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."
The U.S. District Court for the Southern District of New York, Judge Analisa Torres, dismissed the CFTC's argument that it did not prove the intent to create an artificial price in order for it to establish a manipulation claim against an investment firm and the firm's CEO.