October 14, 2019

October 14, 2019

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New York Federal Court Clarifies Standard For CFTC Price-Based Manipulation Charge

On September 30, 2016, the United States District Court for the Southern District of New York issued an order in CFTC vs Wilson, et. al, 13 Civ. 7884 (NYSD), denying motions for summary judgment in an action by the Commodity Futures Trading Commission (“CFTC”) concerning alleged violations of the prohibition on market manipulation contained in Sections 6(c) and 9(a)(2) of the Commodity Exchange Act (“CEA”).  In its order, the Court clarified the burden of proof that the CFTC faces when making a price-based manipulation claim under these sections, including that acting with the intent to influence price is not sufficient to sustain a market manipulation claim.

The Court first rejected the CFTC’s interpretation that all it must prove to satisfy the intent element of a price-based market manipulation claim is the “intent to affect market price.”  Relying on its own precedent, the Court held that “[t]he CFTC must prove that Defendants had the specific intent to affect market prices that ‘did not reflect the legitimate forces of supply and demand.’”  In other words, “there is ‘no manipulation without intent to cause artificial prices.’” 

Nevertheless, the Court denied the Defendants’ (together “DRW”) motion for summary judgment on the basis that there was sufficient evidence such that a jury could reasonably conclude that the Defendants had the specific intent to create artificial prices.  In particular, the Court cited evidence indicating “DRW developed a long position in the [relevant contract] and then undertook a bidding strategy to create artificial prices” by placing bids it did not believe would be accepted with the intent to affect the relevant market price.  At the same time, the Court found that summary judgment in favor of the CFTC was unwarranted because a jury might reasonably conclude that DRW lacked the specific intent required based on evidence that DRW “believed the [relevant contract] had been undervalued and that DRW’s bids were a legitimate source of supply and demand.” 

The Court then elaborated on the meaning of “legitimate source of supply and demand” in its discussion of the artificial-price element of the manipulation claim.  The Court explained that a reasonable jury could conclude that the CFTC met its burden with respect to proving an artificial price by finding that “DRW did not intend to transact on its bids—i.e., they were not a legitimate source of supply and demand.”  The Court’s interpretation of this element bears a striking resemblance to the CFTC’s prohibition on “spoofing,” which prohibits the submission of bids or offers with the intent to cancel the bid or offer before execution.  Similar to the reasoning employed in Wilson, when construing the scope of the spoofing prohibition, both the CFTC and the courts have distinguished between legitimate trading strategies—which may result in a good-faith cancellation of orders in some cases—and entering into transactions with the “intent to cancel.”

Separately, the Court rejected several other grounds for summary judgment:

  • First, the Court rejected DRW’s argument that the CFTC had failed to provide evidence to support its allegation that DRW’s bidding was the proximate cause of an artificial price because the derivatives clearing organization (“DCO”) had discretion as to whether to base the settlement price on DRW’s bids.  The Court reasoned that a jury might find that the practice was to set prices based on DRW’s bids and that this was predictable. 

  • Second, the Court also rejected DRW’s arguments that the CFTC’s action was inconsistent with due process because DRW did not have adequate notice that their conduct was unlawful.  The Court rejected this argument on the basis that the CFTC’s manipulation claim involved the application of well-established legal principles. 

  • Lastly, the Court rejected DRW’s jurisdictional claims on the basis that bids on a registered exchange were subject to CFTC jurisdiction.

© 2019 Bracewell LLP

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About this Author

Michael Brooks, Energy, Commodities, attorney, Bracewell, law firm
Partner

Michael focuses his practice in the areas of energy, commodities and derivatives law. He represents energy companies and commodity trading companies in a wide variety of regulatory, compliance and enforcement matters and routinely advises clients regarding compliance with federal rules and regulations governing the trading, ownership and transportation of energy commodities.

In addition to actively representing clients in investigations and regulatory matters involving the Federal Energy Regulatory Commission (FERC) and the Commodity Futures...

202-828-5879
David Perlman, Energy Practice, Partner, Lawyer, Bracewell law firm
Partner

David Perlman is a partner in the energy practice in Bracewell's Washington, D.C. office. He represents and counsels clients before regulatory bodies such as the Federal Energy Regulatory Commission (FERC), Commodity Futures Trading Commission and state public utility commissions in regulatory and compliance matters, in the conduct of compliance programs and training, and in energy-related transactions and financings.

Mr. Perlman represents a variety of clients, including utilities, commodities merchants, marketers, industrial customers, generators, lenders, financial institutions, gas producers and others.

Prior to joining Bracewell, Mr. Perlman was Chief Counsel to Lehman Brothers Commodities business in New York, where he was responsible for legal, transactional and regulatory matters relating to the firm's physical and derivative commodity businesses.  Before this, he was a partner in the energy practice at a major law firm in Washington, D.C.

Mr. Perlman served for two years as Senior Legal Advisor at FERC, where he provided advice regarding significant and complex legal, regulatory policy and legislative issues coming before the Commission. These included matters related to Regional Transmission Organizations (RTO)/Independent System Operators (ISO), gas and electric market oversight, market-based rates and transmission.

Before his government service, Mr. Perlman was counsel to the Constellation Energy Group for 18 years, where he was General Counsel of its merchant and trading businesses and ultimately served as Chief Energy Counsel.  He began his career as an attorney at FERC.

202-828-5804
Robert E. Pease, Energy, Attorney, Bracewell law firm
Senior Counsel

Bob Pease represents clients involved in the energy sector in CFTC and FERC regulatory, compliance and enforcement matters involving power, gas, and crude oil, as well as Dodd Frank implementation. Bob has more than 25 years of senior-level experience at CFTC and FERC handling energy-related policy, compliance and enforcement matters, most recently as Counsel to the Director in the Division of Enforcement with the CFTC. Before his time with the CFTC, Bob spent more than 20 years at FERC most recently as Director of Investigations. Bob was involved in some of the...

202-828-5824
Jennifer T. Gordon, Energy Regulation Policy Attorney, Bracewell law firm
Associate

Jennifer Gordon is an associate in Bracewell’s Washington, DC office, where she focuses her practice on white collar criminal defense and energy regulation. 

Jennifer participates in representing clients throughout the trial and appellate process on a wide range of matters arising under state and federal law. She represents clients in connection with Foreign Corrupt Practice Act (FCPA) compliance, securities fraud, public corruption, and environmental crimes. Jennifer has experience representing clients in government investigations and...

202-828-1705
Stephen Hug, Environmental Attorney, Bracewell Law Firm
Associate

Stephen Hug represents clients in matters related to federal regulatory policies, regulations and rules applicable to the electric industry. His experience includes assisting clients with compliance with the rules and regulations of the Federal Energy Regulatory Commission (FERC) and the Federal Power Act (FPA).  Stephen also represents clients in litigated proceedings before FERC.

202-828-5866