CFTC Fails to Prove Market Manipluation in CFTC v. DRW Investments, LLC

In a recent decision, a Southern District of New York court found the Commodity Futures Trading Commission (“CFTC”) failed to prove DRW Investments, LLC (“DRW”) manipulated the price of an exchange-traded interest rate swap futures contract known as the IDEX USD Three-Month Interest Rate Swap Futures Contract.

The CFTC alleged that DRW placed bids during the settlement period in order to artificially inflate the price of the 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 found that the CFTC 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.  

The Court also rejected the CFTC’s theory of “attempted market manipulation” for failing to establish artificiality.  The Court noted that the CFTC’s only substantive evidence of intent to manipulate was the fact that the DRW failed to consummate trades during the period in question. 

This is one of many cases the CFTC has brought forward alleging market manipulation. Any registered or non-registered company that receives a CFTC investigative demand should consult competent counsel immediately to discuss the investigative process.

About Kennyhertz Perry’s Commodities, Futures, and Derivatives Practice Group

Kennyhertz Perry advises clients on a wide range of commodities and derivatives regulatory matters.   Kennyhertz Perry has experience in all types of derivative transactions and design structures to meet clients’ specific trading, financial and/or credit needs.  The roots of the practice are in the commodities markets, where Kennyhertz Perry partner Braden Perry spent time as a Senior Trial Attorney with the Commodity Futures Trading Commission.  Our lawyers regularly advise our clients on compliance with the complex laws and regulations governing the securities and derivatives industries, including the Commodity Futures Modernization Act of 2000, the Commodity Exchange Act, the Gramm-Leach-Bliley Act, the Securities Acts of 1933 and 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the SEC and CFTC regulations, the rules of the various derivatives exchanges and clearinghouses and other industry self-regulatory organizations and the “Blue Sky” state securities laws. Keeping abreast of regulatory developments is imperative, and enables our lawyers to guide clients on comment-making about proposed legislation and regulation, provide ongoing operational and compliance counseling, and offer advice on appropriate modifications of transaction structure and documentation.

Clients also benefit from Kennyhertz Perry’s experience in related areas of law, such as litigation, banking, securities, insurance, and its regular practice before the Commodity Futures Trading Commission. Leaders in the financial industry choose Kennyhertz Perry because the firm’s lawyers tailor their advice to the unique issues presented by each matter they handle.

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