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Court Rules against CFTC, Says Defendants Better Understood Product and Market Values

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Commentary by Bob Zwirb

The U.S. District Court for the Southern District of New York determined that the CFTC failed to prove that a Chicago trader and his firm had either manipulated or attempted to manipulate the price of certain interest rate swaps.

The CFTC alleged that the trader Donald R. Wilson and his firm engaged in market manipulation for an exchange-traded interest rate swap futures contract by placing trades that they believed would not be executed. According to the Memorandum and Order, the Judge found, in rather blunt terms, that the CFTC provided no evidence to prove that the settlement prices of the swaps were artificially high or that the Defendants knew that they were able to, or were intending to, cause artificial prices.

In pertinent part, the Judge stated:

"In light of Defendants' explanations for their bidding practices, and the CFTC's complete inability to contradict those explanations with credible evidence, the Court finds that Defendants made bids with an honest desire to transact at those posted prices, and that they fully believed the resulting settlement prices to be reflective of the forces of supply and demand. Since Defendants' trading pattern is supported by a legitimate economic rationale, it 'cannot be the basis for liability under the CEA.'"

The Judge then went on to say:

"It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product. . . . By August 2011, virtually every market participant . . . and even the CFTC 's Clearing Division - came to acknowledge that [the Defendant] was right."


This is the second time in this proceeding that the CFTC has lost on the standard for proving manipulation and attempted manipulation. Earlier, before a different Judge, the CFTC argued that it need not prove the intent to create an "artificial price" in order for it to establish attempted manipulation, but that it need prove only an "intent to affect price." Here, before Judge Sullivan, the CFTC argued that an artificial price could be proven merely by showing that the Defendants intended to affect the settlement price. As with the first time, the Court saw through this argument as simply an attempt to "lower the bar" for proving market manipulation. Judge Sullivan reminds the regulators why "[p]roving the existence of an artificial price is difficult - and with good reason," and that is because "'laws that forbid market manipulation should not encroach on legitimate economic decisions lest they discourage the very activity that underlies the integrity of the markets they seek to protect.'" (quoting In re Amaranth, 587 F. Supp. 2d 513, 534-535 (S.D.N.Y. 2008)). A good lesson to take away from the decision.

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