Big Story 10

CFTC faces tough questions as trial of Chicago firm, founder ends

NEW YORK (Reuters) - The U.S. Commodity and Exchange Commission faced tough questions from a federal judge on Wednesday over whether the agency could support its claims that a Chicago trading firm and its founder had manipulated the price of a futures contract.

During closing arguments in the non-jury trial in Manhattan federal court, CFTC lawyer Traci Rodriguez urged U.S. District Judge Richard Sullivan to find Don Wilson and a unit of his firm DRW Holdings LLC liable for engaging in market manipulation.

She said DRW Investments placed illegitimate bids more than 1,000 times that it knew would go unfulfilled for a three-month interest-rate swap futures contract in order to artificially increasing prices to benefit a $350 million bet it made.

“They did so with the intent to produce a price distortion,” Rodriguez said.

But Sullivan repeatedly interrupted her, questioning why no one would take DRW up on its bids if it was offering a higher price in what was an illiquid market. That could mean, he said, that DRW’s bids were actually too low to attract a counterparty.

“If that’s the case, then it seems to me the entire theory of artificiality goes out the window,” Sullivan said.

The comments came the end of what the CFTC says was its the first market manipulation case to go to trial since 2008.

The CFTC has asked Sullivan to impose a permanent registration and trading ban on Wilson and DRW, and force them to forfeit $13.5 million in profits and pay penalties.

Sullivan’s remarks appeared to potentially support DRW, which contended it submitted real bids based on legitimate economic rationales to entice buyers in the illiquid market.

Matthew Menchel, a lawyer for DRW, said it was placing bids “consistent with our understanding of fair value.”

According to court papers, beginning in June 2010, Wilson and DRW began researching a particular type of three-month interest-rate swap futures contract that was designed to hedge against, or speculate on, swings in rates.

After also studying various pricing and valuation rules, the CFTC said, DRW concluded it could exploit the contact to its favor and bought more than $350 million of interest-rate futures, anticipating the position’s value would increase.

When the underlying rates for the contracts did not rise as high as the firm hoped, the CFTC said, Wilson and DRW manipulated those rates by placing bids they knew would never be accepted to increase their positions’ value.

The case is Commodity Futures Trading Commission v. Wilson el al, U.S. District Court, Southern District of New York, No. 13-07884.

Reporting by Nate Raymond in New York; Editing by Alan Crosby