Judge Grills Futures Trader on 'Suckers' Email
03 December 2016 - 3:30AM
Dow Jones News
The head of DRW Investments LLC fielded questions this week in a
market-manipulation trial about trades that took place six years
ago with Jefferies and MF Global, which one DRW trader described as
a "suckers" bet in an e-mail displayed in court.
Donald Wilson Jr., founder and chief executive of the Chicago
trading firm DRW, faces the possibility of a lifetime trading ban
if he's found to have directed an alleged scheme to manipulate an
interest-rate contract. He denies the civil allegations from the
Commodity Futures Trading Commission, which sued Mr. Wilson and his
firm in 2013.
U.S. District Judge Richard Sullivan, who is presiding over the
bench trial, asked on Thursday in a Manhattan federal court about
an email in which one of DRW's traders referred to companies that
took the other side of a large futures transaction as
"suckers."
"Did you consider potential counterparties to be suckers?" the
judge asked. Mr. Wilson replied: "I wouldn't put it that way."
Most traders faced with such charges settle, but Mr. Wilson
didn't, setting the stage for a rare CFTC manipulation trial. The
last time a similar case went to trial was eight years ago,
according to a CFTC spokesman.
Court filings in the CFTC's legal battle with Mr. Wilson show
DRW entered the big futures trades in September 2010 with
investment bank Jefferies and MF Global, a now-defunct brokerage
firm, taking the other side. DRW bought $350 million of the futures
in a bet that interest rates would rise, while the other two firms
bet that rates would fall.
But DRW had concluded that the contract they were trading had a
design flaw, according to court filings made by the CFTC. The
contract was listed on an exchange owned by Nasdaq Inc.
In DRW's view, the flaw was that the price of the futures
contract needed to be different from the price of similar
interest-rate swap contracts traded outside of the exchange, but
Nasdaq treated the two as equivalent. DRW expected its bet would
climb in value as more people understood the design flaw, according
to the CFTC's lawsuit.
In court on Thursday, the agency shared a September 2010 email
in which DRW trader Brian Vander Luitgaren asked a colleague
whether "any more suckers" were willing to enter the same trade as
Jefferies and MF Global.
The judge asked Mr. Wilson about a February 2011 phone call in
which MF Global general counsel Laurie Ferber accused DRW of a
tactic that "screws other people", according to a transcript
released by the CFTC.
Mr. Wilson downplayed Ms. Ferber's accusation. "People accuse
people in the marketplace of manipulation all the time," he
said.
The tactic that upset MF Global's Ms. Ferber is the behavior
that the CFTC describes as illegal manipulation. It involved
placing electronic bids during a 15-minute settlement window that a
Nasdaq subsidiary used to calculate the daily closing value of the
interest rate contract.
DRW placed such bids more than 1,000 times from January to
August 2011, according to the CFTC. The agency says the bids set
the contract's price and enhanced the value of the $350 million of
futures DRW bought.
"There is no invisible hand here," CFTC lawyer Dan Ullman said
in his opening argument. "It is DRW's hand, pointing to the prices
it wanted and setting them illegally."
DRW admits entering bids but denies the tactic was illegal. The
firm says its bids were actually beneficial for the marketplace,
helping to correct a mispricing caused by the design flaw.
A DRW lawyer said Thursday there was nothing wrong with the
firm's dealings with Jefferies and MF Global.
In the summer of 2010, DRW "did their homework and rigorously
analyzed the fair value of the three-month contract," then found
two counterparties who "apparently hadn't done their homework,"
said Jonathan Cogan, an attorney with law firm Kobre & Kim
LLP.
Jefferies and Nasdaq declined to comment.
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
December 02, 2016 11:15 ET (16:15 GMT)
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