Shearman & Sterling LLP | Government Regulatory Enforcement Blog | CFTC Declines To Appeal Ruling That It Failed To Prove Artificiality In Market Manipulation Action
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  • CFTC Declines To Appeal Ruling That It Failed To Prove Artificiality In Market Manipulation Action
    On February 27, 2019, the Commodity Futures Trading Commission (“CFTC”) announced that it would not appeal a November 2018 decision in U.S. Commodity Futures Trading Commission v. Donald R. Wilson, et al., No. 1:13-cv-07884 (S.D.N.Y. Nov. 30, 2018), by Judge Richard J. Sullivan of the United States Court of Appeals for the Second Circuit, who was sitting by designation on the United States District Court for the Southern District of New York.  Judge Sullivan’s decision, which came after a bench trial of claims that defendant DRW Investments LLC (“DRW”) had manipulated the price of a certain swap future in violation of the Commodities Exchange Act (“CEA”), entered judgment for DRW on all claims and found that the CFTC had failed to prove that DRW’s challenged bids were at artificial prices.

    Specifically, as previously covered in the Need-to-Know weekly, the CFTC had alleged that DRW placed bids during the settlement period to artificially inflate the price of an exchange-traded interest rate swap futures contract known as the IDEX USD Three-Month Interest Rate Swap Futures Contract (the “Three-Month Contract”), which in turn increased the margin payments received by DRW on its existing long positions.  DRW responded that the bids it placed were not “artificial,” but were instead based on its own internal modeling and valuations, which led it to be willing to continue bidding the price up in the hopes of enticing new market entrants, while still turning a profit if those trades were consummated.  The Court agreed with DRW, finding that, among other things, the CFTC had failed to establish the four elements of “market manipulation” required in the Second Circuit:  that a defendant had the ability to influence market prices, that an artificial price existed, that defendant caused the artificial price, and that defendant specifically intended to cause the artificial price. 

    In announcing that the CFTC was not going to appeal Judge Sullivan’s decision, a CFTC spokesperson said that “[a]fter careful consideration of the issues, as well as discussions with agency staff and Commissioners, Chairman Giancarlo has decided that the agency will not appeal the district court’s decision in CFTC v. Wilson et al.,” said CFTC Director of Public Affairs Erica Elliott Richardson. “While the agency will not move forward with this case, it will continue to vigorously enforce the Commission’s anti-manipulation provisions and prosecute cases through trial where necessary.”