The U.S. Commodity Futures Trading Commission took a Chicago-based trading firm and its prominent founder to trial on Thursday over claims they manipulated the price of a futures contract, illegally earning nearly $13.5 million.
Daniel Ullman, a CFTC lawyer, in his opening statement in the civil proceeding urged a federal judge in Manhattan to hold Don Wilson and a unit of his privately held 725-employee company, DRW Holdings LLC, liable for "brazenly" engaging in market manipulation.
He said traders at DRW Investments placed bids that they did not intend to have consummated, affecting more than 1,000 three-month interest-rate swap futures contracts and creating prices that were inconsistent with what would have otherwise occurred in the market.
"There was no invisible hand, your honor," Ullman said. "It was DRW's hand."
But Jonathan Cogan, an attorney for DRW and Wilson, said his clients did not intend to manipulate prices and had instead submitted real bids based on legitimate economic rationales, particularly to entice buyers in an illiquid market.
"It's bids were real bids that they stood ready and willing to act on," Cogan said.
The non-jury trial, before U.S. District Judge Richard Sullivan, is rarity in a CFTC market manipulation case, which more often ends in a settlement. The regulator's last such trial was in 2008, according to the CFTC.
The CFTC wants DRW to forfeit $13.5 million in profits and pay penalties. It has also asked the judge to impose a permanent registration and trading ban on Wilson and DRW.
According to court papers, beginning in June 2010, Wilson and DRW began researching a particular type of three-month interest-rate swap futures contract that was designed to hedge against, or speculate on, swings in rates.
After also studying various pricing and valuation rules, the CFTC said, DRW concluded it could exploit the contact to its favor and bought more than $350 million of interest-rate futures, anticipating the position's value would increase.
When the underlying rates for the contracts did not rise as high as the firm hoped, the regulator said, Wilson and DRW manipulated those rates by placing bids they knew would never be accepted to increase their positions' value.
In particular, the CFTC said that over 118 days, DRW placed bids during a 15-minute settlement window used by the NASDAQ OMX Futures Exchange to determine the contract's close-of-day value, resulting in the setting of artificial prices.
The case is Commodity Futures Trading Commission v. Wilson el al, U.S. District Court, Southern District of New York, No. 13-07884.