Donald R. Wilson and his DRW Investments LLC were sued by the U.S. Commodity Futures Trading Commission over what the agency called “manipulative” futures trades that allegedly made them $20 million.
Wilson and his Chicago-based investment fund manipulated prices for interest-rate swap futures contracts traded on the Nasdaq OMX Futures Exchange and cleared through the International Derivatives Clearinghouse, or IDCH, from January through August 2011, according a complaint the CFTC filed today in Manhattan federal court.
Specifically, DRW allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract. The CFTC said the contract was listed by the IDCH in 2010 and marketed as an alternative to over-the-counter products that trade outside the exchanges. At the end of 2010, DRW took a long position in the three-month contracts with a value of more than $350 million, the commission claimed.
Wilson and DRW knew that the settlement price of the contract relied on bids placed on the futures exchange during a 15-minute “settlement window” each day, before the close of trading, according to the complaint. The firm artificially increased the value of its position by “banging the close,” making bids within the settlement window and then canceling them so transactions weren’t completed, the CFTC said.
DRW denied all wrongdoing in a statement today.
Wilson and DRW used the strategy to profit from inflated prices over at least 118 trading days, affecting more than 1,000 futures contracts, the agency claimed.
“Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive,” Gretchen Lowe, the CFTC’s enforcement director, said in a statement today.
The CFTC is seeking unspecified fines and restitution.
DRW sued the CFTC in September in federal court in Chicago, seeking to block the regulator from its “stated intention to bring an enforcement action.”
In today’s statement, DRW said the CFTC “brazenly filed” the New York case before giving the Chicago court the opportunity to consider its claims. The firm said it entered fair and open bids that complied with exchange rules.
“The CFTC’s application of the Commodity Exchange Act to DRW’s activity disregards legitimate and important market practices related to the provision of liquidity and violates DRW’s constitutional rights to due process of law and freedom from arbitrary and unreasonable government action,” DRW said in the statement. “It is unfair and unconstitutional to impose punishment without giving fair notice of what conduct is prohibited.”
Interest-rate swaps -- exchanges of interest-rate exposure from floating to fixed or vice versa for a notional amount of money -- are used by speculators and those looking to hedge risks.
In the Chicago suit, DRW claimed the CFTC in August 2011 began reviewing whether the IDCH swaps contract orders produced an “artificial price” because they deviated from prevailing yields of comparable OTC swaps. Those swaps weren’t economically equivalent, DRW said.
In April, the CFTC sent DRW a Wells notice, informing it of the regulator’s preliminary intent to start an enforcement action for alleged market manipulation, according to the firm.
The New York case is U.S. Commodity Futures Trading Commission v. Wilson, 13-cv-07884, U.S. District Court, Southern District of New York (Manhattan). The Chicago case is DRW Investments LLC v. U.S. Commodity Futures Trading Commission, 13-cv-06630, U.S. District Court, Northern District of Illinois (Chicago).