Financial Industry Groups Submit Request to File Amicus Brief in Price Manipulation Case
Commentary by Bob Zwirb
Financial industry groups seek permission to file an amicus brief in a federal case involving the legal standard required to prove manipulation and attempted manipulation of a commodity price. The MFA, the Chicago Mercantile Exchange Group Inc., the Commodity Markets Council, the Futures Industry Association and the Intercontinental Exchange (collectively, the "Organizations") filed a motion with the U.S. District Court of the Southern District of New York seeking permission to file an amicus brief in U.S. CFTC v. Donald R. Wilson Jr. & DRW Investments. The Organizations specified that the amicus brief would support the "long-standing legal standard for manipulation" and not the CFTC's assertion that proof of intent to create an "artificial price" is not required to prove that the defendants manipulated and attempted to manipulate the price of a commodity in violation of the Commodity Exchange Act ("CEA").
The Organizations expressed their mutual concern that "the lower legal standard, for which the CFTC is advocating, would interfere with lawful business conduct, price discovery, liquidity and hedging activities." The Organizations also stressed that the CFTC's argument that it need only prove "an intent to affect price" and not that the price was intended to be artificial "departs from decades of settled law."
Commentary
A great deal of attention has centered around the CFTC's new fraud-based anti-manipulation authority (as provided by Congress in the Dodd-Frank Act, CEA Section 6(c)), which makes it easier to prove manipulation by doing away with two key elements of the prior requirements (specific intent and artificiality). Considerably less attention has been paid to the CFTC's efforts to water down its own traditional standard for establishing manipulation or attempted manipulation under CEA Section 9(a)(2).
Two recent developments illustrate this trend. First, in In re DiPlacido, CFTC Docket No. 01-23 (Nov. 5, 2008), an administrative case, the CFTC declared that "uneconomic trading strategies" – i.e., "violating bids and offers – in order to influence prices" – is "sufficient to show manipulative intent." Second, in connection with the adoption of a new rule implementing the traditional standard – Rule 180.2 – the CFTC indicated that the prohibition on price manipulation and attempted price manipulation would "encompass every effort to improperly influence the price of a swap, commodity, or commodity futures contract," and that "'an illegal effect on price can often be conclusively presumed from the nature of the conduct in question and other factual circumstances not requiring expert economic analysis.'" 76 Fed. Reg. 41398, 41407-408 (July 14, 2011).
Even in these instances, there was an implicit assumption that the price resulting from the manipulation or attempted manipulation would be "artificial." If the characterization in the amicus brief of the CFTC's position is true, then the CFTC's effort to transform its law on manipulation in order to prevail more easily has taken an audacious turn.