor denied any rule violations in his offers of settlement.

CFTC Division of Enforcement staff members responsible for this matter include K. Brent Tomer, R. Stephen Painter, Jr., Patrick Daly, Trevor Kokal, Sheila Marhamati, Elizabeth Brennan, Steven I. Ringer, Lenel Hickson, Stephen J. Obie, Manal Sultan, and Vincent A. McGonagle.

CFTC TAKES ACTION AGAINST OWNER AND COMPANY ENGAGED IN OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges New York-Based The Yorkshire Group Inc. and Its Owner, Scott Platto with Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil injunctive enforcement action in the U.S. District Court for the Eastern District of New York against Defendants The Yorkshire Group Inc. (Yorkshire) of Staten Island, New York, and its sole owner, Scott Platto, also of Staten Island. The CFTC Complaint, filed on September 25, 2013, charges the Defendants with engaging in illegal, off-exchange financed transactions in precious metals with retail customers. The Complaint further alleges that Platto, as the owner, operator, and controlling person of Yorkshire, is liable for Yorkshire’s violations of the Commodity Exchange Act (CEA)

According to the Complaint, between September 2011 and August 2012, the Defendants solicited retail customers by telephone to buy physical precious metals such as silver and palladium in off-exchange leverage transactions. Retail customers engaging in financed transaction with Yorkshire were allegedly told that they were borrowing money to purchase precious metals. Customers paid Yorkshire a portion of the purchase price for the metals, and Yorkshire financed the remainder of the purchase price, while charging the customers interest on the amount they purportedly loaned to customers. The Complaint further alleges that Yorkshire’s customers never took delivery of the precious metals they purportedly purchased and that the Defendants neither bought, sold, loaned, stored, or transferred any physical metals for these transactions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which expanded the CFTC’s jurisdiction over retail commodity transactions like these, prohibits fraud in connection with such transactions, and requires that these transactions be executed on or subject to the rules of a board of trade, exchange, or contract market. Thus, since Yorkshire’s and Platto’s transactions were executed off exchange, they were illegal, according to the Complaint.

When Yorkshire and Platto allegedly engaged in these illegal transactions, they were acting as a dealer for metals merchant Hunter Wise Commodities, LLC (Hunter Wise), which the CFTC charged with fraud and other violations in federal court in Florida on December 5, 2012 (see CFTC Press Release 6447-12). On February 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets (see CFTC Press Release 6522-13).

In its continuing litigation against Yorkshire and Platto, the CFTC seeks restitution to defrauded customers, a return of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the CEA, as charged.

The CFTC Division of Enforcement staff responsible for this action are Karin N. Roth, Philip Rix, David W. MacGregor, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.

CFTC’s Precious Metals Fraud Advisory

In January 2012, the CFTC issued a Precious Metals Consumer Fraud Advisory to alert customers to precious metals fraud. The Advisory states that the CFTC had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Advisory specifically warns that companies often fail to purchase any physical metals for their customers, instead simply keeping the customer’s funds. The Advisory further cautions consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.

CFTC CHARGES MISSOURI RESIDENT AND COMPANY WITH VIOLATING COMMODITY EXCHANGE ACT AND FOREX REGULATIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Files Enforcement Action Charging Missouri Resident Daniel K. Steele and His Foreign Currency  Firm with Violations of the Commodity Exchange Act and Forex Regulations
Court enters Order freezing Defendants’ assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil Complaint against Defendants Daniel K. Steele of Rolla, Missouri, and his firm Champion Management International, LLC (Champion Management).  The CFTC’s Complaint charges Steele with, among other things, engaging in an act or practice which operated as a fraud or deceit under Section 4o(1)(B) of the Commodity Exchange Act (CEA) for failing to disclose material information, including that defendants were acting as unregistered Commodity Pool Operators (CPO) for at least two commodity pools engaging in off-exchange retail foreign currency transactions (forex).  The Complaint also charges Steele with failing to disclose that the counterparty to the retail forex transactions that were offered or entered into with the respective pools was not registered as a Retail Foreign Exchange Dealer (RFED).  The Complaint charges Champion Management with acting as an unregistered CPO in connection with a third forex pool. The Complaint further alleges that neither Defendant has ever been registered with the CFTC in any capacity.

The complaint, filed on September 25, 2013, in the U.S. District Court for the Eastern District of Missouri Eastern Division, alleges that from at least February 28, 2011 through the present (relevant period), Steele individually and acting as an agent of Champion Management, solicited at least $1.7 million from at least 24 pool participants to participate in three forex pools.  The Complaint further alleges that Steele, during the relevant period, failed to disclose material information to pool participants, which operated as a fraud in that neither he nor Champion Management were properly registered with the CFTC and that he misappropriated a portion of pool participants’ funds.

On September 25, 2013, the same day the complaint was filed, Judge Rodney W. Sippel, of the U.S. District Court for the for the Eastern District of Missouri, entered under seal an emergency order freezing the defendants’ assets and prohibiting the destruction or alteration of books and records.  The judge set a hearing date on the CFTC’s motion for a preliminary injunction for October 7, 2013.

In its continuing litigation, the CFTC seeks a return of ill-gotten gains, restitution, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws.

The CFTC appreciates the assistance of the Missouri Secretary of State, Securities Division and the United States Postal Inspection Service.

CFTC Division of Enforcement staff responsible for this case are: Eugene Smith, Melanie Devoe, George Malas, Kyong J. Koh, Peter M. Haas, and Paul G. Hayeck.

ETHANOL TRADER CHARGED BY CFTC WITH SCHEMING TO CONCEAL TRADING LOSSES

FROM:  U.S. COMMODITY FUTURE TRADING COMMISSION
CFTC Charges Ethanol Trader John Aaron Brooks with Fraud for Scheming to Conceal Trading Losses

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil injunctive enforcement action charging John Aaron Brooks with defrauding an affiliate of a large commercial bank where he then worked by scheming to conceal trading losses from the bank and its affiliate.  As alleged in the CFTC’s Complaint, Brooks effectuated his scheme by inflating the value of New York Mercantile Exchange Chicago Ethanol (Platts) Futures contracts to conceal trading losses he was incurring.  The losses concealed ultimately grew to cause the bank and its affiliate to suffer over $40 million in realized losses before Brooks’s fraud was detected, leading to his termination, according to the Complaint. Brooks resides in Houston, Texas.

The CFTC’s civil complaint, filed September 27, 2013, in the U.S. District Court for the Southern District of New York, alleges that for the majority of the days for nearly eleven months beginning in or about November 2010, and continuing through on or about October 20, 2011, Brooks, then employed as Director in the commodities business of the bank affiliate, knowingly entered false inflated prices into an internal trade booking and valuation computer software system to effectuate his scheme to conceal trading losses.

In its continuing litigation, the CFTC seeks a civil monetary penalty, restitution, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff responsible for this case includes Janine Gargiulo, Michael Geiser, Trevor Kokal, David Acevedo, Lenel Hickson, Stephen J. Obie, Manal Sultan, and Vincent McGonagle.

CFTC CHAIRMAN GENSLER MAKES REMARKS BEFORE THE ISDA EUROPEAN CONFERENCE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler before the ISDA European Conference

September 19, 2013

Thank you, Bob, for that introduction. I would also like to thank the International Swaps and Derivatives Association (ISDA) for the invitation to speak at this annual European conference.

Five years ago this week, the U.S. economy was in a free fall. Federal Reserve Chairman Bernanke and then Treasury Secretary Paulson faced the unthinkable – asking the American people to bail out financial institutions to save the economy.

Five years ago, the swaps market was at the center of the crisis. It cost middle-class Americans – and hardworking people across the globe – their jobs, their pensions and their homes.

Five years ago, there was no reporting of swaps to the public or to regulators

Five years ago, the swaps market was largely uncleared.

Five years ago, unregulated dealers dominated the market.

Five years ago, swaps were not exchange traded – all classic attributes of a dark market.

President Obama then met in 2009 with the G-20 leaders in Pittsburgh. They committed to bringing the swaps market into the light through transparency and oversight.

The President, working with the U.S. Congress, in 2010 gave the task of implementing swaps market reform to the Commodity Futures Trading Commission (CFTC) and security-based swaps market reform to the Securities and Exchange Commission.

Today, the CFTC has substantially completed these reforms.

The CFTC’s 61 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.

This new era of swaps market reform began to be implemented last October 12. With numerous implementation dates behind us and a number of critical dates coming up, the transition to a reformed swaps market is fully in motion.

This represents a paradigm shift to a transparent, regulated marketplace.

Transparency

Today, the public can see the price and volume of each swap transaction as it occurs on a website, like a modern-day tickertape. Further, half of the swaps market (by volume) is being reported to the public without delay – or as Congress mandated “as soon as technologically practicable.” Soon swaps will be traded on transparent platforms.

This transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.

Regulators have benefited as well. Nearly $400 trillion in market facing swaps now are being reported into data repositories. There is still work to be done to ensure the data in the warehouses is reliable and accessible. There is still work to be done to aggregate across data warehouses as well. But this market transparency is a reality.

This transparency also spans the entire marketplace – cleared as well as bilateral or customized swaps. All categories of market participant from swap dealers to end-users now are to report transactions. Every product, without exception, now must be reported – interest rate; cross currency; foreign exchange; credit index; equity index; and commodities, such as energy and agricultural.

On September 30, the far-flung operations of U.S. financial entities, the guaranteed affiliates and the branches of U.S. persons, also will begin required public reporting.

Further, starting October 2 the public will benefit from the competition and transparency that swap execution facilities (SEFs) will bring to the marketplace. All market participants will have impartial access to SEFs where they can leave live, executable bids or offers in an order book.

We have 18 SEF applications, with seven of them now temporarily registered.

These reforms will finally close what had been known in the U.S. as the “Enron Loophole,” which had allowed for unregistered, multilateral swaps trading platforms.

Five years ago, this market transparency was nonexistent.

Clearing

This month, with the completion of phased implementation, mandatory clearing of interest rate and credit index swaps is a reality. Clearinghouses lower risk and promote access for market participants.

In the month of August, even before our last domestic clearing compliance date, 63 percent of new interest rate swaps were cleared. In total, nearly $180 trillion of the approximately $330 trillion market facing interest rate swaps market, or 53 percent, was cleared at the end of August. This compares to only 21 percent of the market in 2008, according to information on ISDA’s website.

On October 9, the guaranteed affiliates and branches of U.S. persons also will come into central clearing. This includes hedge funds that are operating in the United States but are incorporated in the Cayman Islands.

As we move into 2014, I would anticipate that closer to two-thirds of the interest rate swaps market will be in central clearing.

Yet five years ago, there was no required clearing in the swaps market.

We’ve also made significant progress since the crisis on reforms to protect both futures and swaps customers through the CFTC’s gross margining and the so-called “LSOC” (legal segregation with operational comingling) rules.

Commissioners now are considering final rules that would further strengthen controls around customer funds.

Swap Dealer Oversight

In 2008, swaps were basically not regulated in the United States, Europe or Asia. Among the reasons for this, it was claimed that financial institutions did not need to be specifically regulated for their swaps activity, as they or their affiliates already were generally regulated as banks, investment banks, or insurance companies.

AIG’s downfall was a clear example of what happens with such limited oversight.

Today, we have 82 swap dealers and two major swap participants registered. This group includes the world’s 16 largest financial institutions in the global swaps market, commonly referred to as the G16 dealers. It also includes a number of energy swap dealers.

These reforms help protect the public, lower risk and increase market integrity as swap dealers now must report their transactions and comply with sales practice and other business conduct standards.

Working closely with our counterparts in Europe, we have essentially identical risk mitigation rules that include promoting the timely confirmation of trades and documentation of the trading relationship. Through ISDA protocols, 9,100 market participants have amended their documents to conform to the new U.S. risk mitigation requirements, and 5,200 market participants have conformed to European standards. More than 10,900 market participants are adhering to ISDA’s protocols for sales practices.

These reforms will significantly lower the risk of the swaps market to the public and the economy.

Five years ago, such oversight of swap dealers did not exist.

International Coordination on Swap Market Reform

AIG nearly brought down the U.S. economy through the operations of its offshore guaranteed affiliate.

It wasn’t the only U.S. financial institution that brought risk back home from its far-flung operations during the 2008 crisis.

It was also true at Lehman Brothers, Citigroup, and Bear Stearns. Ten years earlier, it was true at Long-Term Capital Management.

The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. When a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders.

The U.S. Congress was clear in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that the far-flung operations of U.S. enterprises are to be covered by reform.

The CFTC, coordinating closely with global regulators, completed guidance on the cross-border application of the Dodd-Frank Act in July. Swaps market reform covers transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates.

Further, the guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business in the U.S. or that are majority owned by U.S. persons.

The guidance embraces the concept of substituted compliances where there are comparable and comprehensive rules abroad. We are currently reviewing submissions for entity-level substituted compliance in six jurisdictions (the European Union, Australia, Canada, Hong Kong, Japan and Switzerland). We’re consulting closely with regulators in those jurisdictions and look forward to making determinations prior to December 21 of this year.

Benchmark Interest Rates

Five years ago, interest rate benchmarks such as LIBOR and Euribor were being readily and pervasively rigged.

Working with the Financial Conduct Authority and the U.S. Justice Department, we brought actions against three global banks for such abuses.

LIBOR and Euribor are critical reference rates for global futures and swaps markets. In the U.S., LIBOR is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.

We must ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.

The interbank, unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.

The U.S. Financial Stability Oversight Council recommended that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks anchored in observable transactions and supported by appropriate governance structures, and to develop a plan to accomplish a transition.

An International Organization of Securities Commissions (IOSCO) task force took an important step in announcing new principles in July that require benchmarks to be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest.

Building on IOSCO’s work, the Financial Stability Board is initiating a review of alternatives to existing benchmark interest rates, as well as considering any potential transition issues.

I want to thank Martin Wheatley, with whom I’ve worked so closely on these issues, for all of his efforts and leadership.

Conclusion

In the five years since the financial crisis, the swaps market has experienced a paradigm shift.

No longer is the market closed and dark.

With the substantially completed reforms, the public and regulators have transparency. We have a majority of the market moving to central clearing. We have oversight of swap dealers, including the far-flung operations of U.S financial institutions.

The public and the markets are benefitting from these common-sense rules of the road.

I’d like to close by saying that the CFTC is currently an underfunded agency. We are only slightly larger than we were 20 years ago. At that time, we oversaw just the futures market, which is less than a tenth of the size of the swaps market we now oversee as well.

It is critical to the public’s confidence in these markets that the regulator is well funded.

Investments in both people and technology are needed for effective market oversight – like having more cops on the beat.

It’s only with a well-funded CFTC that market participants, including this association’s members, will get timely reviews of applications and petitions and answers to your questions.

Last Updated: September 19, 2013

DEFENDANTS TO PAY OVER $2.4 MILLION FOR ROLES IN FRAUDULENT FOREIGN CURRENCY SCHEME

FROM:   COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Alex Ekdeshman and Paramount Management, LLC, to Pay over $2.4 million in Restitution and a Fine for Fraudulent Foreign Currency Scheme

Court Order Stems from a CFTC Complaint that Charged Defendants with Solicitation Fraud and Misappropriation of Customer Funds

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent Order against Defendants Alex Ekdeshman of Holmdel, New Jersey, and Paramount Management, LLC (Paramount), requiring them to pay $1,146,000 in restitution to their defrauded customers and a $1,337,000 civil monetary penalty. The Consent Order of Permanent Injunction also imposes permanent trading and registration bans against the Defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The Order was entered on September 9, 2013, by U.S. District Judge Colleen McMahon of the Southern District of New York and stems from a CFTC Complaint filed against the Defendants on June 26, 2013. The CFTC’s Complaint charged Ekdeshman, individually and as the agent of Paramount, with solicitation fraud and misappropriating “the vast majority” of customer funds for business expenses. Specifically, the Complaint charged the Defendants with operating a fraudulent scheme that solicited more than $1.3 million from approximately 110 retail customers to engage in leveraged or margined foreign currency (forex) transactions with unregistered off-shore counterparties. The Defendants allegedly advised customers that forex trading accounts would be opened in the customer’s name and would be traded by the Defendants on behalf of the customer.

Furthermore, the Defendants, through a telemarketing sales force and a “Performance Record” linked to their website, touted Paramount’s successful trading record as having yielded an average monthly return of 4.6% over a 20-month period, based on the performance of Paramount’s proprietary trading software system, according to the Complaint.

However, the court’s Order finds that, contrary to the claims made during the solicitations, the Defendants did not manage or trade any customer account, and thus Paramount’s customers neither made actual purchases of any forex nor received delivery of forex. The Order also finds that the Defendants misappropriated all customer funds for Ekdeshman’s personal benefit and failed to disclose to actual or prospective customers that they were misappropriating customer funds. To conceal their fraud, the Order finds that, during all phases of the scheme, the Defendants issued false account statements to their customers, as no individual customer accounts were ever created and no profits were ever generated.

The CFTC appreciates the assistance of the United Kingdom Financial Conduct Authority, the Financial Services Commission Mauritius, and the Financial Services Board of the Republic of South Africa.

Further, the CFTC appreciates the assistance of the Wisconsin Department of Financial Institutions, the National Futures Association, and the Federal Trade Commission.

CFTC Division of Enforcement staff members responsible for this matter are Thomas Kelly, Michael Amakor, Michael Geiser, Melanie Devoe, George Malas, Timothy J. Mulreany, Paul Hayeck, and Joan Manley.

CFTC COMMISSIONER CHILTON'S SPEECH TO THE AMCOT 2013 BUSINESS CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION

“Cowboy Company”

Speech of Commissioner Bart Chilton to the Amcot 2013 Business Conference, Lake Tahoe, California

August 5, 2013

Hey Yeah, Hold Your Horses!

Hey yeah! Much obliged for the introduction. It sure is a fine thing to spend a spell with all you good folks in this pretty part of the American West. I always get a little “giddy-up” when dealing with cooperatives, so it’s a great treat to be with each of you.

When people think of Tahoe, they may ponder “Tahoe, oh—skiing, the Lake, maybe golf or gambling. Heck, let’s go.” But today, well, let’s switch it up and talk about the Old West and Tahoe aglow, back in the day. This is a fitting place to do just that. The Ponderosa Ranch, from Bonanza, was just over yonder, on the Nevada side of the Lake. Remember the Cartwright’s? There was Ben who survived three wives, but begets a son from each one: Adam, Hoss, and Little Joe. And just a few miles from here, they hold the Genoa Cowboy Festival at the site of the first ranch in Nevada. (Not the Mustang Ranch—that’s 15 minutes east of Reno. Hey, you at the door, where ya going?) The first ranch in Nevada was Trimmer Ranch No. 1. Let’s assume there were others. The oldest saloon in Nevada is also in Genoa. A portion of the original bar from the 1800’s is still in use. And, the local phone book lists at least 25 places to “get your boots on” and get a pair.

Right about now, some of you might be thinking, “Whoa, hold your horses there, long hair.” Isn’t this supposed to be about financial regulation or commodity markets or something?” Yeah, Sundance, it is. We’re just going to kick up the dust a bit as we “tumble along with the tumbling tumbleweeds” and have our cordial conversationalizing. After all, like George Strait sings, “I ain’t here for a long time. I’m here for a good time.” So, let’s get to it and talk some about the Old West and our financial markets today.

Has anybody seen the new Lone Ranger movie? Ooh, not too many, eh? It received some rough reviews, although I found a few good ones. It tanked on opening weekend. As of a few days ago, the film had made $85 million in the U.S., and $164 million worldwide. The production budget was $215 million. So, not good, Kemosabe. The whole thing has the good folks at Disney cogitating some on that one. But, I’ll come clean: I’m partial to it. In fact, I really liked it! Yessiree, Bob. (Jarral asked me to refer to Bob Norris as “sir.” Yessiree, Bob. Was that okay, Jarral?) In fact my wife and I saw The Lone Ranger twice. Heck, he’s an American legend. Plus, I’m a patsy for Westerns and the William Tell Overture. Can’tcha just hear that tune? Hi-Yo Silver, away! It really gets you going. You can envision Silver rearing up then taking off like wildfire and galloping along. Lots and lots of action—ooh, ooh yeah!

Well, there’s a lot of action in financial markets too. How smooth was that? But it’s true. The William Tell Overture might as well be the theme music for our work, sun-up to sun-down these days.

Blue Jean Baby & Prospectors

So, let’s travel back those golden days of yesteryear, to the mid-1800’s. The Gold Rush was going strong here in California. Prospectors came to make their fortunes. Some did. Some didn’t. In addition to those gold prospectors, some folks that assisted them also found their fortunes. Think Levi Strauss, who switched very early on from canvas to twilled cotton cloth to make his now-famous pants. He later co-patented, with a Reno tailor, the pants with rivets to make them stronger. It was the birth of blue jeans. “Blue jean baby . . . L.A. lady, seamstress for the band” (sorry). But, it was the birth of blue jeans, if you will. There was also Henry Wells and William Fargo of stagecoach and now banking renown. One of the prospectors, Charles Bowles, had a side job. He robbed Wells Fargo stagecoaches of their strongboxes ‘round these parts. He committed 28 such robberies in Northern California in eight years and became better known as Black Bart. Gotta love the name.

At the same time, a group of market prospectors in Chicago started what would become the Chicago Board of Trade. Commodity prices were in disarray with extreme volatility that didn’t do anyone any good. These market prospectors sought to fix that. Cotton wasn’t one of the original products traded, but soon, it would be.

Here we are, all these years later, and like the Western gold prospectors who changed the way they looked for gold over the years, the market prospectors—in particular the speculators—have also changed, or morphed. The question I ask as a regulator, and I know some of you ask as well, is this: Are markets still performing the purposes envisioned by those folks back in the day? There are a couple of areas, actually some new types of traders and activities, which make me wha wha wha wonder.

The Massive Passive Gang

First, we have seen a “financialization” of commodity markets by a band of traders called Massive Passives—the Massive Passive Gang (they are a “gang” for today). Investors looking to diversify their present-day strongbox portfolios sought out the derivatives world and dumped roughly $200 billion into U.S. regulated futures markets as they were “coming round the mountain” between 2005 and 2008.

Say a pension fund wanted to diversify into commodities—there’s nothing wrong with that from my perspective. They aren’t Desperados. Nevertheless, the type of trading activity they undertake is different from what speculators have typically done. Instead of getting in and out of markets, maybe based upon a drought or other natural disaster, this gang of very large funds, pension funds, some hedge funds, exchange traded funds (ETFs), and the like buy and hold their market positions. They bury them, only to come back a few years later. They are both massive in size, and fairly passive in their trading strategy—the Massive Passive Gang.

Here’s the worrisome part, pardners: too much concentration in markets by too many of the Massive Passive Gang can influence and contribute to price abnormalities. Heck, just one large massive passive can impact price if they are large enough.

Take 2008, when crude went from right around $99 at the beginning of the year to more than $145 in July, then all the way back to $31 in December. All of that took place without much change in supply or demand. Convince me the Massive Passive Gang had no role in that market distortion and I’ll wear chaps and a fringe coat to your next meeting.

On cotton futures markets, absent a few exceptions (uh hum, 2008, pardon me…frog in my throat) since their inception more than 120 years ago, things have been comparatively stable. There are lots of commercial traders, like many of you and other end-user-related traders. Of course, we still have the market speculators. We need the speculators, want ‘em, gotta have ‘em, or we have no markets.

One thing that has changed is the length of the trading day. The markets run nearly 24-7-365. That’s actually caused some problems in cotton, by the way. Also back in 2008, we saw 14 days in about a six week period where markets went lock-limit, 11 of which were before sun-up in New York—ya know, back in the Old States. There was sparse liquidity, and traders in China in the markets, and what would normally not be huge trades pushed prices to the limits. Heck, the markets were locked before folks here had their eggs and bacon.

In response to what was going on in 2008 with the Massive Passive Gang, Congress and President Obama instructed us (as part of the Dodd-Frank financial reform law in 2010) to put in place speculative position limits. Those limits would ensure that regulators have the firepower to run excessive speculation outta these markets. To date, the limits aren’t in place. There’s fierce opposition out there, but we’re fix’n to pony up and fix that soon. In September I expect we’ll get back in the saddle again and put out a proposal on position limits. And, I believe the final limits rule will be in place come January of 2014. This rule, I assure you, won’t be able to be shot down (in a blaze of glory or otherwise).

So, that’s the Massive Passive Gang. Let’s go, daylights burning and we’ve got ground to cover.

The Fastest Gunslingers

There is a lot of debate about who actually was the fastest gun in the West. Some say Doc Holliday or Johnny Ringo deserve the designation. Others suggest Bat Masterson (born Bartholomew, by the way—what’s it about those dandy Western names?). How about Billy the Kid? The Kid thought he was the one, “I’m Billy the Kid,” he said, “…the fastest draw. It’s not arrogance. It’s the truth.” Maybe Wyatt Earp? Nah, he held that, “Fast is fine, but accuracy is everything.” Annie Oakley and Calamity Jane, the renowned sharpshooters, would agree with Sherriff Earp. Some suggest the fastest gun was John Wesley Hardin, also known as “Little Arkansaw.” He claimed to have killed 42 men.

Let’s talk about some other fast guns—market gunslingers. They’re a rough bunch of young guns, and a Wild West breed all their own. Not a horse, like the Lone Ranger’s “Silver,” or a cow, coyote or rattlesnake, but a cheetah. That’s right, a cheetah. Not a card cheater who sits in the gunfighter’s chair in the corner saloon, but a cheetah as in the fastest land animal. Those cats are the fastest trading guns. Sometimes you just gotta mix it up.

Now, I’m asking you to envision a cheetah with a hat (let’s say a ten-gallon hat, just for the hell of it), tooled boots with silver spurs, and a low-slung gun belt on those slim cheetah hips. That cheetah gunslinger is eyeballing us from 40 paces. Will we be fast enough to take him? In truth, nah, probably not. They usually win, those cheetahs, with their fancy spurs. Who do they think they are?

The thing is, those cheetahs gunslingers are always so hell-bent for leather when they trade that they are impacting the ability of you guys, and other end-users, to do what you need to do, to hedge. I mean, pardon you guys to pieces for simply trying to hedge your legitimate business risks. For crying out loud, you aren’t looking for a gunfight. You just wanna do what those original prospectors set in motion all those years ago. Yet, here you are, staring down the barrel of a gun. And . . . that gun is held by a damn cat, with a hat . . . at that!

How Fast is Fast?

How fast are these cheetah gunslingers? Well, it’s about a thousand miles from New York to Chicago. A recent article in the Financial Times pointed out that communications cables laid between the two cities meant that a message could be delivered in 14.5 milliseconds—70 round trips per second. Now that’s fast—cheetah gunslinger fast. But not fast enough for some who use those cables to trade commodities. It’s been reported that at least one company has cut that time down to 13.1 milliseconds and that microwave capability could get it under 10 milliseconds. Holy smokes!

Let me give you some of our own data: over the last year, we analyzed 20 million trading seconds. Of those 20 million, we pinpointed 189,000 seconds, primarily around the open and close of markets. In those 189,000 seconds we found something astounding: cheetahs traded at rates of 100-500 trades per second in a major commodity market! Trading 100 to 500 times per second, as a gang, in one commodity contract? That’s pretty hard to wrap your head around. Heck, it’s easier to imagine our cheetah friends in their gunfighter get-up.

Why this need for speed? It’s not the need to stay alive like an Old West gunfighter, of course not. It’s about the dinero, the loot. A study late last year, which was conducted in conjunction with the CFTC, said in essence that cheetah trading imposes quantifiable costs. Aggressive cheetahs make a lot of money, and they make their biggest paydays when they trade with small, traditional traders. A cheetah trading with a fundamental trader—like a lot of you—makes $1.92 on a $50,000 trade, but if that same trade is made with a small trader, the number goes up to $3.49. This could end up pushing smaller, slow-shooters out of markets and it doesn’t help the fundamental traders either.

But that’s not the only issue with the cheetahs, no sirree.

Ghost Town Liquidity

The name “Tahoe” actually came from the name “Washoe,” which is the name of the Native Americas that inhabited this area for something like 6,000 years. In fact, Washoe City is located just south of Reno. In the 1860’s it was booming with a sawmill for lumber used in Virginia City (ya know, where the Cartwright clan went when they went to town—da ta da da da, da da da, ta da da, da da da daa). Washoe City was even the county seat of Washoe County (it’s now Reno). But today, you can’t even visit Washoe City. It’s all fenced off. Washoe City is an Old West ghost town.

That brings us to another problem area with the cheetah gang. I told you it was like the William Tell Overture—lots going on. In fact, this ghost town thing is sort of a dirty little secret. It involves “wash” trading, where cheetahs (and sometimes others) trade with themselves. They make a bid or offer and they hit it themselves. Putting a price out and hitting it yourself, you take no risk, yet create the impression that a legitimate trade has occurred. That entices others—easy prey—to get into markets. But the liquidity isn’t real. It’s ghost town liquidity. If this was only for a few trades, it wouldn’t make much difference. However, there is a lot of ghost town liquidity. I mean a whole lot. “Voluminous” is the word I’ve used. And if this ghost town trading amounts to wash trading, it’s not only wrong, but based upon the facts and circumstances, it is illegal. That’s because wash trading is clearly unfair to other traders, and it can impact price discovery which is unfair to consumers.

Wash Blockers—20-Mule Team Borax!

One might think the exchanges would put in place what are called “wash blockers.” That sounds like a commercial: “Wash blockers—for cleaner markets!” Remember Death Valley Days? “Brought to you by 20-Mule Team Borax.” The show was Ronald Reagan’s last acting gig before he went into politics.

Wash blocker technology is available and exchanges are starting to put more of an emphasis on it. In my view, traders shouldn’t be able to just opt-in to the technology requirements if they want to. It needs to be mandatory that they utilize wash blocker technology. Otherwise, we’ll still have ghost town liquidity and markets that aren’t necessarily fair and effective.

So, that’s the cheetah gang and we did the Massive Passive Gang. Let’s head down the trail to our last topics.

Bank Ownership

When we think about how the West was won, it had a lot to do with the railroads. As the Iron Horses moved from east to west, towns along the line grew. But towns could never ever have amounted to much without banks. The banks helped build the towns. They made loans to individuals and businesses. They helped fuel economic development. They built communities. Some refer to the Winchester rifle as “The gun that won the West.” But I’ll tell ya, a good case could be made that banks won the West.

However, just like markets have morphed with the Massive Passive Gang, with non-stop trading, with our cheetah gunslingers and their “gee whiz” technology, so too have the banks changed. And it seems some have lost sight of those noble endeavors for which they are known as the country moved west.

A decade ago, in the shifting climate to allow banks more freedom, several policy changes took place. One such change was approved by the Federal Reserve. It allowed the ownership of totally unrelated businesses. The idea was that it was a good thing for the banks to be diversified. It was okay to get away from their sweet spot—ya know . . . banking. Like folks do when they see an opening, the banks got into all sorts of other businesses—businesses which include physical commodities like agriculture, energy or metals. It also includes owing the storage or warehousing facilities of commodities, and/or the delivery mechanisms of commodities—like pipelines, shipping, rail or other transportation interests.

Bank Ownership: The Data

You might wonder, “What it is they actually do own?” Well, let me tell you a story. A couple of weeks ago we rounded up a posse to look and see what actually is owned by the banks. I’m a financial regulator; you’d think it would be a piece of pie to find a list of what they own, right? I mean, it would be understandable if there were certain business reasons why a few particulars of the ownership information might not be available to the public. Nevertheless, you’d think I could get it. After all, banks own commercial interests that can impact prices, and at the same time their trading desks are all over the very same markets. There are obvious conflicts of interest. I’m not saying there have been any violations of the law, but how would we even know?

Our little posse did find that Morgan Stanley has ownership stakes in oil tankers and a fuel distributor. And, of course, they also trade crude oil and other energy contracts. Parts of Citigroup, Goldman Sachs and Bank of America own or have owned power plants. They also trade energy contracts. And, everybody’s been talking about Goldman Sachs holding onto aluminum at warehouses they own. Some say that’s consequently driving the up the price of beer and soda, while the bank collects storage fees. And, they trade aluminum. JP Morgan also owns similar warehouses, although they said last week they may get out of commodities. We’ll see. Oh, and by the way, Barclays and JP Morgan are putting out hundreds of millions of dollars in restitution for getting caught rigging electricity prices. There is that.

But, getting other information on ownership of the banks has been super difficult, at best. Maybe we need a “WANTED” poster:

W A N T E D

Information leading to the apprehension of ownership data related to large investment banks, including but not limited to businesses related to commodities, the storage and warehousing of commodities, and/or the delivery mechanisms of commodities.

This might be a little amusing if it weren’t such a serious thing that the information isn’t readily available. In fact, its sorta deja-oohish in that it’s reminiscent of that period of time, just before the financial crisis, when folks were asking questions about the valuation of credit default swaps (CDSs). Nobody could turn up much of anything. We all know how that troubled tale of tragedy ended . . . in tragedy and economic catastrophe. So, this is a big deal.

Tracking down this information should be an immediate responsibility of regulators. It’s gonna require more bodies and more horses, and maybe that “WANTED” poster, but we need to find out specifically—and comprehensively—what banks own relating to physical commodities. Furthermore, the basic ownership information should be transparent, certainly to regulators. And public information should be easily accessible on the Federal Reserve’s website or someplace where people can view it without needing a bloodhound to track it down.

Bank Ownership: The Work-Around (Volcker & Limits)

There is also a related issue with ownership of commodities by banks. If the banks own the physical commodities, warehousing or delivery mechanisms, they may then contend that their “legitimate business interests” should allow them to hedge those risks, in addition to hedging their financial proprietary risks.

This approach could amount to yet another work-around the Volcker Rule. Recall the Volcker Rule? It’s a provision of Dodd –Frank that requires that banks no longer be able to conduct speculative trading. They may only hedge their legitimate business risk. But, if they own the physical, then it muddies up what is their business risk.

I’ve written to Chairman Bernanke about this issue (and am discussing it for the first time today). In the letter, I urge that the final Volcker Rule be written in a precise and surefooted fashion that allows only for appropriate hedging of banks proprietary risks, but firmly prohibits speculation. I even provided rule text language for his consideration. I won’t vote for a final Volcker Rule unless this language, or something substantially similar, is included in the final text.

Incidentally, owning the physical could also be used as a way around speculative position limits. (I’m working on that one.) We’d be fools to think the bank lawyers aren’t thinking about these work-around end runs.

Bank Ownership: Reverse the Policy!

One easy way to stop the work-around is to simply have the Federal Reserve’s ownership policy reversed. Why can’t the banks, just can’t get back to banking? That’s my preferred policy. I don’t want a bank owning an electric service, or cotton, corn or feedlots. I don’t want banks owning warehouses, whether they have aluminum, gold, silver, or anything else in them. Get back (Jo Jo) to making loans to individuals and businesses to help get our economy on track. We don’t want Cowboy Companies out there. We don’t want a Wild West anymore when it comes to our economy. Do what you did when the West was won, when you helped to build the frontier. That is such an honorable, worthy, noble and essential endeavor. Plus, you were so very good at accomplishing so much!

I hope the Federal Reserve, which announced last week that the policy was being reviewed, actually reverses it. They can and should reverse it. Sure, if they have to grandfather some of the bank ownership in for a time-certain, I get that. The banks shouldn’t be required to take a loss due to the policy change. But the policy should, in fact, change, and soon. And, if the Fed doesn’t do so, I expect there will be efforts in Congress, and I hope there are, to prohibit such ownership by changing the law.

Cowboy Ethics

Our trail has come to an end. However, I’d like to leave you with this: there’s a book out by a gentleman named James P. Owen who’s a cowboy and western lover and who also happens to be a 40-year veteran of Wall Street. The book’s called Cowboy Ethics. It is sort of a coffee table book with a message—great photography, too. Owen opines that businesses today, especially the behemoth banks on Wall Street, need to live less by the “greed is good” mantra and more like the Code of the West. “When you make a promise, keep it.” “Remember that some things aren’t for sale.” “Know where to draw the line.” Do those sound like mantras for Wall Street? Unfortunately—not so much. You folks can recall the horrific headlines of malfeasance as well as anyone. A recent study queried 250 financial service industry insiders and 23 percent said they had “observed or had firsthand knowledge of wrongdoing in the workplace.”

For a while now, I’ve been saying that there needs to be a culture shift in the financial sector. How about the responsibility to customers, to society and the economy? Maybe the Code of the West is just the thing.

Conclusion—Shut Up

There’s a scene near the end of The Lone Ranger where, as the sun is setting, the masked man rears up on Silver, and says the famous “Hi-Yo Silver, away!”—only time in the movie he actually says it. And Johnny Depp, as Tonto, says, “Don’t ever do that again.” Well, I’m not going to stop working on these issues. I’m going to remember the Old West and how and why these markets began. I’m going to talk about them and work on them again and again. Even if the William Tell Overture remains our theme song.

However, there’s another old cowboy adage, “Never miss a good chance to shut up.” So, for now I’ll just say . . . thanks, Kemosabes.

FLORIDA-BASED AMERIFIRST MANAGEMENT LLC AND OWNERS CHARGED IN FRAUDULENT PRECIOUS METALS SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges Florida-Based AmeriFirst Management LLC and Its Owners, John P. D’Onofrio, George E. Sarafianos, and Scott D. Piccininni, in Multi-Million Dollar Fraudulent Precious Metals Scheme

CFTC alleges that the Defendants engaged in illegal, off-exchange commodity transactions and deceived retail customers regarding financed precious metals transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against AmeriFirst Management LLC (AML) of Fort Lauderdale, Florida, and its owners, John P. D’Onofrio of Fort Lauderdale, George E. Sarafianos of Lighthouse Point, Florida, and Scott D. Piccininni of Fort Lauderdale.  The CFTC Complaint charges the Defendants with operating a precious metals scheme where the Defendants marketed illegal, off-exchange financed commodity transactions and fraudulently misrepresented the nature of those transactions.

According to the Complaint, filed on July 29, 2013, AML held itself out as a precious metals wholesaler and clearing firm, operating through a network of more than 30 precious metals dealers. As alleged, these dealers solicited retail customers to invest in financed precious metals transactions, where a customer gave a percentage deposit of the total value of the metal, typically 20%, and the dealer supposedly made a loan to the customer for the remaining 80%, supposedly sold the customer the total metal amount, and supposedly allocated the total metal amount at a depository to be held for the customer.

The Complaint alleges that AML created customer documents that represented that the dealer had in fact made such a loan and sold and allocated the total metal amount to the customer. However, these documents were false because the dealer never made a loan to the customer, nor did the dealer sell or allocate any metal to the customer, according to the Complaint. Further, the Complaint alleges that although there was no loan and no metal was allocated to the customer, AML charged the customer finance and storage fees.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the CFTC’s jurisdiction over transactions like these and requires that such transactions be executed on or subject to the rules of a board of trade, exchange, or commodity market, according to the Complaint. This new requirement took effect on July 16, 2011. The Complaint alleges that all of the Defendants’ financed commodity transactions took place after this date and were illegal. The Complaint also alleges that the Defendants defrauded customers in these financed commodity transactions.

In its continuing litigation, the CFTC seeks a permanent injunction from future violations of federal commodities laws, permanent registration and trading bans, restitution to defrauded customers, disgorgement of ill-gotten gains, and civil monetary penalties.

The CFTC Division of Enforcement staff responsible for this action are David Chu, Mary Beth Spear, Eugene Smith, Patricia Gomersall, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

CFTC ORDERS BAN ON TRADING FOR ONE YEAR FOR COMPANY AND PRINCIPAL IN 'SPOOFING' CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Panther Energy Trading LLC and its Principal Michael J. Coscia to Pay $2.8 Million and Bans Them from Trading for One Year, for Spoofing in Numerous Commodity Futures Contracts

First Case under Dodd-Frank’s Prohibition of the Disruptive Practice of Spoofing by Bidding or Offering with Intent to Cancel before Execution

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and simultaneously settling charges against Panther Energy Trading LLC of Red Bank, New Jersey, and Michael J. Coscia of Rumson, New Jersey, for engaging in the disruptive practice of “spoofing” by utilizing a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts. The Order finds that this unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform. The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.

According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts. For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse – a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question.

David Meister, the CFTC’s Enforcement Director, said, “While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated.  We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms.”

The Order finds that Panther and Coscia engaged in this unlawful activity in 18 futures contracts traded on four exchanges owned by CME Group. The activity involved a broad spectrum of commodities including energies, metals, interest rates, agricultures, stock indices, and foreign currencies. The futures contracts included the widely-traded Light Sweet Crude Oil contract as well as Natural Gas, Corn, Soybean, Soybean Oil, Soybean Meal, and Wheat contracts.

In a related matter, the United Kingdom’s Financial Conduct Authority issued a Final Notice regarding its enforcement action against Coscia relating to his market abuse activities on the ICE Futures Europe exchange, and has imposed a penalty of approximately $900,000 against him. Furthermore, the CME Group, by virtue of disciplinary actions taken by four of its exchanges, has imposed a fine of $800,000 and ordered disgorgement of approximately $1.3 million against Coscia and Panther and has issued a six-month trading ban on its exchanges against Coscia.

The CFTC’s $1.4 million disgorgement will be offset by amounts paid by Panther and Coscia to satisfy any disgorgement order in CME Group’s disciplinary action related to the spoofing charged by the CFTC. As CME Group has represented to the Commission, disgorgement paid in the CME Group’s action will be used first to offset the cost of customer protection programs, and thereafter, if the disgorged funds collected exceed the cost of those programs, the excess will be contributed to the CME Trust to be used to provide assistance to customers threatened with loss of their money or securities. The CME Trust is prohibited from utilizing any of its funds for the purpose of satisfying any legal obligation of the CME.

The CFTC thanks the Financial Conduct Authority in the United Kingdom and the CME Group for their cooperation.

Concurring Statement of Commissioner Bart Chilton in the Matter of Panther Energy Trading LLC and Michael J. Coscia

July 22, 2013
While I concur with the settlement in this matter, and agree wholeheartedly with the civil monetary penalty, disgorgement, findings of violations, undertakings, and cease and desist order imposed by the settlement, I am dissatisfied with the imposition of a one-year trading ban as to the respondents. I believe that the type of disruptive trading practice described in the Commission’s complaint is an egregious violation of the Commodity Exchange Act, and warrants the imposition of a much more significant trading ban to protect markets and consumers, and to act as a sufficient deterrent to other would-be wrongdoers.

Additionally, these types of violations of the law are becoming more common with the advent of high frequency traders (HFTs)—traders I’ve termed “cheetahs” due to their incredible speed. The cheetahs are to be commended for their innovative strategies, at the same time, when they violate the law, regulators need to be firm and resolute in our desire to deter such activities. Regulators already have a tough time keeping up with the cheetahs. Without sufficient deterrents, such as meaningful trading bans, many trading cats will simply find other ways to get back to their market hunting grounds. In years past, for example, a trader who was banned for a year from trading might as well consider it a lifetime ban. People on the trading floor would know, customers would know. People wouldn’t want to do business with the trader. In today’s cheetah trading world where identities can be cloaked behind technology, a year trading ban might simply be a nice sabbatical for a cheetah trader to work on some new algo programs to unleash after the trading ban has expired.

At the end of the day, regulators will have to work overtime to be able to keep up with the cheetahs and their superfast trading.  But like the cheetahs are a breed all their own, so are regulators.  And, we are a persistent bunch.  That’s our advantage.  We may have to work out the curve to get all the technology tools we need.  But we will be tenacious and tireless in our efforts to tract down market predators that break the rules.  And, we need those that violate, or may be thinking of violating the law to understand that regulators will always be harsh hard-hitters when the rules are broken.

NGX NOW PERMITTED TO PROVIDE MEMBERS IN U.S. WITH DIRECT ACCESS TO TRADING SYSTEM

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Issues Order of Registration for the Natural Gas Exchange Inc.

Washington, DC — On May 2, 2013, the Commodity Futures Trading Commission issued an Order of Registration to the Natural Gas Exchange Inc. (NGX), a foreign board of trade located in Calgary, Alberta, Canada. Under the Order, NGX is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system. The Order is the first issued by the Commission pursuant to Part 48 of the Commission’s regulations, which provide that such an Order may be issued to a foreign board of trade that possesses, among other things, the attributes of an established, organized exchange and that is subject to continued oversight by a regulator that provides comprehensive supervision and regulation that is comparable to the supervision and regulation exercised by the Commission. NGX submitted an application for registration that included, among other things, representations that NGX and its regulatory authority, the Alberta Securities Commission, satisfy the requirements for registration set forth in regulation 48.7. Commission staff, in reviewing the application, found that NGX has demonstrated its ability to comply with the requirements of the Act and applicable Commission regulations thereunder. Accordingly, the Commission granted NGX an Order of Registration to permit NGX to provide direct access, subject to the terms and conditions specified in the Order, to its identified members or other participants located in the U.S. The terms and conditions applicable to the Order include, among others, that NGX shall comply with the applicable conditions of registration specified in Commission regulation 48.8 and any additional conditions that the Commission deems necessary and may impose, and that NGX shall fulfill each of the representations it made in support of the application for registration. NGX has operated in the U.S. as an Exempt Commercial Market (ECM), under then current section 2(h)(5) of the Commodity Exchange Act, since November 5, 2002, and has been registered as a derivatives clearing organization since 2008.

CFTC CHARGES ACCOUNTING FIRM WITH IMPROPERLY AUDITING REGISTERED FUTURES COMMISSION MERCHANT

FROM: COMMODITY FUTURES TRADING COMMISSION

April 18, 2013

CFTC Charges Accounting Firm Tunney & Associates, P.C. and Its Sole Owner Michael Tunney with Failing to Properly Audit a Registered Futures Commission Merchant

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a Complaint against Tunney & Associates, P.C. (Tunney & Associates), an accounting firm with offices in Hammond, Indiana and Orland Park, Illinois, and Michael Tunney (Tunney), its sole owner and a certified public accountant (CPA) licensed in Illinois and Indiana, alleging violations of the CFTC’s Regulations related to conducting audits for The Linn Group, Inc. (TLG), a registered Futures Commission Merchant (FCM).

According to the Complaint, filed in the U.S. District Court for the Northern District of Illinois, Tunney & Associates served as TLG’s independent auditor and conducted TLG’s required year-end audits for 2007 through 2011. The Complaint alleges, however, that neither Tunney & Associates nor Tunney had any experience auditing FCMs or any entity that holds customer segregated accounts, and neither was qualified to conduct an FCM audit, and that Tunney had no understanding of the applicable Commodity Exchange Act or CFTC regulatory provisions prior to accepting any of the audit engagements. The Complaint states that Tunney & Associates and Tunney improperly relied on a non-employee, non-CPA, to perform all of the work on TLG’s 2007 through 2010 audits, and that Tunney conducted TLG’s 2011 audit on his own, despite the fact that he was not qualified to conduct an FCM audit.

The Complaint also alleges, among other things, that Tunney & Associates’ audits did not comport with Generally Accepted Auditing Standards (GAAS) or CFTC Regulations. For example, there was no planning for the auditing of TLG, and the audits failed to include appropriate tests of TLG’s accounting system, internal accounting controls, and procedures for safeguarding customer and firm assets.

TLG has entered into a settlement with the CFTC in connection with its failure to properly handle, monitor, and report customer funds it maintained as required by the Commodity Exchange Act (Act) and Regulations, and for supervision failures. As part of the settlement, TLG agreed to a $400,000 civil monetary penalty and retention of a consultant to review and improve TLG’s procedures as necessary to comply with the Act and Regulations TLG terminated the services of Tunney & Associates prior to entering into a settlement with the CFTC.

David Meister, the CFTC’s Director of Enforcement, stated, "Auditors are gatekeepers who perform a key role in a system designed to promote market integrity and protect market participants. An accountant who assumes the role of independent auditor for a CFTC registrant must be capable of satisfying his professional obligations. The audit function is meant to do more than earn the auditor a paycheck."

In the litigation, the CFTC seeks disgorgement of all benefits Tunney & Associates and Tunney received as a result of their conduct, civil monetary penalties, and permanent injunctions against further violations of the Commodity Exchange Act and Regulations, as charged.

The CFTC appreciates the assistance of the Division of Swap Dealer and Intermediary Oversight. The CFTC also appreciates the assistance of the National Futures Association.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.