Thursday, July 14, 2016

Alleged 'spoofer' escapes injunction, but trading restricted until trial

By Anne Sherry, J.D.

A court declined the CFTC's request to preliminarily enjoin a trader's "spoofing" behavior, electing instead to restrict the defendants' trading to ensure compliance until the charges go to trial. 3Red Trading, LLC and its principal allegedly engaged in a four-year manipulative scheme by manually placing large orders on one side of the market then canceling prior to execution. Despite the "troubling" evidence of spoofing, the Northern District of Illinois imposed a number of reporting and compliance requirements and ordered the principal to attest to compliance every month until the end of trial (CFTC v. Oystacher, July 12, 2016, St. Eve, A.).

In a prior order, the court denied the CFTC's bid to disqualify the defendants' expert, University of Chicago law professor and Compass Lexecon president Daniel R. Fischel. One of the CFTC's own experts, Arizona State University professor Hendrik Bessembinder, entered into a consulting agreement with Compass, but the court determined that this did not rise to the level of "side-switching" that would justify such an extreme sanction. Nevertheless, Professor Fischel's testimony did not sway the court's judgment on the preliminary injunction motion. Despite Fischel's assertions that confirmation, selection, and aggregation bias clouded Bessembinder's findings of spoofing, the court was satisfied with Bessembinder's rebuttals.

Instead, the court deferred to nine restrictions imposed on the individual defendant by 3Red's chief compliance officer. The CFTC presented no evidence or argument that the principal was not complying with those self-implemented restrictions, nor did it identify any motivations that might undercut the CCO's credibility or the legitimacy of the measures. In addition to the nine tools, the court noted that the trial date is only six months away; the order imposes additional limitations and requirements to ensure compliance until the trial; and the principal currently trades on only two exchanges. The totality of the circumstances did not warrant a preliminary injunction, the court concluded.

The order formalizes the nine internal requirements and requires the CCO to monitor the individual defendant's compliance. It also restricts trading to the two markets in which the principal currently trades. He must file a sworn affidavit attesting to compliance on the first of every month until the conclusion of trial.

The case is No. 15-CV-9196.