Thursday, February 18, 2016

Suit Alleging Spoofing of Treasury Futures Dismissed, Must Be Arbitrated

By Lene Powell, J.D.

An Illinois federal district court dismissed a private action alleging that anonymous traders manipulated futures markets by “spoofing” trades on the Chicago Board of Trade, ruling that the Federal Arbitration Act required the matter to be arbitrated. A CBOT rule mandates arbitration of disputes between exchange members and the defendants were CBOT members and had not waived their arbitration rights. The court also ruled that CBOT did not need to reveal the identities of the traders to the plaintiff in the federal case, though left it to the arbitrator decide on anonymity in the arbitration proceeding (HTG Capital Partners, LLC v. Doe, February 16, 2016, Chang, E.).

Alleged spoofing. HTG Capital Partners, a proprietary trading firm, sued a group of unidentified traders for alleged market manipulation in about 7,000 trades in the CBOT U.S. Treasury futures markets. HTG alleged that the traders, who were anonymous but known to CBOT and/or the CME Group, engaged in “spoofing”, or entering orders with no intent of executing them in order to move the market in their favor. HTG said the traders’ actions caused them significant financial losses and violated Sections 4c and 6(c) of the Commodity Exchange Act.

Subsequently, the court ordered CME Group to reveal under seal the identities of the traders so the court could determine if the traders were CBOT members. The court said if they were, it would probably compel arbitration because CBOT rules mandate arbitration of member disputes. The traders were revealed to the court to be CBOT members.

Arbitration compelled. HTG did not dispute that the arbitration agreement was valid or that CBOT rules required arbitration of the claims. Rather, HTG argued that the defendants had waived their right to arbitration by their conduct in the litigation.

The court first determined that the issue of waiver should be decided by the court, not the arbitrator. Next, the court ruled that the defendants had not waived their right to arbitration. The defendants did not delay invoking arbitration and did not actively litigate the matter or seek discovery in federal court. The defendants also did not waive arbitration by arguing that the dispute was subject to the exclusive jurisdiction of CBOT enforcement proceedings, rather than arbitration. Because the defendants had not waived their right to arbitration, the court granted the motion to compel arbitration.

Dismissal vs. stay. Having held that arbitration was required, the next question was whether the action should be dismissed or stayed pending the arbitration. The court decided that the action should be dismissed—not under Federal Rule of Civil Procedure 12(b)(3) as argued by the defendants, but under the FAA.

The FAA states that when arbitration is required, the district court “shall … stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.” Also, Seventh Circuit precedent generally holds that a stay is appropriate when a party seeks to invoke an arbitration clause. However, in other circuits and in recent district court cases in the Seventh Circuit, there is a growing trend of allowing dismissal when it is clear the entire controversy between the parties will be resolved by arbitration.

This approach is sensible, said the court, because in such a case there is nothing for the court to decide unless and until a party seeks confirmation of or challenges the arbitrators’ award. The court concluded that dismissal of the action without prejudice was appropriate because all of HTG’s claims are arbitrable under CBOT Rule 600.A.

Anonymity preserved. The court denied HTG’s request to link each defendant with HTG’s orders and granted the defendants’ motion to proceed anonymously as to the federal case. The court did deny the defendants’ motion, without prejudice, as to asserting the anonymity argument in arbitration. However, the court noted that the arbitrator, not the court, should decide what, if any, confidentiality protections would apply.

The case is No. 15 C 02129.

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