Exchanges Condoned Alleged Spoofer's Trades, Ex-Partner Says

  • 3Red co-founder faults exchange officials in civil Lawsuit
  • Oystacher's trading later called manipulation by regulator

Igor Oystacher’s former business partner alleged that top executives at the world’s largest futures exchanges condoned Oystacher’s trading practices, which U.S. regulators later said amounted to market manipulation.

Edwin Johnson, who co-founded 3Red Trading LLC, is locked in a legal dispute with Oystacher over terms of his departure from the firm. In a court filing this month in that litigation, Johnson described meetings he had with FBI agents in 2014 about his partner’s trading. He told those agents that CME Group Inc. Executive Chairman Terry Duffy and David Goone, the chief strategy officer of Intercontinental Exchange Inc., and two others had given him “false assurances” that “Oystacher’s trading practices were legal and legitimate.”

The U.S. Commodity Futures Trading Commission sued Oystacher and 3Red in October 2015, saying he engaged in an illegal trading practice called spoofing, in which orders are placed and then canceled with the sole purpose of moving prices.

Others disputed Johnson’s description of events. Oystacher’s spokesman questioned Johnson’s credibility, and a CME spokeswoman said Duffy never discussed Oystacher’s trading with Johnson. A representative for Intercontinental Exchange declined to comment. Johnson has not been accused of any wrongdoing by regulators.

Self-Regulatory Model

CME and Intercontinental Exchange are both self-regulatory organizations, and the issues raised by Johnson are at the center of that model, in place for decades in U.S. markets. The exchanges have a duty to root out manipulation, which may conflict with their efforts to maximize revenue from trading. The CME and ICE executives named by Johnson are not directly responsible for market oversight, though their companies are. The exchanges in turn are overseen by the CFTC, which is overseen by Congress.

Oystacher and 3Red would have been significant contributors to revenue. They were the largest traders of copper, natural gas and E-Mini S&P 500 futures contracts on CME’s markets, according to the CFTC suit.

Tom Becker, a spokesman for Oystacher, said “Johnson has no credibility.”

“By submitting a filing referencing two-year old meetings that resulted in not a single contact by any law enforcement agency to the firm, Mr. Johnson is blatantly trying to mislead the court and the public,” Becker said.

Anthony Pinelli, a lawyer for Johnson, declined to comment or to make Johnson available. Johnson, who helped set up 3Red in 2010, wasn’t named in the CFTC’s complaint. Nor were Duffy or Goone.

‘Preferential Treatment’

Johnson also questioned the propriety of how other exchanges treated Oystacher. In his filing he referred to “preferential treatment afforded to Oystacher” by CME Group, ICE, Eurex and the CBOE Futures Exchange. CME and ICE are the world’s two biggest operators of exchanges by market value. Representatives from Eurex, Deutsche Boerse’s futures market, and CBOE Futures Exchange, run by CBOE Holdings Inc., declined to comment.

Spoofing in U.S. futures markets became illegal in 2010, when the Dodd-Frank Act took effect. The CFTC invoked that rule when it accused Oystacher and 3Red last year of engaging in the practice. 

Spoofers place orders they don’t intend to fill for the sole purpose of moving prices in a direction favorable to their strategy, then cancel them before they are filled. While there’s nothing wrong with canceling orders, it’s illegal to put orders into a markets with no intention of following through on them.

Previous Fines

Exchanges have previously fined Oystacher for spoofing on their markets. He’s been fined five times for a total of $660,000 by CME, ICE and Eurex. In each case, Oystacher neither admitted nor denied wrongdoing. The Russian-born trader is also facing another spoofing investigation by CME, a person familiar with the matter said in November.

The U.S. Justice Department convened a grand jury in Chicago that heard testimony last year about Oystacher’s alleged manipulation, a person familiar with the matter said at the time. Federal prosecutors are expected to watch the CFTC case against Oystacher closely and may follow it with a criminal indictment, two people familiar with the matter said last year. Spokesmen for the FBI and Department of Justice declined to comment for this story.

Johnson and Oystacher met when they were colleagues at the Chicago futures firm Gelber Group LLC. Oystacher left Gelber in late 2010 and partnered with Johnson to start 3Red. Two lawsuits followed.

Lawsuits

In the first, Johnson, who owned 10 percent of 3Red, sued the law firm that helped set up the firm after claiming he was pushed out in 2013. Johnson alleged in his suit that potential investors were being spooked by fears of spoofing at the firm. He also claimed his law firm had a conflict of interest in representing both him and Oystacher, who held 90 percent of 3Red, at the same time. Johnson eventually left the firm and entered into a confidentiality agreement with Oystacher and 3Red concerning his allegations over his departure, according to the complaint. The case is ongoing.

In the second, Oystacher and 3Red sued Johnson for allegedly breaching that confidentiality agreement. That’s the case where the new filing surfaced. In it, Johnson answered a set of questions posed to him by Oystacher’s lawyers such as who Johnson plans to call as witnesses, any times Johnson has disclosed details of the confidentiality agreement, any times he met with federal authorities and any contact Johnson has had with the news media.

Johnson, answering the request, detailed two sets of communications he had with journalists.

According to the filing, witnesses Johnson plans to call include three people tied to CME -- Duffy, Chief Commercial Officer Bryan Durkin, and board member David Wescott -- as well as ICE’s Goone and Oystacher.

The reason Johnson met with FBI agents and the U.S. Attorney’s Office for the Northern District of Illinois in 2014 was “related to the investigation into Oystacher’s illegal trading activities and other unlawful misconduct,” according to Johnson’s filing. At the request of the FBI and U.S. Attorney’s office, Johnson didn’t reveal to Oystacher or his lawyers that he was meeting with federal investigators, according to the filing.

In a March 25, 2014, meeting with two FBI agents, Johnson said they discussed “a pending FBI raid on 3Red’s offices and Oystacher’s residences,” as well as “whether Oystacher would flee or stand trial,” according to the filing. They also “discussed Oystacher’s contacts in Russia and where Oystacher may attempt to hide assets.”

In a June 2, 2014, meeting with the FBI agents and an assistant U.S. Attorney, they “reviewed a backup copy of Oystacher’s iPhone and related text messages,” the filing said.

A hearing in the 3Red case against Johnson is scheduled for tomorrow in the Cook County court.

The cases are Johnson v. Gardiner Koch Weisberg & Wrona, 14-06857, Illinois Circuit Court of Cook County (Chicago), 3Red Group Illinois LLC v. Johnson Edwin, 14-19726 Illinois Circuit Court of Cook County (Chicago) and U.S. Commodity Futures Trading Commission v. Oystacher, 15-cv-09196, U.S. District Court, Northern District of Illinois (Chicago).

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