SEC, CFTC and DOJ Charge Family Office and Certain Principals with Market Manipulation
The SEC, the CFTC and the DOJ filed actions against a New York-based family office and certain of its principals for an alleged market manipulation scheme that resulted in billions of dollars in losses.
The SEC filed a Complaint in the Southern District of New York charging the firm, its owner and three of its employees with fraud and manipulation charges, primarily alleging that the firm made material misstatements and omissions in manipulating the price of a number of equity securities. The SEC charged the firm, its owner and its head trader with violating Section 17(a) of the Securities Act and, Sections 10(b) ("Regulation of the Use of manipulative and deceptive devices") and 9(a)(2) ("Prohibition Against Manipulation of Security Prices") of the Exchange Act.
The CFTC brought settled administrative proceedings against two of the firm's employees and also filed a Complaint in the Southern District of New York alleging that the firm and one of its employees "engaged in a scheme whereby they intentionally and/or recklessly provided false or misleading material information and/or omitted to provide such material information to their trading swap counterparties." The CFTC charged the firm with violating Section 6(c)(1) ("Prohibition regarding manipulation and false information") of the Commodity Exchange Act and CFTC Rules Part 180.1(a)(1)-(3) ("Prohibition on the employment, or attempted employment, of manipulative and deceptive devices").
The DOJ issued an Indictment in the Southern District of New York, charging the owner of the firm and its CFO with racketeering conspiracy, securities fraud, market manipulation and wire fraud.
SEC Chair Gary Gensler stated that: "[the firm's] failure underscores the importance of our ongoing work to update the security-based swap market to enhance investor protection [and prime brokers] must stay vigilant to the risks presented by counterparty relationships."
Commentary
It is not at all clear why the CFTC would have jurisdiction in a matter like this. The agency has little jurisdiction when it comes to equity securities and swaps on equity securities. The explanation from the CFTC, primarily paragraphs 26-28 of the Complaint, raises more questions. The Complaint cites two types of trades: (1) "custom basket swaps" and (2) swaps on ETF shares. The former is an area where previous SEC and CFTC statements on jurisdiction are vague and subject to different interpretations, and the CFTC Complaint gives little additional color for its conclusion that the products were "swaps" (rather than "security-based swaps"). The ETF swap discussion is mystifying or missing some material analytical detail. The paragraphs in the Complaint seem to suggest a "look through" test for a swap on a fund share - i.e., that a "security" may sometimes itself be an "index."