by T. GormanPosted on Posted in SECActions

High speed trading is a frequently discussed and much studied technique used to trade in the securities and futures markets. The SEC is studying the approach. The CFTC has also been evaluating the trading technique and is considering possible regulations. CFTC Commissioner Bart Chilton, who named such traders “cheetahs” because of their speed, has proposed a basic regulatory system for these traders that focuses on the safety and security of their computer systems to avoid market disruptions. It would be implemented while the merits and market impact of the approach is evaluated.

Three regulators announced settled actions centered on abusive high speed trading this week. The CFTC and the CME Group brought proceedings against Panther Energy Trading and Michael Coscia. The Financial Conduct Authority also imposed sanctions on Mr. Coscia for similar conduct in the UK.

The actions by the CFTC and the CME group centered on trading on four exchanges owned by the CFE Group from early August to mid-October 2011. During that period the two traders repeatedly employed a manipulative technique known as “spoofing.” It involves placing a relatively small order on one side of the order book, subsequently placing large orders on the opposite side and then canceling the larger orders while permitting the smaller ones to be executed. Thus, for example, the traders would place small sell orders followed by large purchase orders. The latter were intended to show liquidity and interest, drawing others to the market and facilitating the execution of the smaller sell orders. The process would then be reversed. The two traders utilized this technique in trading 18 futures contracts involving commodities such as Light Sweet Crude Oil, Natural Gas, Corn, Soybean, Soybean Oil, Soybean Meal and Wheat contracts.

The CFTC entered orders requiring the two traders to pay $1.4 million in penalties and to disgorge an equal amount in trading profits. The traders will also be banned from trading on any CFTC registered entity for one year. The amounts paid will be offset by any amount paid to resolve the charges with the CME Group.

CFTC Commissioner Chilton issued a separate statement regarding the settlement. While he concurred with the settlement he argued that a “much more significant” trading ban should have been imposed in view of the egregious conduct involved.

The CME Group, by virtue of disciplinary actions taken by its exchanges, has imposed a fine of $800,000 and order disgorgement of about $1.3 million against the two traders The Group also issued a six month trading ban on its exchanges against Mr. Coscia.

The FCA imposed sanctions on Mr. Coscia for similar trading that took place in September and October 2011 on the ICE Futures Europe Exchange in the UK. During that period Mr. Coscia engaged in what the regulator called “layering,” the equivalent of spoofing. Using direct market access, Mr. Coscia profited from layering in futures for Brent Crude Oil, WTI Crude Oil and Gas Oil. The regulator imposed a fine of €597,993 or $903176. Mr. Coscia received a 30% discount on the amount of the fine for agreeing to settle under the FCA’s executive settlement procedures.

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by T. GormanPosted on Posted in SECActions

The SEC brought another action centered on the municipal bond market. This case, against the City of Miami and its former Budget Director, not only accuses the defendants of fraud in connection with three bond offerings, but also of violating a prior consent decree which is a first for the agency. SEC v. City of Miami, Florida, Civil Action No. 1:13-cv-22600 (S.D. Fla. Filed July 19, 2013).

The action centers on three bond offerings in May, July and December 2009. In advance of those offerings the City distributed its Comprehensive Annual Financial Reports or CAFRAs. That document contains a Management’s Discussion and analysis section and the audited financial statements of the City. The transmittal letter represented that the CAFRA was complete and reliable in all material aspects. The documents in part rely on the budget from the then budget director and now defendant, Michael Boudreaux.

On May 29, 2009 the City issued about $53 million in Limited Ad Valorem Tax Bonds. The bonds were not insured but they were secured by certain pledged City ad valorem tax revenues. The Preliminary Official Statement for the bond offering contained excerpts of the City’s CAFR, including the MD&A section, and the audited financial statements. Subsequently, in July and December 2009 the City issued, respectively, $37 million and $65 million in similar bonds on the same basis and using comparable documents. In each instance rating agencies gave the bonds favorable ratings which secured good terms for the City.

Despite the representations in the documents distributed by the City, a series of transfers had been made from its Capital Projects Fund to its general fund that were not reflected in those materials. The transfers were made to conceal deficits in the general fund. The City had established a goal of maintaining $100 million in reserves in its general fund. The funds transferred were supposed to be restricted. To effectuate the transfers Mr. Boudreaux falsely told the City Commission that the funds were unallocated. He then concealed the transactions in the City’s internal records. Mr. Boudreaux also made misrepresentations to the rating agencies which helped secure the favorable ratings for the bond offerings, according to the complaint.

Previously, in March 2003 the Commission issued a cease and desist order against the City for violations of the anti-fraud provisions of the federal securities laws. The violations were in connection with bond offerings in 1995.

The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22753 (July 15, 2003).

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