Bridging the Week by Gary DeWaal

Market conduct offenses, including alleged spoofing, pre-arranged trades and wash sales, resulted in trading bans for three individuals on CME Group exchanges, while a senior Securities and Exchange Commission officer endeavored to assuage concerns by chief compliance officers that the agency has specifically targeted CCOs in its enforcement program. As a result, the following matters are covered in this week’s edition of Bridging the Week:

• Three Individuals Fined and Banned From Trading on CME Group Exchanges for Market Conduct Violations;
• SEC Chief of Staff Says Agency Is Not Out to Sue Compliance Officers, But Will Bring Legal Actions When Appropriate (includes My View);
• Broker-Dealer Settles With SEC Over Alleged Non-Disclosure Related to Structured Notes Based on Foreign Exchange Trading;
• IB Employee Ordered to Make Full Restitution and Pay a Fine for Unauthorized Trading Activity (includes Legal Weeds);
• NFA Revises Self-Examination Questionnaire for FCMs, FDMs, IBs, CPOs and CTAs (includes Compliance Weeds); and more.

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Three Individuals Fined and Banned From Trading on CME Group Exchanges for Market Conduct Violations

CME Group business conduct committees permanently banned three traders from trading on CME Group exchanges for market conduct violations involving alleged spoofing, pre-arranged trades and wash sales.

In two actions – one involving futures traded on the New York Mercantile Exchange and another involving futures traded on the Commodity Exchange, Inc. – Nitin Gupta was charged with engaging in “a pattern of activity” involving the repeated entry of large orders for futures contracts “without the intent to trade” from February through April 2013. The relevant BCCs claimed Mr. Gupta entered these orders to effectuate the execution of smaller orders on the opposite side of the market as his larger orders. After obtaining fills, Mr. Gupta allegedly cancelled his large orders. In addition, Mr. Gupta did not answer the formal charges brought by the CME Group, said the relevant BCCs.

For his violations, Mr. Gupta was assessed an aggregate fine of US $150,000 in addition to his trading ban.

Separately, Libin Zhou was charged with matching buy and sell futures trades for his own account and for an account owned by his employer, resulting in the transfer of almost US $25,000 from his employer’s to his own account. These trades occurred from May 2013 through June 2013. Mr. Libin was also accused of making “several" false statements during the course of his interviews with CME Group Market Regulation staff.

In addition to his trading ban, Mr. Libin was ordered to pay a fine of US $100,000 and restitution to his employer.

Finally, Rajasekaran Veeramuthu was also banned from trading on CME Group exchanges and fined US $50,000 for engaging in “a series” of wash sales between accounts with the same beneficial owner from November 21 through December 20, 2012. Mr. Veeramuthu also did not respond to the formal charges brought by CME Group, claimed the relevant BCC.

Briefly:

• SEC Chief of Staff Says Agency Is Not Out to Sue Compliance Officers, But Will Bring Legal Actions When Appropriate: Andrew J. Donohue, chief of staff of the Securities and Exchange Commission, claimed that, despite a number of recent enforcement actions naming chief compliance officers, the SEC “is not targeting – and has not targeted – compliance personnel.” He made this statement in a speech before the National Regulatory Services’ 30^th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference held last week in San Diego. Mr. Donohue acknowledged three recent SEC enforcement actions involving CCOs of investment advisers have caused “a lot discussion whether the Commission was targeting CCOs.” (Click here, here and here to access SEC orders against CCOs of BlackRock Advisors, Parallax Investments and SFX Financial Advisory Management Enterprises.) However, he claimed SEC enforcement staff will only “typically” recommend enforcement actions against CCOs “when they have (1) affirmatively participated in the misconduct; (2) helped mislead regulators; or (3) had clear responsibility to implement compliance programs and policies and wholly failed to carry out that responsibility.” As a result, he concluded, “I believe that CCOs should feel empowered to diligently carry out their responsibilities without fear of personal liability.” In his capacity as chief of staff, Mr. Donohue serves as senior adviser to SEC Chair Mary Jo White.

My View: Mr. Donohue’s suggestion that CCOs may only be liable for failure to implement relevant compliance programs and policies appears contrary to the plain language of the applicable SEC rule at least so far as such actions are aimed at CCOs of investment advisers. This rule says it is the responsibility of IAs themselves to adopt and implement relevant policies and procedures to avoid violations of law, not CCOs (SEC Rule 275.206(4)-7; click here to access). As pointed out in the separate statement of former SEC Commissioner Daniel Gallagher to the settlement order of Eugene Mason, the CCO of SFX Financial Advisory Management Enterprises, SEC enforcement actions imposing such an obligation on CCOs send “a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, less they be held accountable for conduct that … is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties to avoid liability when the government plays Monday morning quarterback.” (Click here for further background and commentary on the SEC enforcement action involving SFX in the article “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally,” in the June 21, 2015 edition of Bridging the Week.) To give CCOs more comfort, the SEC should at least agree not to stretch the reach of its own rules to impose obligations on CCOs that are contrary to the rules' plain language.

• Broker-Dealer Settles With SEC Over Alleged Non-Disclosure Related to Structured Notes Based on Foreign Exchange Trading: UBS AG agreed to pay disgorgement and pre-judgment interest of US $11.5 million to resolve allegations by the Securities and Exchange Commission that it misled investors of structured notes whose return was based on a proprietary index derived from the performance of a proprietary trading program involving foreign exchange. UBS sold these notes to US retail investors between December 2009 and November 2010, said the SEC. According to the SEC, these notes were marketed to investors as being based on a “transparent” and “systematic” currency trading program. However, alleged the SEC, UBS engaged in conduct associated with the notes that was not disclosed and not systematic. The SEC claimed that UBS added mark-ups to certain hedging transactions that were not justified; added spreads to hedging transactions “that were determined at the discretion of the FX spot desk” and were not systematic; and, on over 24 occasions, engaged in trading for the firm’s proprietary account that were “directionally consistent” with trades later taken with hedging transactions. UBS’s US employees who drafted the relevant disclosure documents were not aware of these practices by the firm’s employees in Switzerland, claimed the SEC. The SEC acknowledged UBS’s “substantial cooperation” with its staff and having voluntarily undertaken remedial measures in accepting the firm’s settlement. In addition to disgorgement, UBS agreed to pay a fine of US $8 million.
   
• IB Employee Ordered to Make Full Restitution and Pay a Fine for Unauthorized Trading Activity: A US federal court in Ohio ordered Bradley A. Miklovich, a former employee of Rice Investment Company, a Commodity Futures Trading Commission-registered introducing broker, to make full restitution to Rice of US $566,360 and pay a fine of US $100,000 for unauthorized trading and concealment. In March 2014, the CFTC brought charges against Mr. Miklovich claiming he traded without authorization through three accounts of one customer, and the single account of another customer from July 23 through July 30, 2013. Because, during this time, Mr. Miklovich temporarily assumed certain reconciliation functions on behalf of a Rice employee on vacation who ordinarily performed these tasks, he was able to falsify both the reconciliations viewed by Rice’s principals as well as daily account summaries viewed by one of Rice’s customers, claimed the CFTC. As a result, Rice did not become aware of Mr. Miklovich’s unauthorized trades, according to the CFTC’s complaint, until the morning of July 31, 2013, when it was advised by the FCM carrying the customers’ accounts that one of Rice’s customers required additional margin or would be liquidated. Rice previously paid to its carrying FCM US $566,360 to cover the customers’ losses. In connection with this matter, the court also imposed registration and trading bans on Mr. Miklovich. (Click here for further details regarding this matter in the article “CFTC Sues IB Employee for Unauthorized Trading and Concealment; Charges Violation of New Anti-Manipulation Law and Rule” in the March 24, 2014 edition of Bridging the Week.)

Legal Weeds: In addition to relying on its traditional tools for prosecuting fraud (e.g., Commodity Exchange Act §§4b(1)(A)-(C) – click here to access), in bringing this action, the CFTC also relied on its new broad anti-manipulation authority under law and regulation. These provisions prohibit, intentionally or recklessly,  (1) the use of any manipulative device, scheme or artifice to defraud; (2) making any untrue or misleading statement of a material fact or failing to state material fact in order not to be misleading; or (3) engaging in any act or practice that operates as a fraud or deceit on another person, or any attempt to engage in any of these prohibitions. (Click here to access CFTC Regulation 180.1(a).) These provisions are increasingly becoming a favorite tool of the CFTC to prosecute a wide range of conduct from traditional fraud, as in this action, to allegations of market price manipulation. (Click here for details regarding a case involving allegations of price manipulation in the article “Manipulation Is Not Hedging Says CFTC in Federal Court Lawsuit Against Kraft Foods Group and Mondelez Global” in the April 5, 2015 edition of Bridging the Week.) Unfortunately, the court in this matter did not take the opportunity to address what is the lawful perimeter of these provisions.

• NFA Revises Self-Examination Questionnaire for FCMs, FDMs, IBs, CPOs and CTAs: The National Futures Association published an updated version of its Self Examination Questionnaire for FCMs, FDMs, IBS, CPOs and CTAs to reflect recent regulatory changes, and for Forex Dealer Members, certain rule changes to enhance protections for retail customers that go into effect in January 2016. (Click here for an overview of these changes for FDMs in the article, "CFTC Approves NFA Enhanced Customer Protection Rules for FX Retail Clients; Commissioner Bowen Says More Protection Needed" in the August 30, 2015 edition of Bridging the Week.)  Under NFA rules, members must review their operations on an annual basis using NFA’s most current questionnaire. Each questionnaire must be reviewed by an appropriate supervisory person, who must sign and date an attestation. A separate attestation is required for each branch office.

Compliance Weeds: The NFA Self-Examination Questionnaire is just one of the many useful guidances that US futures registrants can utilize to assess the completeness of their internal policies and procedures. Other publications published by regulators that registrants may find useful are: (1) NFA Regulatory Requirements for FCMS, IBs, CPOs and CTAs (click here to access); (2) Joint Audit Committee Margins Handbook (click here to access); and (3) Commodity Futures Trading Commission Form 1-FR-FCM Instructions (click here to access).

And more briefly:

• Former UBS Rogue Trader Banned for Life from Financial Services Industry by FCA: Kweku Adoboli, a former trader with UBS AG convicted by a UK court in November 2012 of engaging in unauthorized trades causing UBS losses of $2.3 billion in 2011, was formally prohibited last week by the UK Financial Conduct Authority from ever again working in the financial services industry. Mr. Adoboli is currently serving a seven-year prison sentence for his conduct. UBS previously settled charges brought by the FCA by paying a fine equal to US $47.6 million for its alleged failures to maintain controls to prevent Mr. Adoboli’s fraud.
   
• One-Day Position Limits Violation Results in Sanctions for Coffee Trading Firm From ICE Futures U.S.: Armajaro Asset Management agreed to pay sanctions of US $50,000 to resolve a disciplinary action brought by ICE Futures U.S. for a possible violation of the exchange’s spot month position limit in Coffee C futures on one day – April 8, 2013. The amount of the sanctions includes a fine and disgorgement of unspecified profits.
   
• CFTC Grants Further Delay to Trade Execution Requirements for Certain Swaps That Are Part of Package Transactions: The CFTC’s Division of Market Oversight provided a fourth delay until November 16, 2016, for the application of the Commission’s trade execution requirements in connection with the swap portion(s) of certain so-called “package transactions” that would otherwise be subject to mandatory trading on a designated contract market or a swap execution facility. In approving the delay, Commissioner J, Christopher Giancarlo criticized the proposed requirements, writing that “[a]fter four delays, the CFTC should admit that forcing certain complex package transactions to trade via SEF’s limited execution methods … is simply not workable.” (Click here for additional information on the package transactions impacted by the delay in the article “CFTC Further Extends No-Action Relief for Certain Package Transaction Swaps” in the October 16, 2015 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
   
• Six Firms Sanctioned for Selling Stock Short Right Before Purchasing Same Equity in Public Offering: The Securities and Exchange Commission resolved enforcement actions against six firms, alleging that they unlawfully engaged in short sales, within a restricted period – generally five days before a public offering – and then purchased the relevant securities during the public offering. This conduct is prohibited by an SEC rule (Rule 105 of Regulation M; click here to access). In aggregate, the firms paid fines of more that US $2.5 million to resolve this matter. One firm, War Chest Capital Partners LLC, also consented to a one-year bar from participating in stock offerings because this was the second time the firm has been accused of and settled an action with the SEC for this type of violation. (Click here for information regarding a prior group of SEC enforcement proceedings against firms for similarly violating the relevant SEC rule in the article “US SEC Charges 23 Firms in Connection with Unlawful Short Sales related to Initial Public Offerings; Simultaneously Issues a Risk Alert” in the September 23, 2013 edition of Bridging the Week.)

For more information, see:

Broker-Dealer Settles With SEC Over Alleged Non-Disclosure Related to Structured Notes Based on Foreign Exchange Trading:
http://www.sec.gov/litigation/admin/2015/33-9961.pdf

CFTC Grants Further Delay to Trade Execution Requirements for Certain Swaps That Are Part of Package Transactions:
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-55.pdf

Statement of Commissioner J. Christopher Giancarlo:
http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement101415

Former UBS Rogue Trader Banned for Life from Financial Services Industry by FCA:
http://www.fca.org.uk/static/documents/final-notices/kweku-mawuli-adoboli.pdf

IB Employee Ordered to Make Full Restitution and Pay a Fine for Unauthorized Trading Activity:
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbradleyorder093015.pdf

NFA Revises Self-Examination Questionnaire for FCMs, FDMs, IBs, CPOs and CTAs:
https://www.nfa.futures.org/NFA-compliance/publication-library/self-exam-questionnaire.pdf

Changed sections summary:
https://www.nfa.futures.org/NFA-compliance/publication-library/self-exam-questionnaire-updates-Oct-2015.pdf

One-Day Position Limits Violation Results in Sanctions for Coffee Trading Firm From ICE Futures U.S.:
/ckfinder/userfiles/files/Amajaro.pdf

SEC Chief of Staff Says Agency Is Not Out to Sue Compliance Officers, But Will Bring Legal Actions When Appropriate:
http://www.sec.gov/news/speech/donohue-nrs-30th-annual.html

Six Firms Sanctioned for Selling Stock Short Right Before Purchasing Same Equity in Public Offering:
SEC Press Release (with links to individual Orders):
http://www.sec.gov/news/pressrelease/2015-239.html

Three Individuals Fined and Banned From Trading on CME Group Exchanges for Market Conduct Violations:

Gupta:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/COMEX-13-9391-BC-NITIN-GUPTA.html#pageNumber=1
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-13-9391-BC-NITIN-GUPTA.html#pageNumber=1
Veeramuthu:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/COMEX-12-9204-BC-3-RAJASEKARAN-VEERAMUTHU.html#pageNumber=1
Zhou:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-13-9577-BC-LIBIN-ZHOU.html#pageNumber=1

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of October 17, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.