CHARGES FILED IN ILLEGAL MANIPULATIVE TRADING CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading of publicly traded stocks through an illegal practice known as “layering” or “spoofing.” 

The SEC also charged the owner and others for registration violations.  Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case.

In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels.  An SEC investigation found that Joseph Dondero, a co-owner of Visionary Trading LLC, repeatedly used this strategy to induce other market participants to trade in a particular stock.  By placing and then canceling layers of orders, Dondero created fluctuations in the national best bid or offer of a stock, increased order book depth, and used the non-bona fide orders to send false signals to other market participants who misinterpreted the layering as true demand for the stock.

“The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC.”

Joseph G. Sansone, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit, added, “Week after week, Dondero lined his pockets by placing phony orders and tricking others into trading with him at distorted prices.  The fact that Dondero perpetrated this deceit through the entry of trade orders did not allow him to evade detection.”

The SEC additionally charged Dondero, Visionary Trading, and three other owners with operating a brokerage firm that wasn’t registered as required under the federal securities laws.  New York-based brokerage firm Lightspeed Trading LLC is charged with aiding and abetting the registration violations, and its former chief operating officer is charged with failing to supervise one of the Visionary owners who shared with his co-owners commission payments that he received from Lightspeed while he was simultaneously working as a registered representative there.

According to the SEC’s order instituting settled administrative proceedings, the misconduct occurred from May 2008 to November 2011.  Visionary Trading and its four owners – Dondero, Eugene Giaquinto, Lee Heiss, and Jason Medvin – illegally received from Lightspeed a share of the commissions generated from trading by Visionary customers.  Lightspeed aided and abetted the violation by ignoring red flags that Visionary and its owners were receiving transaction-based compensation while Visionary and its owners were not registered as a broker or dealer or associated with a registered broker-dealer firm. 

According to the SEC’s order, Lightspeed also failed to establish reasonable policies and procedures designed to prevent and detect the improper sharing of commissions between its registered representatives such as Giaquinto, who was associated with Lightspeed for part of the relevant period, and others who were not registered with the SEC in any capacity.  Lightspeed’s former COO Andrew Actman failed reasonably to supervise Giaquinto by not taking appropriate steps to address red flags indicating that Giaquinto was sharing commission payments that he received from Lightspeed with the other Visionary owners. 

The SEC’s order finds that Dondero violated Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Visionary and its owners willfully violated Section 15(a)(1) of the  Exchange Act.  Giaquinto willfully aided and abetted and caused Visionary’s and his co-owners’ violations of Exchange Act Section 15(a)(1).  Lightspeed willfully aided and abetted and caused Visionary’s and its owners’ violations of Exchange Act Section 15(a)(1).  Lightspeed and Actman failed reasonably to supervise Giaquinto. 

In settling the SEC’s charges, Dondero agreed to pay disgorgement of $1,102,999.96 plus prejudgment interest of $46,792 and penalties of $785,000 for a total exceeding $1.9 million. He agreed to a bar from the securities industry.  Giaquinto, Heiss, and Medvin must each pay disgorgement of $118,601.96 plus prejudgment interest of $14,391.32 and a penalty of $35,000 for a combined total of more than $500,000 from the three of them.  They are barred from the securities industry for at least two years.  Lightspeed must pay disgorgement of $330,000 plus prejudgment interest of $43,316.54, post-order interest of $4,900.38, and a penalty of $100,000 for a total of approximately $478,000.  Actman agreed to a penalty of $10,000 and a supervisory bar for at least one year.

The SEC’s investigation was conducted by Jason Burt, a member of the Market Abuse Unit in Denver, and Thomas P. Smith, Jr. of the New York Regional Office.  It was supervised by Mr. Sansone, Mr. Wadhwa, and Daniel M. Hawke, chief of the Enforcement Division’s Market Abuse Unit.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

CFTC CASE OF SPOOFING IN COMMODITY FUTURES CONTRACTS ENDS WITH BANS, PENALTIES AND DISGORGEMENTS

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Panther Energy Trading LLC and its Principal Michael J. Coscia to Pay $2.8 Million and Bans Them from Trading for One Year, for Spoofing in Numerous Commodity Futures Contracts

First Case under Dodd-Frank’s Prohibition of the Disruptive Practice of Spoofing by Bidding or Offering with Intent to Cancel before Execution

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and simultaneously settling charges against Panther Energy Trading LLC of Red Bank, New Jersey, and Michael J. Coscia of Rumson, New Jersey, for engaging in the disruptive practice of “spoofing” by utilizing a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts. The Order finds that this unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform. The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.

According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts. For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse – a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question.

David Meister, the CFTC’s Enforcement Director, said, “While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated.  We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms.”

The Order finds that Panther and Coscia engaged in this unlawful activity in 18 futures contracts traded on four exchanges owned by CME Group. The activity involved a broad spectrum of commodities including energies, metals, interest rates, agricultures, stock indices, and foreign currencies. The futures contracts included the widely-traded Light Sweet Crude Oil contract as well as Natural Gas, Corn, Soybean, Soybean Oil, Soybean Meal, and Wheat contracts.

In a related matter, the United Kingdom’s Financial Conduct Authority issued a Final Notice regarding its enforcement action against Coscia relating to his market abuse activities on the ICE Futures Europe exchange, and has imposed a penalty of approximately $900,000 against him. Furthermore, the CME Group, by virtue of disciplinary actions taken by four of its exchanges, has imposed a fine of $800,000 and ordered disgorgement of approximately $1.3 million against Coscia and Panther and has issued a six-month trading ban on its exchanges against Coscia.

The CFTC’s $1.4 million disgorgement will be offset by amounts paid by Panther and Coscia to satisfy any disgorgement order in CME Group’s disciplinary action related to the spoofing charged by the CFTC. As CME Group has represented to the Commission, disgorgement paid in the CME Group’s action will be used first to offset the cost of customer protection programs, and thereafter, if the disgorged funds collected exceed the cost of those programs, the excess will be contributed to the CME Trust to be used to provide assistance to customers threatened with loss of their money or securities. The CME Trust is prohibited from utilizing any of its funds for the purpose of satisfying any legal obligation of the CME.

The CFTC thanks the Financial Conduct Authority in the United Kingdom and the CME Group for their cooperation.

Concurring Statement of Commissioner Bart Chilton in the Matter of Panther Energy Trading LLC and Michael J. Coscia

July 22, 2013
While I concur with the settlement in this matter, and agree wholeheartedly with the civil monetary penalty, disgorgement, findings of violations, undertakings, and cease and desist order imposed by the settlement, I am dissatisfied with the imposition of a one-year trading ban as to the respondents. I believe that the type of disruptive trading practice described in the Commission’s complaint is an egregious violation of the Commodity Exchange Act, and warrants the imposition of a much more significant trading ban to protect markets and consumers, and to act as a sufficient deterrent to other would-be wrongdoers.

Additionally, these types of violations of the law are becoming more common with the advent of high frequency traders (HFTs)—traders I’ve termed “cheetahs” due to their incredible speed. The cheetahs are to be commended for their innovative strategies, at the same time, when they violate the law, regulators need to be firm and resolute in our desire to deter such activities. Regulators already have a tough time keeping up with the cheetahs. Without sufficient deterrents, such as meaningful trading bans, many trading cats will simply find other ways to get back to their market hunting grounds. In years past, for example, a trader who was banned for a year from trading might as well consider it a lifetime ban. People on the trading floor would know, customers would know. People wouldn’t want to do business with the trader. In today’s cheetah trading world where identities can be cloaked behind technology, a year trading ban might simply be a nice sabbatical for a cheetah trader to work on some new algo programs to unleash after the trading ban has expired.

At the end of the day, regulators will have to work overtime to be able to keep up with the cheetahs and their superfast trading.  But like the cheetahs are a breed all their own, so are regulators.  And, we are a persistent bunch.  That’s our advantage.  We may have to work out the curve to get all the technology tools we need.  But we will be tenacious and tireless in our efforts to tract down market predators that break the rules.  And, we need those that violate, or may be thinking of violating the law to understand that regulators will always be harsh hard-hitters when the rules are broken.