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District Court Rejects CFTC's Attempted Manipulation Charge and Much of Its Experts' Testimony

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Commentary by Bob Zwirb

The U.S. District Court for the Southern District of New York, Judge Analisa Torres, rejected the CFTC's assertion that it need not prove the intent to create an "artificial price" in order for it to establish an attempted manipulation claim against an investment firm and the firm's CEO. In the recent price manipulation case U.S. CFTC v. Donald R. Wilson Jr. & DRW Investments, the Court did not accept the CFTC's position that it must prove only the "intent to affect price." Judge Torres stated that the CFTC's position was "incorrect," and that in order to claim market manipulation took place, the CFTC first must establish that the defendants intended to cause an artificial price.

However, the court also dismissed the defendants' motion for summary judgment, which argued that its bids were shielded by former CEA Section 2(d)(2), which "exempts transactions 'entered into on a principal-to-principal basis between parties.'" After considering that argument, the Court concluded that transactions by one of the defendants "on this CFTC regulated exchange are not exempted because its bids are a 'unilateral action by a single party' and not, as the exemption requires, a transaction between two parties."

Additionally, the court ruled on the parties' motions to exclude the testimony of each other's expert witnesses. It upheld (with some exceptions) the testimony of the defendant's two experts, while excluding a significant amount of testimony by the CFTC's experts. On the issue of price discovery, the Court found that the witness "failed to provide any reliable authority supporting his theory." The Court also found the testimony of the CFTC's expert to be "unreliable" on another issue, and "[not] within the range of where experts might reasonably differ" on still another.

Commentary

The Court's ruling on the standard for establishing attempted manipulation represents more than a victory for the defendants. It also vindicates the integrity of the CFTC's previous positions and upholds decades of settled law. The ruling is especially important because U.S. courts apply and rely on the standards developed by the CFTC in its adjudicatory forum for establishing such legal concepts. Preexisting CFTC standards – which still require the CFTC to prove that the defendants had the intent to affect prices in a way that does "not reflect the legitimate forces of supply and demand" – would have been undermined if the Court had upheld the CFTC's current position.

The CFTC's effort to persuade the Court to accept a different (and lower) standard of proof for establishing intent in an attempted manipulation case is also inconsistent with previous CFTC caselaw, which holds that the intent standard for an attempted manipulation is identical to that of a completed manipulation. See Indiana Farm Bureau ("We discern no difference in the intent required to accomplish a manipulation and that required by an attempted manipulation which is simply the performance of an act or conduct which was intended to effect an artificial price. . . .").

The CFTC undermines its authority as a regulator when it attempts to materially alter the standards for what constitutes improper conduct, and supports that attempt with testimony from expert witnesses whose positions lack support to make their way into evidence.

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