Bridging the Week by Gary DeWaal: February 29 – March 4, and 7, 2016 (Electricity; Prearranged Trades; Delivery Line Freshening; FCPA; Limiting Bank Exposure)

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Published Date: March 06, 2016

Last week, a federal court in California refused to stop the Federal Energy Regulatory Commission from seeking to affirm its July 2013 order that a bank and four of its traders manipulated electricity prices from 2006 to 2008 to benefit the bank’s swap positions, while the Securities and Exchange Commission settled charges with a company, claiming the firm’s hiring of relatives of Chinese government officials constituted violations of the Foreign Corrupt Practices Act. In addition the Board of Governors of the Federal Reserve System proposed rules to limit the credit exposure of big banks to any single counterparty. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:


Legal Weeds: The current litigation by FERC follows a somewhat unique process in which FERC first required the defendants to answer allegations that they manipulated western electricity markets. The defendants exercised their right not to respond. This permitted FERC to assess a penalty on its own without a hearing before an administrative law judge. Once the penalty was assessed and the defendants did not pay, FERC was entitled to seek affirmation of the penalties from a federal district court. Effectively, this process grants defendants a right to challenge FERC’s allegations in a federal court as opposed to before an administrative tribunal. (Click here for a schematic of FERC’s penalty assessment process.)

Compliance Weeds: For products settling by physical delivery against the oldest open long position (e.g., Live Cattle futures contracts), both the CBOT and CME permit the liquidation and re-establishment of futures positions intraday to defer physical delivery. However, relevant trades for a single account or accounts with common beneficial ownership must be competitively executed and must be independent transactions subject to market risk. CME Group will regard pre-arranged purchases and sales or buys and sells executed as part of an express or implied agreement for a single account or accounts with common beneficial ownership to constitute prohibited wash trades. (Click here to access CME Group Market Regulation Advisory Notice RA1411-5RR (January 6, 2015), question and answer 8.)

Legal Weeds: In the relatively early days of the Commodity Futures Trading Commission, the CFTC sought to ban the practice of freshening positions to defer delivery through an enforcement action against Manning Stoller, who had engaged in such practice to avoid taking delivery of potatoes on his New York Mercantile Exchange futures contracts in May 1976. He did this because he believed potato prices were artificially depressed. However, this marked the first time that the CFTC, or its predecessor agency, the Commodity Exchange Authority, had formally suggested that freshening –a then common industry practice– constituted prohibited wash sales. Ultimately the US Court of Appeals in New York held that, although the CFTC could take this position, it could not do so for the first time in an enforcement action against defendant. According to the court, “if the Commission suddenly changes its view …with respect to what transactions are ‘bona fide trading transactions,’ it may not charge a knowing violation of that revised standard and thereby cause undue prejudice to a litigant who may have relied on the agency's prior policy or interpretation.” (Click here to access the decision in Stoller v. Commodity Futures Trading Commission, 834 F2d 262 (2d Cir 1987).)

Compliance Weeds: Firms conducting business abroad often struggle with how to adhere to local custom that incorporates gift giving as a means to demonstrate respect and collegiality while at the same time complying with the strict prohibitions imposed by the FCPA. Unfortunately, under the FCPA, there is not a threshold that provides a safe harbor for gift giving or any other payment (whether in cash or in kind) if the intent is to improperly influence a government official. However, staff of the US Department of Justice and the SEC have jointly published a helpful guide that notes that “[i]tems of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” It’s not a bright line test, but it’s something. Also keep in mind, the FCPA applies not only to issuers of SEC-registered securities, but also all US “domestic concerns” (e.g., all US citizens, nationals, residents and incorporated entities) and certain foreign nationals or entities too. (Click here to access A Resource Guide to the U.S. Foreign Corrupt Practices Act by staff of the DOJ and SEC.)

Compliance Weeds: Registration and membership applications with regulators cannot be forgotten once filed. Most applications, like Form U4 or National Futures Association Form 8R, place an affirmative obligation on individuals to amend and update information requiring disclosure promptly after a change occurs. FINRA has not hesitated to bring disciplinary actions against a broker-dealer where, in its judgment, the firm was on notice that its registrants’ disclosure information should have been updated but was not. (Click here for instructions to Form U4 and here for instructions to Form 8R describing this ongoing obligation.)

And more briefly:

And finally:

For more information, see:

All in the Family Prearranged Trades Result in CME Group Fines; Delivery Line Freshening Transactions Also Result in Sanctions:

A, Wilkey:
M. Wilkey:

ASIC Files Charges Against Bank for Role in Setting Australia’s Primary Interest Rate Benchmark:

Basel Committee Proposes New Operational Risk Framework:

Broker-Dealer Penalized by FINRA for Inadequately Monitoring Registered Representatives’ Tax Garnishments That Might Require a Registration Filing Update:

California Federal Court Refuses to Stop FERC Lawsuit to Uphold the Validity of US $453 Million Penalty for Manipulating Electricity Prices:

See also, initial FERC Order:

Fed Proposes Rules to Reduce Credit Exposure of Large Banking Organizations to Single Counterparty:

FinCEN Reports an 812% Increase in Reported Instances of Suspicious Activity Attributable to Layering From 2012/13 Through 2014:

FINRA Proposes to Shorten the Securities Settlement Cycle by One Day:

Former Trader Who Pleaded Guilty to Playing a Role in the Manipulation of LIBOR Barred From Business by FCA:

Introducing Broker Permanently Barred as NFA Member for Solicitation Practices; Principal and Certain APs Also Sanctioned:


Japanese Regulator Recommends Fine Against Asset Manager for Market Manipulation:

NFA Updates Regulatory Requirements and Self-Examination Questionnaire for FCMs, FDMs, IBs, CTAs and CPOs to Reflect New Cybersecurity Expectations:

Totally Irrelevant (But Is It): Reflections on the Article, “A Eulogy for the Pit Trader: An Oral History of Chicago’s Commodity Futures Pits” by John McDermott:

US Company Fined US $7.5 Million by SEC for Hiring Relatives of Chinese Government Officials to Obtain Business:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 5, 2016. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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Gary DeWaal
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