This week’s enforcement update covers:
- CFTC orders Deutsche Bank Securities Inc. to pay $70 million penalty for attempted manipulation of ISDAFIX benchmark;
- CFTC and DOJ announce spoofing charges against banks and individuals;
- FERC files amended complaint in case against Powhatan and Chen;
- Judge grants joint motion on summary judgment procedure in FERC case against Silkman/CES;
- FERC OE files answer to BP motion seeking dismissal based on statute of limitations;
- FERC Chairman testifies on grid performance during recent weather events; and
- FERC Commissioner Rich Glick stresses importance of FERC enforcement regime.
CFTC orders Deutsche Bank Securities Inc. to pay $70 million penalty for attempted manipulation of ISDAFIX benchmark. On February 1, the CFTC issued an order filing and settling charges against Deutsche Bank Securities Inc. (DBSI) for attempted manipulation of the U.S. Dollar ISDAFIX benchmark and requiring DBSI to pay a $70 million civil monetary penalty. The CFTC’s order finds that over a five-year period, beginning in January 2007 and continuing through May 2012, DBSI made false reports and its traders attempted to manipulate the USD ISDAFIX, a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps. According to the CFTC, DBSI options and/or swaps traders understood and employed two primary means in their attempts to manipulate USD ISDAFIX rates: trading attempted manipulation and submission attempted manipulation. The CFTC’s order cites to electronic communications and recorded calls in which DBSI traders talk about “pushing” or “moving” the fix, or “getting the print” at a price in order to benefit DBSI’s positions.
CFTC and DOJ announce spoofing charges against banks and individuals. On January 29, the CFTC announced, in conjunction with the Department of Justice and Federal Bureau of Investigation’s Criminal Investigative Division, criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes. According to the DOJ’s press release and related announcement by Acting Assistant Attorney General John P. Cronan, the charges announced aggressively target, among other things, the practice of spoofing, which was allegedly employed in various forms by these defendants and/or their co-conspirators to manipulate the market for futures contracts traded on the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), and the Commodity Exchange Inc. (COMEX).
“I think the main lesson from these spoofing cases, once again, is that email/im/chats are usually what do you in,” said Geoff Aronow, our colleague and former CFTC Director of Enforcement.
The defendants and their co-conspirators are alleged to have defrauded market participants and manipulated these markets by placing hundreds or thousands of orders that they did not intend to trade, or “spoof orders,” to create the appearance of substantial false supply and demand and to induce other market participants to trade at prices, quantities, and times that they otherwise would not have traded. According to the charging documents, the spoof orders often had the effect of artificially depressing or artificially inflating the prices of futures contracts traded on CME, CBOT, and COMEX. To take advantage of the artificial price levels created by their spoof orders, the defendants and/or their co-conspirators are alleged to have executed real, genuine orders to buy (at the artificially low prices) or to sell (at the artificially high prices) in order to generate trading profits or to illicitly mitigate other trading losses.
CFCT Division of Enforcement Director James McDonald said: “Spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology. The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets. At the CFTC, we are committed to facilitating these market-enhancing developments. But at the same time, we recognize that these new developments also present new opportunities for bad actors. We are equally committed to identifying and punishing these bad actors.”
Acting Assistant Attorney General Cronan stated: “As alleged, the defendants in these cases engaged in sophisticated schemes or trading practices aimed at defrauding individuals and entities trading on U.S. futures exchanges,” Conduct like this poses significant risk of eroding confidence in U.S. markets and creates an uneven playing field for legitimate traders and investors. The Department and our law enforcement partners will use all of the tools at our disposal, including cutting-edge data analysis, to detect these types of schemes and to bring those who engage in them to justice. Protecting the integrity of our markets remains a significant priority in our fight against economic crime.”
FERC files amended complaint in case against Powhatan and Chen. On January 29, FERC filed its First Amended Complaint against the defendants in FERC’s case against Powhatan Energy Fund and Alan Chen in the U.S. District Court for the Eastern District of Virginia, consistent with the court’s December 18, 2017 Order. FERC asks the court to affirm and enforce FERC’s penalty assessment without modification. FERC argues that the defendants manipulated the wholesale energy markets by implementing a scheme involving the execution of large volumes of offsetting trades – wash trades – for the purpose of capturing excessive amounts of certain credit payments. According to FERC, defendants implemented their manipulative wash trading scheme knowingly with the intent to engage in wash trading and deceive PJM about the true nature of their transactions, thereby harming the market and other market participants. FERC demands a trial by jury if the court determines that the matter requires a trial on any issues.
Judge grants joint motion on summary judgment procedure in FERC case against Silkman/CES. On January 26, FERC and Silkman/CES filed a joint motion on summary judgment procedure in the U.S. District Court for the District of Maine. The parties propose to file cross–motions for summary judgment on one discrete issue – whether the five-year statute of limitations expired before the case was filed – no later than 30 days after this procedural motion is granted. If Silkman and CES’s summary judgment motion is denied, in whole or in part, and/or if FERC’s summary judgment motion is granted, then the parties would file separate motions for summary judgment on the merits. The parties propose this bifurcated approach because they believe it is the most efficient way to resolve this matter. According to the motion, the parties agree that the statute of limitations is a threshold issue that the court should resolve before addressing the more complex merits of FERC’s allegations against Silkman and CES. The parties agree that filing for summary judgment on the statute of limitations issue at this stage makes sense because it is a discrete legal issue that does not involve significant factual analysis and is not contingent on completion of ongoing expert discovery.
On January 29, Judge John A. Woodcock, Jr. granted the joint motion. The cross-motions for summary judgment are due February 28.
FERC OE files answer to BP motion seeking dismissal based on statute of limitations. On January 25, FERC’s Office of Enforcement (OE) filed an answer to BP’s motion to lodge and to dismiss, or in the alternative, for reconsideration of FERC’s order affirming the initial decision assessing a civil penalty and disgorgement against BP in FERC Docket No. IN13-15. As we previously reported, BP sought to lodge the district court’s decision in FERC v. Barclays and the Supreme Court’s decision in Kokesh v. SEC regarding the five-year statute of limitations in 28 U.S.C. § 2462. FERC argues that BP provides neither adequate procedural nor substantive grounds to reopen the proceeding at this late stage, after failing to raise a statute of limitations defense for more than four years. According to FERC, BP fails to meet FERC’s stringent standard to reopen the record because, contrary to BP’s claims, the Barclays and Kokesh decisions do not represent an extraordinary change in the law relevant to consideration of the statute of limitations in this Natural Gas Act proceeding, and therefore, will not meaningfully assist FERC’s decision-making process. FERC also argues that BP waived its statute of limitations defense by failing to raise it in a timely manner.
FERC Chairman testifies on grid performance during recent weather events. On January 23, FERC Chairman Kevin J. McIntyre testified before the Senate Energy & Natural Resource Committee in a hearing to examine the performance of the electric power system under certain weather conditions. During the hearing, Chairman McIntyre and other witnesses discussed the performance of the electric power system in the Northeast and mid-Atlantic during recent winter weather events, including the bomb cyclone. Related to enforcement, Chairman McIntyre stated in his prepared testimony: “We would expect competitive pressures supplemented by market power mitigation rules to lead to energy market prices that reflect the cost of fuel to generate energy and any shortage conditions. However, the Commission is attentive to the potential for behavior that takes advantage of extreme weather events. As part of its daily surveillance activities, Commission staff is reviewing market data to identify market outcomes during the most recent cold weather event that could be the result of manipulative behavior.”
FERC Commissioner Rich Glick stresses importance of FERC enforcement regime. On January 12, FERC Commissioner Rich Glick participated in FERC’s Open Access podcast. During the podcast, Commissioner Glick discussed his four goals as Commissioner. One of Commissioner Glick’s goals is supporting FERC’s Office of Enforcement. Commissioner Glick stressed the importance of competitive markets, and he stated that FERC must “continue to ensure that these markets are truly competitive and not being manipulated.”