• Appeals Court Affirms CFTC Enforcement against Trading that Produces Artificial Price
  • November 25, 2009 | Authors: M. Andrew McLain; David M. Perlman
  • Law Firm: Bracewell & Giuliani LLP - Washington Office
  • The United States Court of Appeals for the Second Circuit upheld a U.S. Commodity Futures Trading Commission (CFTC) civil enforcement action against a New York Mercantile Exchange broker for “knowingly” manipulating settlement prices for electricity future contracts on behalf of Avista Energy, Inc. in 1998.  In DiPlacido the court lowered the CFTC’s penalty by one third, and affirmed the CFTC’s cease-and-desist order, registration revocation, and 20-year trading prohibition.

    DiPlacido, a case of first impression, is the first CFTC action to find manipulation based solely on a trading practices such as “slamming the close,” as compared to prosecutions of “corners” or “squeezes,” which generally involve manipulation of futures prices through control of the cash market. Moreover, DiPlacido stands in contrast to a recent opinion from the Eastern District of Texas, U.S. v. Radley, which rejected the CFTC’s definition of “price artificiality” as impermissibly vague. Although Radley involved criminal charges and a different procedural history, both the Radley and DiPlacido cases largely turned on the concept of “price artificiality” as it relates to the CFTC’s analysis of market manipulation.

    In Radley, the defendant argued that the CFTC’s test lacked “support in the law and in the marketplace” because, under the government’s construction, “any activity in a market by parties other than producers or consumers would not be a legitimate force of supply and demand.” The Court agreed and held that under the CFTC’s construction of “price artificiality,” “any activity in a market by parties other than producers or consumers would not be a legitimate force of supply and demand”. In DiPlacido, however, the Second Circuit held that the CFTC had acted “reasonably [in its administrative adjudication] in concluding that defendant DiPlacido had the ability to influence prices where, on the relevant dates, his trades over two minutes at the Close accounted for an average 14% of a full day’s volume,” and therefore had the effect of creating artificial prices.

    As the CFTC’s oversight extends beyond areas traditionally within its jurisdiction -- futures and options -- to over-the-counter swap markets and carbon markets, the implications of CFTC manipulation cases increase significantly. The differing interpretations of price artificiality in DiPlacido and Radley underscore the intricacy of these types of cases, which often involve complex fact patterns and similarly complex legal and economic theories.