February 27, 2019 / 11:20 PM / 9 months ago

U.S. CFTC will not appeal loss to prominent trader in manipulation case

NEW YORK (Reuters) - A U.S. regulator said on Wednesday it will not appeal the dismissal of its market manipulation lawsuit against DRW Investments LLC and its founder Donald Wilson, ending its more than five-year battle with the prominent Chicago trader.

The Commodity Futures Trading Commission abandoned the case three months after Circuit Judge Richard Sullivan in Manhattan said it failed to prove DRW rigged a market for interest-rate swaps in 2011 to boost a roughly $350 million trading position.

Sullivan’s decision followed a four-day bench trial in December 2016. It was a blow to CFTC efforts to thwart price rigging, and contained scathing language accusing the regulator of trying to impede legitimate efforts to make money.

Though market manipulation is a major CFTC focus, its last such trial in that area had been in 2008.

Chairman J. Christopher Giancarlo decided not to appeal before a March 1 deadline after internal agency discussions and “careful consideration” of the issues, a spokeswoman said in a statement.

“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,” the spokeswoman added.

The lawsuit was filed in November 2013.

DRW said in a statement that Sullivan’s decision “clarified that our trading activity was lawful, legitimate and in line with market regulation. [We] look forward to working with the CFTC to ensure efficient, well-functioning markets.”

The CFTC had accused Wilson of generating about $20 million of illegal profit by exploiting the market for a particular three-month interest rate swap futures contract, and placing trades he knew would not be consummated.

But Sullivan said Wilson simply pursued a strategy he thought the understood better than rivals such as Jefferies & Co and MF Global, the now-defunct firm once run by former New Jersey Governor Jon Corzine.

The judge also dismissed as sloganeering the CFTC’s frequent description of Wilson’s activity as “banging the close,” and said the regulator could not stake its case on “an ‘earth is flat’-style conviction” that market manipulation had occurred.

“It is not illegal to be smarter than your counterparties in a swap transaction,” Sullivan wrote, referring to DRW and Wilson.

Sullivan oversaw the trial as a federal district judge. He was elevated in October to the 2nd U.S. Circuit Court of Appeals in Manhattan.

Reporting by Jonathan Stempel in New York; Editing by Richard Chang

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