Bridging the Week by Gary DeWaal: October 12 to 16 and 19, 2015 (Pre-Arranged Trades, Wash Sales, Spoofing, CCO Liability, Non-Disclosure, IBs)

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Published Date: October 18, 2015

Market conduct offenses, including alleged spoofing, pre-arranged trades and wash sales, resulted in trading bans for three individuals on CME Group exchanges, while a senior Securities and Exchange Commission officer endeavored to assuage concerns by chief compliance officers that the agency has specifically targeted CCOs in its enforcement program. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Three Individuals Fined and Banned From Trading on CME Group Exchanges for Market Conduct Violations

CME Group business conduct committees permanently banned three traders from trading on CME Group exchanges for market conduct violations involving alleged spoofing, pre-arranged trades and wash sales.

In two actions – one involving futures traded on the New York Mercantile Exchange and another involving futures traded on the Commodity Exchange, Inc. – Nitin Gupta was charged with engaging in “a pattern of activity” involving the repeated entry of large orders for futures contracts “without the intent to trade” from February through April 2013. The relevant BCCs claimed Mr. Gupta entered these orders to effectuate the execution of smaller orders on the opposite side of the market as his larger orders. After obtaining fills, Mr. Gupta allegedly cancelled his large orders. In addition, Mr. Gupta did not answer the formal charges brought by the CME Group, said the relevant BCCs.

For his violations, Mr. Gupta was assessed an aggregate fine of US $150,000 in addition to his trading ban.

Separately, Libin Zhou was charged with matching buy and sell futures trades for his own account and for an account owned by his employer, resulting in the transfer of almost US $25,000 from his employer’s to his own account. These trades occurred from May 2013 through June 2013. Mr. Libin was also accused of making “several" false statements during the course of his interviews with CME Group Market Regulation staff.

In addition to his trading ban, Mr. Libin was ordered to pay a fine of US $100,000 and restitution to his employer.

Finally, Rajasekaran Veeramuthu was also banned from trading on CME Group exchanges and fined US $50,000 for engaging in “a series” of wash sales between accounts with the same beneficial owner from November 21 through December 20, 2012. Mr. Veeramuthu also did not respond to the formal charges brought by CME Group, claimed the relevant BCC.


My View: Mr. Donohue’s suggestion that CCOs may only be liable for failure to implement relevant compliance programs and policies appears contrary to the plain language of the applicable SEC rule at least so far as such actions are aimed at CCOs of investment advisers. This rule says it is the responsibility of IAs themselves to adopt and implement relevant policies and procedures to avoid violations of law, not CCOs (SEC Rule 275.206(4)-7; click here to access). As pointed out in the separate statement of former SEC Commissioner Daniel Gallagher to the settlement order of Eugene Mason, the CCO of SFX Financial Advisory Management Enterprises, SEC enforcement actions imposing such an obligation on CCOs send “a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, less they be held accountable for conduct that … is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties to avoid liability when the government plays Monday morning quarterback.” (Click here for further background and commentary on the SEC enforcement action involving SFX in the article “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally,” in the June 21, 2015 edition of Bridging the Week.) To give CCOs more comfort, the SEC should at least agree not to stretch the reach of its own rules to impose obligations on CCOs that are contrary to the rules' plain language.

Legal Weeds: In addition to relying on its traditional tools for prosecuting fraud (e.g., Commodity Exchange Act §§4b(1)(A)-(C) – click here to access), in bringing this action, the CFTC also relied on its new broad anti-manipulation authority under law and regulation. These provisions prohibit, intentionally or recklessly,  (1) the use of any manipulative device, scheme or artifice to defraud; (2) making any untrue or misleading statement of a material fact or failing to state material fact in order not to be misleading; or (3) engaging in any act or practice that operates as a fraud or deceit on another person, or any attempt to engage in any of these prohibitions. (Click here to access CFTC Regulation 180.1(a).) These provisions are increasingly becoming a favorite tool of the CFTC to prosecute a wide range of conduct from traditional fraud, as in this action, to allegations of market price manipulation. (Click here for details regarding a case involving allegations of price manipulation in the article “Manipulation Is Not Hedging Says CFTC in Federal Court Lawsuit Against Kraft Foods Group and Mondelez Global” in the April 5, 2015 edition of Bridging the Week.) Unfortunately, the court in this matter did not take the opportunity to address what is the lawful perimeter of these provisions.

Compliance Weeds: The NFA Self-Examination Questionnaire is just one of the many useful guidances that US futures registrants can utilize to assess the completeness of their internal policies and procedures. Other publications published by regulators that registrants may find useful are: (1) NFA Regulatory Requirements for FCMS, IBs, CPOs and CTAs (click here to access); (2) Joint Audit Committee Margins Handbook (click here to access); and (3) Commodity Futures Trading Commission Form 1-FR-FCM Instructions (click here to access).

And more briefly:

For more information, see:

Broker-Dealer Settles With SEC Over Alleged Non-Disclosure Related to Structured Notes Based on Foreign Exchange Trading:

CFTC Grants Further Delay to Trade Execution Requirements for Certain Swaps That Are Part of Package Transactions:

Statement of Commissioner J. Christopher Giancarlo:

Former UBS Rogue Trader Banned for Life from Financial Services Industry by FCA:

IB Employee Ordered to Make Full Restitution and Pay a Fine for Unauthorized Trading Activity:

NFA Revises Self-Examination Questionnaire for FCMs, FDMs, IBs, CPOs and CTAs:

Changed sections summary:

One-Day Position Limits Violation Results in Sanctions for Coffee Trading Firm From ICE Futures U.S.:

SEC Chief of Staff Says Agency Is Not Out to Sue Compliance Officers, But Will Bring Legal Actions When Appropriate:

Six Firms Sanctioned for Selling Stock Short Right Before Purchasing Same Equity in Public Offering:
SEC Press Release (with links to individual Orders):

Three Individuals Fined and Banned From Trading on CME Group Exchanges for Market Conduct Violations:


The information in this article is for informational purposes only and is derived from sources believed to be reliable as of October 17, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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