Gary DeWaal's Bridging the Week: March 17 to 21 and 24, 2014 (Manipulation and Fraud: More than "I know it when I see it?")

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Published Date : March 24, 2014

The Commodity Futures Trading Commission again warned the financial services industry how broadly it construes and is willing to apply its new anti-manipulation and anti-fraud authority in an enforcement action against an employee of an introducing broker who engaged in unauthorized trading of two customers’ accounts and endeavored to hide his activities from the customers and his employer. As a result, the following matters are covered on this week’s Gary DeWaal’s Bridging the Week:

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Article Version:

CFTC Sues IB Employee for Unauthorized Trading and Concealment; Charges Violation of New Anti-Manipulation Law and Rule

In a preview of how broadly the Commodity Futures Trading Commission’s Division of Enforcement may employ its newly gotten anti-manipulation and anti-fraud authority under Dodd Frank, the Commission filed a lawsuit last week against an employee of an introducing broker who engaged in unauthorized trading in two clients’ accounts, as well as endeavored to conceal the illicit trading from the customers as well as the IB’s principals. The CFTC relied on traditional fraud charges in bringing in this action, but also threw in its new anti-manipulation and anti-fraud authority for good measure too. According to the CFTC’s Complaint filed in a Federal District Court in Ohio, Bradley Miklovich, an associated person of Rice Investment Company, a guaranteed introducing broker, traded without authorization through three customer accounts of one customer, and the single account of another customer from July 23 through 30, 2013.

Because during this time Mr. Miklovich temporarily assumed certain reconciliation functions on behalf of an employee on vacation who ordinarily performed these tasks, he allegedly was able to falsify both the reconciliations viewed by Rice’s principals, as well as daily account summaries viewed by one of Rice’s customers. Rice did not become aware of Mr. Miklovich’s unauthorized trades, according to the Complaint, until the morning of July 31, 2013, when it was advised by the FCM carrying the relevant accounts that one of Rice’s customers required additional margin or would be liquidated.

In response, the CFTC charged Mr. Miklovich with fraud, unauthorized trading and making false statements, under traditional provisions of the Commodity Exchange Act and CFTC Regulations (i.e., CEA §§4b(a) and 4c(b) and Commission Regulations 33.10 and 166.2). However, the CFTC also charged Mr. Miklovich under its newly gotten anti-manipulation authority under Dodd Frank, as well as its recently adopted anti-manipulation and anti-fraud rule (i.e., CEA §6(c)(1) and Commission Regulation 180.1(a)). The Commission claimed that Mr. Miklovich employed,

“…manipulative or deceptive devices or contrivances in connection with commodities for future delivery on or subject to the rules of a registered entity, including: i) knowingly effecting commodity futures transactions in Rice's customers' non-discretionary accounts without obtaining their authorization to effect those transactions; ii) willfully misrepresenting and omitting material facts, including but not limited to, the commodity futures transactions he effected, the profits and losses incurred by those transactions, and the magnitude of the risks to which he subjected the customers' accounts; iii) knowingly and willfully making false daily accounts statements for [one] Customer[‘s] commodity trading accounts at Rice and causing those false account statements to be sent to [the] Customer…; and iv) knowingly and willfully preparing false Rice reconciliations.”

CFTC Rule 180.1 prohibits any person from intentionally or recklessly engaging in deceptive or manipulative practices in connection with swaps, cash commodity contracts or regulated futures (or related options contracts) without regard to price or market effect. (For a detailed discussion of the CFTC’s new anti-manipulative authority, see “My View: Reflections on the JP Morgan's Settlements -- Human Nature, Internal Controls, and the CFTC's Broad New Anti-Manipulation Authority,” at

The CFTC did not charge either the Introducing Broker, who paid its guaranteeing FCM the majority of its customers’ losses, or its guaranteeing FCM in connection with this matter. According to NFA Basic™, Rice is guaranteed by ADM Investor Services Inc. The Commission seeks an injunction and damages against Mr. Miklovich as well as an order requiring Mr. Miklovich to make Rice whole, among other remedies.

My View: Coming just a few months after the CFTC’s lawsuit and settlement involving the so-called London Whale (see article “US CFTC Files and Settles Charges against JP Morgan Chase Bank Employing Its New Anti-Manipulation Authority Related to Certain of the Bank’s London Whale Trading” at, this new enforcement action demonstrates how broadly and readily the CFTC’s Division of Enforcement is prepared to use its newly gotten anti-manipulation and anti-fraud authority under Dodd Frank, as well as its new Rule 180.1. In the JP Morgan London Whale case, the Commission solely charged violation of these provisions; here, at least, it coupled a charge regarding violations of these provisions with other more traditional sections of applicable law and regulations. The industry can only hope that the CFTC’s Division of Enforcement uses these powerful provisions judiciously and considers to provide sufficient guidance so that the industry can understand what might now be considered manipulation other than applying a standard, to quote Justice Potter Stewart in a famous US Supreme Court case dealing with obscenity (Jacobellis v. Ohio (1964)), “I know it when I see it.”

And briefly:

“[t]he Middleman [typically] passed the information to Eydelman by showing him a post-it note or napkin on which the Middleman wrote the stock ticker symbol of the company to be acquired. The Middleman then chewed up, and sometimes ate (with Eydelman watching), the post-it note or napkin to destroy evidence of the tip. The Middleman also conveyed to Eydelman at this time the approximate transaction price and timing of the deal.”

And even more briefly:

For further information, see:

CFTC v. Bradley A. Miklovich:

CFTC: Extension of Time for MTFs Not To Have To Register as SEFs:

CFTC Seeks Comments regarding its Swap Data Recordkeeping and Reporting Requirements:

Citigroup BATS and FINRA Fine Related to Certain Short Sales:


CME Group Disciplinary Actions:

Position Limits:

CME Proposed Waterfall Amendments:

FCA Final Notice Regarding Mark Stevenson:

ICE Clear Credit: Proposed LSOC with Excess Models:


ICE Clear Europe Proposed Non-Default Loss Coverage:

MAS Regulation of Virtual Currency Intermediaries for AML Risks:

SEC v. Vladimir Eydelman and Steven Metro:

See also US Attorney, District of NJ Announcement regarding Criminal Action:,%20Steven%20and%20Eydelman,%20Vladimir%20Charged%20News%20Release.html

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of March 22, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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