Bridging the Weeks by Gary DeWaal: February 17 to 28, and March 2, 2020 (Sanctioned Again; Spoofing; Denied Again; Bitcoin ETF)

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Published Date: March 02, 2020

A proprietary trading firm was sanctioned by a sixth futures-industry regulator for purported spoofing trades by one of three employees many years ago. For the employees’ aggregate alleged misconduct, the firm was first penalized by two CME Group exchanges in 2016, by the Commodity Futures Trading Commission and two different CME Group exchanges in 2018, and now again by ICE Futures U.S. Separately, for the seventh time since March 2017, the Securities and Exchange Commission denied approval of an exchange rule to permit trading of a bitcoin-referenced exchange-traded product. The message seems undeniably clear: no means absolutely no when it comes to bitcoin! As a result, the following matters are covered in this week’s edition of Bridging the Week:

Article Version


In 2018, the same firm agreed to pay a fine of US $1.5 million to the CFTC for the purported spoofing trading by three of its employees – including the same employee fined by IFUS – involving various CME Group exchanges’ futures contracts from January 1 through December 31, 2013, and from June 1, 2015, through October 21, 2016. In parallel actions, Chicago Board of Trade and Chicago Mercantile Exchange business conduct committees also resolved disciplinary actions against the same firm for the alleged spoofing activity from September 1, 2015, through May 23, 2016, by the same employee. The firm agreed to disgorge total profits of US $12,035, but was not required to pay a fine. The employee subject to the current action by IFUS was also subject to disciplinary actions by the two BCCs and resolved his matters by agreeing to pay an aggregate fine of US $75,000 and to be banned from trading on all CME Group markets for six weeks. (Click here for background in the article “CFTC and Exchanges Layer on Multiple Spoofing Cases” in the September 23, 2018 edition of Bridging the Week.)

Unrelatedly, Credit Suisse International and Credit Suisse Securities Europe Limited agreed to pay a fine of US $40,000 to IFUS for allegedly engaging in a block trade to move a position between each other’s account and for reporting the block trade a day late. 

Additionally OTCex LLC agreed to remit a fine of US $10,000 to IFUS for facilitating a wash trade on behalf of the same principal on both sides. A business conduct committee panel of the Chicago Board of Trade likewise assessed a fine of US $60,000 on Bae Jun Seok, a non-member, and permanently barred him from accessing all CME Group markets, for also purportedly utilizing wash trades to engage in money-pass transactions between accounts with common beneficial ownership. Mr. Seok was additionally charged with not producing all records to CBOT as staff requested during an investigation.

Compliance Weeds: In 2016, CME Group exchanges brought and settled disciplinary actions against the same proprietary trading operation subject to the current IFUS matter and two of its employees for engaging in alleged spoofing-type activities on the New York Mercantile Exchange, Inc. and the Commodity Exchange, Inc. To resolve the matter, the proprietary trading firm agreed to disgorge aggregated COMEX and NYMEX trading profits of US $91,241. For the actions of its two traders, the firms was charged by the CME Group exchanges with violating just and equitable principles of trades and related violations, but solely on a strict liability basis. The firm was not charged with failure to supervise, and it was not assessed a fine. The CME Group exchanges implied that no fine was assessed because the firm had and enforced robust policies and procedures regarding the purported wrongful conduct of its employees. (Click here for background in the article “CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits” in the October 9, 2016 edition of Bridging the Week.)

Early this year, IFUS implemented an amendment to its duty to supervise rule – 4.01 (click here to access) – as well as guidance expressly mandating that all firms accessing the exchange must develop, implement and enforce supervisory systems, policies and procedures reasonably designed to effectuate compliance with exchange rules. These measures are not intended to be one-size-fits-all, but rather based on the “nature and size” of the firm’s activities on IFUS. Moreover, in addition to taking steps regarding procedures, firms accessing IFUS are expected to periodically train staff regarding IFUS rules and rule changes; regularly monitor employees and agents for exchange rule compliance; investigate “apparent issues”; and take appropriate measures when noncompliance is identified. (Click here for background in the article “ICE Futures U.S. Proposes Formal Requirements of Supervision and Ancillary Guidance” in the December 15, 2019 edition of Bridging the Week.)

All firms accessing any US designated contract market should ensure they have and enforce robust supervisory procedures consistent with IFUS’s expressly enumerated requirements whether the exchange has parallel detailed requirements or not. This is because all US exchanges have a general duty of supervision, and their obligations apply to all market participants, whether members or not. (Click here, e.g., to access Cboe Futures Exchange’s duty of supervision obligation, Rule 609(b).) Should a rogue employee or agent violate exchange rules that were covered in the firm’s procedures and training, detected by firm surveillance and remediated, the firm could potentially escape an exchange fine if subject to an exchange disciplinary action – although likely it still would have to disgorge profits. Unfortunately, the CFTC likely would not be so rewarding of the firm’s efforts. 

The Trust proposed principally to hold short-term US Treasury Securities and bitcoin. Its investment objective was to mimic the Bitcoin Treasury Index – an index published by Solactive AG each business day at 5 p.m. which contains two components – one based on bitcoin and the other on T-Bills. Prices of bitcoin in the Trust Index are, and prices of bitcoin held by the Trust were proposed to be, based on the Bitcoin Reference Rate computed for the Chicago Mercantile Exchange derived from bitcoin prices of five constituent spot exchanges: Bitstamp, Coinbase, Gemini, itBit and Kraken. (Click here for details.) CME utilizes the BRR to ultimately settle its own bitcoin futures contract. (Click here for CME contract specifications and related information.)

The SEC said that, among other things, to satisfy applicable statutory requirements as interpreted in its prior orders, NYSE Arca had to demonstrate that the portion of the spot market represented by the BRR was “uniquely and inherently resistant to manipulation” and that it had a surveillance-sharing agreement with a “regulated bitcoin market of significant size.” The SEC claimed that NYSE Arca failed to meet these requirements. 

The SEC posited that the level of regulation of the five spot markets did not make their segment of the bitcoin market uniquely invulnerable to fraud and manipulation and that the five spot markets did not constitute a sufficiently supervised market such that NYSE Arca entered into a surveillance sharing agreement “with a regulated market of significant size with respect to bitcoin.” The SEC said the level of its oversight over national securities exchanges was not matched by the combination of potential FinCEN and states’ oversight over the five spot markets or the CFTC’s limited jurisdiction over spot commodities such as bitcoin.

In her dissent, Commissioner Peirce said that this latest disapproval evidences that “this Commission is unwilling to approve the listing of any product that would provide access to the market for bitcoin and that no filing will meet the ever-shifting standards that the Commission insists on applying to bitcoin-related products – and only bitcoin-related products.” While acknowledging that innovation “involves risks,” Ms. Peirce bemoaned the SEC’s application of merit regulation that effectively denies willing investors’ exposure to bitcoin. (Click here to access Ms. Peirce’s dissent.)

The Commission’s Order denying NYSE Arca’s proposed rule amendment was the seventh order of the SEC since March 2017 denying applications by exchanges to amend rules to list and trade bitcoin-related products. (See fn. 2 to Ms. Peirce’s dissent to the current SEC’s Order.) The SEC most recently disapproved rule changes proposed by NYSE Arca, Inc. in October 2019 to list and trade shares of the Bitwise Bitcoin ETF Trust. (Click here for background in the article “New CFTC Chairman Says Ether Derivatives Likely Soon While SEC Says No to Another Bitcoin ETF” in the October 13, 2019 edition of Bridging the Week.)

In other legal or regulatory developments regarding cryptoassets:

In November 2018, the SEC filed and settled two enforcement actions against issuers of ICOs – Carrier EQ Inc. d/b/a/ AirFox and Paragon Coin, Inc. – for violating securities registration requirements. These cases represented the first time the SEC assessed fines in connection with a non-fraudulent ICO. (Click here for background in the article “SEC Assesses Penalties for Non-Fraudulent Initial Coin Offerings and Requires Registration; Issues Advisory on Issuance and Trading of Cryptosecurities” in the November 18, 2018 edition of Bridging the Week.)

My View: In July 2018, the SEC disapproved a proposed rule change by the Bats BZX Exchange, Inc. to permit its listing and trading of shares of the Winklevoss Bitcoin Trust. Commissioner Peirce dissented from the Commission’s determination. She claimed that BZX’s proposed rule change “satisfies the statutory standard” and that the SEC’s refusal to approve the rule “sends a strong signal that innovation in unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin [exchange-traded product].” 

Commissioner Peirce’s dissent was spot-on then, and applies equally to the Commission’s rejection last week of NYSE Arca’s proposal to list and trade shares of the United States Bitcoin and Treasury Investment Trust. There is no language in the relevant statute that appears to require NYSE Arca to address trading in spot bitcoin, as opposed to the exchange-traded product it proposed to accommodate, in a defense of its rules intended to preclude fraudulent and manipulative conduct. The language of the relevant statute is clear:

An exchange shall not be registered as a national securities exchange unless the Commission determines that 

(5) The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and, in general, to protect investors and the public interest. 

(Emphasis added; see 15 U.S.C. § 78f(b)(5).)

Nothing in this provision suggests that an exchange must address the potential for fraud or manipulation on another exchange or trading facility, let alone in the spot market, in order for its rules related to the listing of a specific security to be approved by the SEC.

According to Ms. Peirce, BZX more than adequately met its requirement under the plain language of the law, and there was no suggestion in the NYSE Arca order that the exchange had failed to meet its burden either. (Click here to access the Dissent of Commissioner Peirce to Release No. 34-83723; File No. SR-BatsBZX-2016-30, July 26, 2019.)

Moreover, the SEC’s rejection of FinCEN’s and states’ oversight of exchanges through their licensing regimes seems disrespectful if not demeaning. Comparable does not mean equal, and although FinCEN and the states may not impose all the same obligations on regulated virtual currency exchanges as the SEC does on national securities exchanges, that is not a sufficient basis for concluding the oversight is not comparable. The SEC’s additional disregard of the CFTC’s anti-manipulation authority over commodity spot markets is also troublesome.

No matter what the words of the SEC are to the contrary, as Ms. Peirce points out in her current dissent, the Commission’s continued refusal to approve the listing of a bitcoin ETP appears as a clear vote against new technology.

More Briefly:

For further information:

Cboe EDGA Exchange Speed Bumps Proposal Bumped Off Track by SEC:

CFTC Proposes Rules Amendments to Improve Swap Data Quality and Ease Swaps Reporting:

Data Technology Startup Agrees to Pay US $500,000 to Settle SEC Action Charging Unregistered Initial Offering:

FINRA Probes Zero Commissions at Broker-Dealers

Not Even Much to Do About Nothing – CFTC’s Legal Division Expresses No View on Digital Asset Subject to SEC Enforcement Action:

Lights, Camera, Action and Consequences!; Famed Actor Sanctioned by SEC for Alleged Unlawful Touting of Unregistered ICO:

ICE Futures Europe Issues Revised Self-Match Policy and FAQs:

Like CME (But Unlike the CFTC), ICE Futures U.S. Sanctions Trading Firm for Purported Spoofing by Ex-Employee Solely by Requiring Disgorgement of Profits:

Credit Suisse:

Garret Connery:

Related Broker-Dealers Agree to Reimburse Clients US $35 Million for Unsuitable Recommendations to Settle SEC Enforcement Action:

SEC Again Denies Listing of Bitcoin-Related ETF; Commissioner Peirce Laments Agency’s Merit Regulation Against Bitcoin:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of February 29, 2020. 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. Views of the author may not necessarily reflect views of Katten Muchin or any of its partners or employees.

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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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