CFTC ORDERS BARCLAYS TO PAY $200 MILLION FOR INTEREST RATE MANIPULATION SCHEME

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates.

The Order finds that Barclays attempted to manipulate interest rates and made related false reports to benefit its derivatives trading positions. The Order also finds that Barclays made false LIBOR reports at the direction of members of senior management to protect its reputation during the global financial crisis.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc.(Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.

According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.

The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.

The CFTC Order requires Barclays to pay a $200 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps, such as making the determinations of benchmark submissions transaction-focused (as set forth in the Order), to ensure the integrity and reliability of its LIBOR and Euribor submissions and improve related internal controls.

“The American public and our markets rely upon the integrity of benchmark interest rates like LIBOR and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy,” said David Meister, the CFTC’s Director of Enforcement. “Banks that contribute information to those benchmarks must do so honestly. When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined. The CFTC launched this investigation to protect the markets and the public from such illegal conduct, and today’s action demonstrates that we will bring the full force of our authority to bear as we carry out that mission.”
LIBOR and Euribor

LIBOR – the London Interbank Offered Rate – is among the most important benchmark interest rates in the world’s economy, and is a key rate in the United States. LIBOR is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Banker’s Association (BBA). Each panel bank’s submission is also made public, and the market can therefore see each bank’s independent assessment of its own borrowing costs. LIBOR is supposed to reflect the cost of borrowing unsecured funds in the London interbank market.

Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union.

LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.

Barclays’ Unlawful Conduct to Benefit Derivatives Trading Positions
As the Order shows, Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that LIBOR and Euribor are supposed to reflect the costs of borrowing funds in certain markets. Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions, such as swaps or futures positions, which were priced on LIBOR and Euribor. Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009. The Order relates that, for example, one trader stated in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”

In addition, certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates when many derivatives contracts are settled or reset.

The traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything,” or “Done…for you big boy,” resulting in false submissions by Barclays to the BBA and EBF. The traders and submitters also engaged in similar conduct on fewer occasions with respect to Yen and Sterling LIBOR.

Barclays’ Unlawful Conduct at the Direction of Senior Management
The CFTC Order also finds that Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct concerning LIBOR. In late 2007, Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions to be closer to the rates submitted by other banks and not so high as to attract media attention.

According to the Order, senior managers even coined the phrase “head above the parapet” to describe high LIBOR submissions relative to other banks. Barclays’ LIBOR submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.” The directive was intended to fend off negative public perceptions about Barclays’ financial condition arising from its high LIBOR submissions relative to the submissions of other panel banks, which Barclays believed were too low given the market conditions.
Despite concerns being raised by the submitters that Barclays and other banks were, for example, “being dishonest by definition” and that they were submitting “patently false” rates, the submitters followed the directive and submitted artificially lower rates. The senior management directive for low U.S. Dollar LIBOR submissions occurred on a regular basis during the global financial crisis from August 2007 through early 2009, and, at limited times, for Yen and Sterling LIBOR during the same period. As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

Barclays’ Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates
In addition to the $200 million penalty, the CFTC Order requires Barclays to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information and not influenced by conflicts of interest. See pages 31-44 of the CFTC’s Order. Among other things, the Order requires Barclays to:
Make its submissions based on certain specified factors, with Barclays’ transactions being given the greatest weight, subject to certain specified adjustments and considerations;
Implement firewalls to prevent improper communications including between traders and submitters;
Prepare and retain certain documents concerning submissions, and retain relevant communications;
Implement auditing, monitoring and training measures concerning its submissions and related processes;
Make regular reports to the CFTC concerning compliance with the terms of the Order;
Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and
Continue to cooperate with the CFTC.
* * * *
The Order recognizes Barclays’ significant cooperation with the CFTC during the investigation of this matter.
In a related matter, as part of an agreement with the Fraud Section of the U.S. Justice Department’s Criminal Division, Barclays agreed to pay a $160 million penalty and to continue to cooperate with the Department. Furthermore, the United Kingdom’s Financial Services Authority (FSA) issued a Final Notice regarding its enforcement action against Barclays Bank PLC, and has imposed a penalty of £59.5 million against the Bank.

The CFTC thanks the FSA, the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission for their assistance in the CFTC’s investigation.

CFTC Division of Enforcement staff members responsible for this case are Anne M. Termine, Stephen T. Tsai, Maura M. Viehmeyer, Brian G. Mulherin, Gretchen L. Lowe and Vincent A. McGonagle, with assistance from Philip P. Tumminio, Rishi K. Gupta, Russell Battaglia, Jeremy Cusimano, Elizabeth Padgett, Terry Mayo, Jason T. Wright, Aimée Latimer-Zayets, Timothy M. Kirby, Jonathan K. Huth, Susan A. Berkowitz and staff from the Division of Market Oversight and Office of the Chief Economist.

CHAIRMAN CFTC COMMENTS ON PROPOSED VOLKER RULE TO CURB FINANCIAL RISKS

FROM:  COMMODITY FUTURES TRADING COMMISSION
Statement Regarding Public Roundtable to Discuss the Proposed Volcker Rule
Chairman Gary Gensler
May 31, 2012
Welcome to the Commodity Futures Trading Commission (CFTC) roundtable on the proposed Volcker Rule. Thank you, Dan, for that introduction, and thank you for working with the rest of the team, particularly Steven Seitz from your office and Steve Kane from the Office of the Chief Economist, to put together this important roundtable.

I’d like to thank the Treasury Department staff and the staff of the financial regulators tasked with implementing the Volcker Rule for joining us for this roundtable and for your efforts in coordinating with the CFTC on the rule. I’d also like to thank Sheila Bair, the former Chair of the Federal Deposit Insurance Corporation, for participating today.

Former Federal Reserve Chairman Paul Volcker was unfortunately on international travel today, but I’d like to acknowledge his many years of public service.

In 2008, the financial system and the financial regulatory system failed. The crisis – caused in part by the unregulated swaps market -- plunged the United States into the worst recession since the Great Depression with eight million Americans losing their jobs, millions of families losing their homes and thousands of small businesses closing their doors. The financial storms continue to reverberate with the debt crisis in Europe affecting the economic prospects of people around the globe.

In 2010, Congress and the President came together to pass the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), to promote transparency in the markets and to lower risk to the public from large, complex financial institutions. Amongst these protections is the Volcker Rule, which prohibits banking entities from proprietary trading, an activity that may put taxpayers at risk.

This is the CFTC’s 17th roundtable on important topics related to Dodd-Frank reforms. These roundtables are an additional opportunity – beyond the 30,000 comments we’ve received and 1,600 meetings with the public we’ve held -- for dialogue and helpful input from market participants and the public. Our 18th roundtable related to promoting the price discovery function on designated contract markets and related issues of swap execution facilities will be on June 5.

In adopting the Volcker rule, Congress prohibited banking entities from proprietary trading while at the same time permitting banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing this rule is achieving these multiple objectives.

I’m looking forward to a lively discussion. I’d like to highlight three main issues that I’m particularly interested in getting feedback on today.

First, as prescribed by Congress, the Volcker rule prohibits proprietary trading while permitting risk-mitigating hedging. These two provisions are consistent with each other in that they are both meant to lower the risks of banking entities to the broader public. The question is how we as regulators achieve both of these risk-lowering provisions in a balanced way.

Some commenters have said if we’re too prohibitive in one area, we may limit banking entities ability to engage in risk-mitigating hedging. On the other hand, if we follow comments of some of the banking entities, then the rule’s allowance for permitted hedging might swallow up Congress’ intent to limit the risk of proprietary trading.

Specifically, under the statute, banking entities may engage in “risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings.”

To qualify as hedging, these activities must be “designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings.”

The criteria for the hedging exemption as included in the proposed Volcker Rule are the following: hedges must mitigate one or more specific risks on either individual positions or aggregated positions, they cannot generate significant new exposures, they must be subject to continuous monitoring and management, compensation for hedging cannot reward proprietary trading, and the hedges must be reasonably correlated to the specific risks of the positions.

A further question about hedging activity that was asked by the agencies ( question 109 of the CFTC’s proposal) is whether “certain hedging strategies or techniques that involve hedging the risk of aggregated positions (e.g. portfolio hedging) create the potential for abuse of the hedging exemption.”

A related question on which it would be helpful to hear from the panel: is it possible, and if so how, could a separate trading desk with its own profit and loss statement engage in risk-mitigating hedges?

The further removed hedging activities are from the specific positions the banking entity intends to hedge, is it not more likely that such trading activity is prone to express something other than hedging?

As Dan will explain in a moment, we’re not going to be speaking about the specifics of the credit derivative product trading of JPMorgan Chase’s Chief Investment Office. I do think, though, it may be instructive for regulators as we finalize key reforms.

Second, in addition to hedging, Dodd-Frank permits market making, which is important to well-functioning markets as well as to the economy. The question for regulators once again is finding a balance, but this time between prohibiting proprietary trading and permitting market making. The agencies ask in the proposal (question 89 in the CFTC’s proposal): “Is the proposed exemption overly broad or narrow? For example, would it encompass activity that should be considered proprietary trading under the proposed rule?”

The criteria for market making in the proposed rule included seven requirements. A number of commenters suggested that these requirements may be more applicable to the listed securities markets than to the swaps market. During the second panel today, we are looking for your input on this issue. If some of these requirements are not appropriate, what would be more appropriate with regard to market making in swaps?

Third, I’m particularly interested in hearing about how the prohibition on proprietary trading should best be applied to banking entities transacting in futures and swaps. The CFTC’s role with regard to the Volcker Rule and banking entities is primarily with regard to these derivatives traded by swap dealers and futures commission merchants within the banking entity.

In particular, banking entities’ market making in swaps is likely to leave them with significant open positions for many years in customized swaps. When would a banking entity’s decision not to hedge or to only partially hedge open swaps positions be considered prohibited proprietary trading? We at the CFTC will benefit from your input on how the Volcker Rule can best protect the public against risk in the swaps and futures markets.

Thank you again for coming, and I’ll turn it back to Dan.

MAN AND COMPANY ORDERED TO PAY RESTITUTION FOR COMMODITY POOL PONZI SCHEME FRAUD

FROM:  COMMODITY FUTURES TRADING COMMISSION
May 30, 2012
Federal Court in New Jersey Orders Victor Eugene Cilli and His Company, Progressive Investment Funds LLC, to Pay over $700,000 in Restitution and Penalty in Commodity Pool Ponzi Scheme

Cilli also pled guilty to related fraud and other criminal charges
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) has obtained a federal court consent order requiring defendants Victor Eugene Cilli and his company, Progressive Investment Funds LLC (Progressive), both formerly of Hackensack, N.J., to pay, jointly and severally, restitution of $243,000 and a $474,000 civil monetary penalty in connection with operating a commodity pool Ponzi scheme that defrauded investors of over $500,000 and misappropriated investor funds

The court’s order also finds that the defendants made false statements to the National Futures Association (NFA), failed to distribute required reports to pool participants, and failed to keep required books and records.

The consent order of permanent injunction, entered on May 29, 2012, by Judge William J. Martini, of the U.S. District Court, District of New Jersey (Newark), permanently prohibits Cilli and Progressive from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC. The order also permanently prohibits the defendants from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The order finds that between September 2006 and September 2007, the defendants engaged in a Ponzi scheme and solicited $506,000 from four individuals to trade commodity futures (primarily E-mini S&P 500 futures contracts) in a pooled account. However, the defendants used only approximately $263,000 to trade futures and had net trading losses of approximately $201,168, according to the order. Instead of disclosing the losses, the defendants sent pool participants statements falsely showing trading profits. The defendants also sent two pool participants false IRS Form 1099s, which showed net profits instead of the actual net losses, the order finds. To conceal their scheme, defendants used pool participant funds to make purported profit payments to other participants, as is typical of a Ponzi scheme, the order finds.

Further, the order finds that the defendants failed to provide pool participants with quarterly and annual Net Asset Value reports, failed to retain required pool records, and falsely told the NFA that Progressive never had pool participants.

On October 3, 2011, Cilli pled guilty to criminal securities fraud (15 U.S.C. § 78j(b) and 78ff(a) and 18 U.S.C. § 2) in connection with the fraudulent scheme described above (United States v. Victor Cilli, Crim. No. 1-660 (AET) (D. NJ), and to other, unrelated charges. In the criminal case, Cilli agreed to pay $243,000 in restitution. The consent order in the CFTC’s case gives Cilli credit for any restitution payments made in the criminal action.

The CFTC thanks the U.S. Attorney’s Office for the District of New Jersey and NFA for their assistance.

The CFTC Division of Enforcement staff members responsible for this case are W. Derek Shakabpa, Judith M. Slowly, David Acevedo, Lenel Hickson, Stephen J. Obie, and Vincent McGonagle.

CFTC CHARGES WASHINGTON D.C. RESIDENT WITH FOREX CURRENCY TRADING FRAUD

FROM:  U.S. COMMODITY AND EXCHANGE COMMISSION
CFTC Charges Washington, DC, Resident Marina Bühler-Miko and Her Company, Coventry Asset Managers, LLC, with Operating Fraudulent Forex Scheme

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement action in U.S. District Court for the District of Columbia against defendants Marina Bühler-Miko(Bühler-Miko) and her company, Coventry Asset Managers, LLC (Coventry), both of Washington, DC.  The CFTC complaint charges that Bühler-Miko and Coventry fraudulently solicited members of the general public to trade off-exchange foreign currency (forex) contracts on a leveraged or margined basis through a pooled investment vehicle, the Coventry Eire Forex Fund (Coventry Eire).  Neither defendant has ever been registered with the CFTC.

The complaint, filed on May 16, 2012, alleges that from at least June 18, 2008, through April 2011, Bühler-Miko and Coventry defrauded customers of at least $300,000 through their scheme.

In soliciting actual and prospective customers, the defendants allegedly made misrepresentations of material facts, including (1) guaranteeing customer profits of six percent quarterly, plus a bonus payment at the end of the 13-month “Asset Management Agreement” by trading forex in Coventry Eire, and (2) downplaying the risk of entering into leveraged forex transactions.

Bühler-Miko, who had no trading experience, admitted in sworn testimony that no customers received the promised quarterly returns or bonus payments and that she ultimately advised each customer that they had lost nearly all of their principal trading forex contracts through Coventry Eire, according to the complaint.

In its continuing litigation, the CFTC seeks disgorgement of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, permanent trading and registration bans, and permanent injunctions against further violations of the Commodity Exchange Act.
CFTC Division of Enforcement staff responsible for this action are Timothy J. Mulreany, Tracey Wingate, Michael Amakor, Paul Hayeck, and Joan Manley.

WALL STREET FIRM CHARGED WITH FOREX FRAUD

Photo:  Currency Sign.  Credit:  Wikimedia
FROM:  COMMODITIES FUTURES TRADING COMMISSION
CFTC Charges New York Firm Madison Dean, Inc., and its Principals, George Athanasatos and Laurence Dodge, with Forex Fraud

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement action in the U.S. District Court for the Eastern District of New York charging Madison Dean, Inc. (Madison Dean), of Wantagh, N.Y., and its principals, George Athanasatos, also of Wantagh, and Laurence Dodge of Fresh Meadows, N.Y., with fraudulently soliciting approximately 19 persons to invest approximately $415,000 in managed trading accounts to trade off-exchange foreign currency (forex) contracts on a leverage or margined basis. None of the defendants has ever been registered with the CFTC.

The CFTC complaint, filed on May 8, 2012, alleges that from approximately December 2008 through approximately July 2010, defendants Madison Dean, Athanasatos, and Dodge, through an Internet website, written solicitation materials, and other actions, misrepresented and omitted material facts about Madison Dean, including the background and qualifications of Madison Dean employees and the firm’s performance record, to create a false impression that it was a well-established and successful company.

Specifically, according to the complaint, the defendants allegedly fraudulently claimed that 1) Madison Dean had been in existence since 1998, 2) Madison Dean’s customers included high net worth individuals, financial institutions, and institutional clients, 3) Madison Dean provided “professional money managers” who would be in charge of the forex trading for the customers’ managed accounts, and 4) Madison Dean had been making money for its customers for years.

Contrary to these claims, Madison Dean had not been making money for its customers for years, as it did not exist prior to December 2008, and its customers were “neither high net worth individuals, financial institutional or other institutional clients, hedge funds, nor millionaires,” according to the complaint. Also, according to the complaint, Madison Dean did not have professional money managers in charge of customer trading. Rather, Athansatos allegedly managed the trading of customer accounts, and on various occasions, Dodge and Athanasatos’ mother – neither a professional money manager – also traded customer accounts.

The complaint further alleges that Madison Dean’s customers lost approximately $250,000, “as a result of its poor trading.” As further alleged, after being in operation for a little over a year, during which time the firm collected approximately $112,000 in commissions and fees, Madison Dean shut down its operation with no notice to its customers and no way for those customers to contact the company or anyone associated with it.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, disgorgement of ill-gotten gains, trading and registration bans, and preliminary and permanent injunctions against further violations of the Commodity Exchange Act, as charged.
The CFTC appreciates the assistance of the United Kingdom Financial Services Authority in this matter.

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