December 10, 2010
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed an enforcement action charging Kent R.E. Whitney, a registered floor broker of Chicago, Ill., with making false and misleading statements to Chicago Mercantile Exchange (CME) representatives, futures commission merchants (FCMs) and others in connection with an elaborate scheme to trade options without posting the required margin.
The CFTC’s civil complaint, filed on December 10, 2010, in the U.S. District Court for the Southern District of New York, alleges that, from May 2008 through April 2010, Whitney perpetrated a margin avoidance scheme in connection with out-of-the-money options by knowingly or recklessly making false and misleading statements to a representative of the CME, representatives of FCMs and others.
On multiple occasions, Whitney allegedly placed orders to sell a large volume of front month out-of-the-money options one or two business days before front month options expiration. Whitney is also charged with knowingly providing FCMs with invalid account numbers for trade allocation. When the FCMs realized that the account numbers were invalid, or that the accounts were closed, the clearing firms rejected the trades and returned them to the clearing firm of the executing floor broker, according to the complaint. On the next business day, Whitney allegedly provided valid account numbers through which the trades cleared and then these valid accounts collected the premiums.
In one instance, as alleged, Whitney placed a large order to sell out-of-the-money CME S&P 500 options through an account at an FCM. The margin call for the order was approximately $47 million; however, the account held less than $100,000 and could not meet the margin call, according to the complaint.
This scheme allegedly enabled Whitney to shift the overnight margin risk to the FCMs of the executing floor brokers and avoid posting margin himself. During the period from May 2008 through April 2010, the accounts that Whitney traded avoided paying tens of millions of dollars of margin.
Whitney also lied to an associate director at the CME when he was questioned in January 2010 about his trading. In response to Whitney’s trading practices, the CME has suspended Whitney from trading until May 2011.
The CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, permanent registration and trading bans and a permanent injunction against further violations of the federal commodities laws.
The CFTC acknowledges the assistance of the CME, the New York Mercantile Exchange and the National Futures Association.
The CFTC Division of Enforcement staff members responsible for this case are Michael R. Berlowitz, W. Derek Shakabpa, Michael Geiser, David Acevedo, Judith Slowly, Trevor Kokal, Lenel Hickson, Jr., Stephen J. Obie and Vincent A. McGonagle.
Last Updated: December 10, 2010