The Blotter: CBOE hit with $6 million fine, optionsXpress fined $3.5 million

Also: Arizona CPO accused of being fraudulent

This week’s enforcement actions:

Arizona

CFTC files enforcement action against Arizona resident for issuing false account statements and operating as an unregistered commodity pool operator

The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil complaint against Thomas L. Hampton, an Arizona resident.  The CFTC’s complaint charges Hampton with acting as an unregistered commodity pool operator (CPO) and issuing false account statements in violation of the Commodity Exchange Act.

The complaint filed on June 11, 2013, in theU.S. District Court for the district of Arizona Phoenix division, alleges that from approximately September 2010 through at least September 2011 (“relevant period”), Hampton, while acting as an unregistered CPO, operated Hampton Capital Markets, LLC, as a commodity pool and/or hedge fund.  The complaint further alleges that, during the relevant period, Hampton solicited approximately $5.2 million from at least 72 pool participants to invest in the pool for the purpose of trading commodity futures contracts, including E-mini S&P 500 futures contracts and E-mini Dow futures contracts, as well as securities based index products.  The complaint also alleges that Hampton defrauded pool participants by issuing false account statements that represented that the pool was generating significant trading profits, when Hampton knew that the pool was sustaining consistent net losses.

In its continuing litigation, the CFTC seeks a return of ill-gotten gains, restitution, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws.

Illinois

CBOE settles with SEC for $6 million on compliance failures; OptionsXpress fined

The Securities and Exchange Commission charged the Chicago Board Options Exchange (CBOE) and an affiliate for various systemic breakdowns in their regulatory and compliance functions as a self-regulatory organization, including a failure to enforce or even fully comprehend rules to prevent abusive short selling.

CBOE agreed to pay a $6 million penalty and implement major remedial measures to settle the SEC's charges. The financial penalty is the first assessed against an exchange for violations related to its regulatory oversight. Previous financial penalties against exchanges involved misconduct on the business side of their operations.

Self-regulatory organizations (SROs) must enforce the federal securities laws as well as their own rules to regulate trading on their exchanges by their member firms. In doing so, they must sufficiently manage an inherent conflict that exists between self-regulatory obligations and the business interests of an SRO and its members. An SEC investigation found that CBOE failed to adequately police and control this conflict for a member firm that later became the subject of an SEC enforcement action. CBOE put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm's compliance with Regulation SHO and then interfering with the SEC investigation of the firm.

According to the SEC's order instituting settled administrative proceedings, CBOE demonstrated an overall inability to enforce Reg. SHO with an ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short selling. CBOE also fell short in its regulatory and compliance responsibilities in several other areas during a four-year period.

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