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.
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