UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
___________________________________
: CFTC Docket No.
In the Matter of :
: ORDER INSTITUTING
Mitsubishi Corporation, : PROCEEDINGS PURSUANT TO
a Japanese corporation, : SECTIONS 6(c), 6(d), 8A(3)
: AND 8a(4) OF THE COMMODITY
Merrill Lynch Futures Inc., : EXCHANGE ACT AND FINDINGS
a Delaware corporation, : AND ORDER IMPOSING REMEDIAL
: SANCTIONS
Country Hedging, Inc., :
a Delaware corporation, and :
:
Charles B. Soule, :
:
Respondents. :
___________________________________:
I.
The Commodity Futures Trading Commission ("Commission") has reason to
believe that Mitsubishi Corporation ("Mitsubishi"), Merrill Lynch Futures
Inc. ("Merrill Lynch"), Country Hedging, Inc. ("Country Hedging") and
Charles B. Soule ("Soule") are violating or have violated Section 4c(a)(A)
of the Commodity Exchange Act, as amended ("Act"), and that Merrill Lynch
is violating or has violated Commission Regulation 1.37(a) promulgated
thereunder. Therefore the Commission deems it appropriate and in the public
interest that public administrative proceedings be, and they hereby are,
instituted to determine whether Mitsubishi, Merrill Lynch, Country Hedging
and Soule engaged in the violations as set forth herein and to determine
whether any order should be issued imposing remedial sanctions.
II.
In anticipation of the institution of these administrative proceedings,
Mitsubishi, Merrill Lynch, Country Hedging and Soule each have submitted an
Offer of Settlement ("Offer") which the Commission has determined to
accept. Without admitting or denying the findings herein, Mitsubishi,
Merrill Lynch, Country Hedging and Soule each acknowledge service of this
Order Instituting Proceedings Pursuant to Sections 6(c), 6(d), 8a(3) and
8a(4) of the Act and Findings and Order Imposing Remedial Sanctions
("Order"). Mitsubishi, Merrill Lynch, Country Hedging and Soule each
consent to the use of the findings contained in this Order in this
proceeding and in any other proceeding brought by the Commission or to
which the Commission is a party.(1)
III.
The Commission finds the following:
A. RESPONDENTS
Mitsubishi Corporation is a Japanese corporation located at 6-3,
Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-86, Japan. Mitsubishi, through
the Produce Department of its Foods Division, is, among other things,
engaged in the business of purchasing and selling cash grains throughout
the world and, in connection therewith, trades wheat futures on the
Minneapolis Grain Exchange ("MGE") and other exchanges in the United
States. Mitsubishi has never been registered with the Commission in any
capacity.
Merrill Lynch Futures Inc. is a Delaware corporation
headquartered at World Financial Center-South Tower, 225 Liberty
Street, 24th Floor, New York, New York 10080. At all times relevant to the
this Order, Merrill Lynch has been a registered futures commission merchant
("FCM") and a nonclearing member of the MGE.
Country Hedging, Inc. is a Delaware corporation located at 1667
North Snelling, St. Paul, Minnesota 55108. Country Hedging is a registered
FCM and a clearing member of the MGE. At all times relevant to this Order,
Country Hedging carried a customer omnibus account for Merrill Lynch,
Account #�4JJD ("Omnibus Account"), an account in which Merrill Lynch
traded in wheat futures on the MGE for Merrill Lynch's customers.
Charles B. Soule resides at 3035 Walnut Grove Lane North,
Plymouth, Minnesota 55447. At all times relevant to this Order, Soule was
the manager of Country Hedging's floor operations at the MGE. Soule is
registered with the Commission as an associated person ("AP") of Country
Hedging and as a floor broker.
B. OTHER RELEVANT ENTITY
Mitsubishi International Corporation ("MIC") is a New York
corporation located at 520 Madison Avenue, New York, New York 10022. MIC is
a wholly owned subsidiary of Mitsubishi. MIC, through the Grain Department
of its Foods A Division, is, among other things, engaged in the business of
performing contractual services for Mitsubishi as Mitsubishi's agent,
including making trades in wheat futures for the accounts of Mitsubishi
carried at various FCMs in the United States. MIC also purchases and sells
wheat and wheat futures for its own account. MIC has never been registered
with the Commission in any capacity.
C. FACTS
On two occasions, one in 1992 and one in 1993, Mitsubishi sought to
shift profits related to futures trading from one reporting period to
another for accounting purposes. To accomplish this objective, an MIC wheat
trader devised a strategy of buying and selling equal quantities of wheat
spreads by submitting simultaneous orders.(2) Because there were corresponding price movements
in nearby and deferred futures, the spread differentials did not vary
significantly. MIC's wheat traders were willing to accept small net losses
(a quarter cent to one cent per bushel) on the entire transaction in
order to show profits in the nearby future and corresponding losses in the
deferred future. These spread trades were not related to any cash position
of Mitsubishi. Since at least l970, Mitsubishi has owned one or more
trading accounts carried at Merrill Lynch, including Account
#�173-08336 ("Account 336"), a hedge account.(3)
On September 2, 1992, MIC's trader telephoned a Merrill Lynch broker
("ML broker")(4) and placed two orders for
Mitsubishi's account. The MIC trader had discussed the purpose and strategy
of the orders with the ML broker. The MIC trader simultaneously ordered the
ML broker to buy and sell 500,000 bushels of the Sep/Dec spread in
Minneapolis wheat. MIC's trader gave the ML broker instructions that the
price differentials of the initiating and offsetting spread trades could
not result in an overall loss to Mitsubishi of more than one cent per
bushel, and that the purchase of the September future should be priced at
the day's low price and the sale of the September future should be priced
at the day's high price.
The ML broker wrote two office orders, an order to buy and an order to
sell 500,000 bushels of the Sep/Dec spread. Each of the order tickets was
time stamped twice in Merrill Lynch's office at 11:34 a.m. ET, signifying
the time each order was received from the customer and transmitted to the
exchange floor.
The ML broker then simultaneously placed orders with Soule at Country
Hedging's floor desk at the MGE to buy and sell 500,000 bushels of the
Sep/Dec spread in Minneapolis wheat for the Omnibus Account, with the
limitation that the initiating and offsetting spread trades could not
result in an overall loss to the Merrill Lynch Omnibus Account of more than
a specified amount per bushel. The orders reflected the instruction to
price the buy at the day's low price and to price the sell at the day's
high price. Soule, in turn, gave the orders to an independent floor broker
and communicated to him that he should execute the orders with the price
differentials of the buy and sell orders as close to each other as
possible. The floor broker executed the two orders by buying and selling
simultaneously.
On February 16, 1993, MIC's trader(5)
again telephoned the ML broker and, in one conversation, placed two orders
for Mitsubishi's account. MIC's trader simultaneously ordered the ML broker
to buy and sell one million bushels of the March/May spread in Minneapolis
wheat. He instructed the ML broker to price the purchase of the March
future at the day's low price and price the sale of the March future
at the day's high price. He limited the amount of loss he would accept on
the initiating and offsetting spread trades to a quarter cent per
bushel.
The ML broker wrote two office orders, an order to buy and an order to
sell one million bushels of the March/May wheat spread. The first order was
time stamped twice in Merrill Lynch's office at 12:59:30 p.m. ET,
signifying the time it was received from the customer and transmitted to
the exchange floor. The second order was time stamped twice at 1:01:00 p.m.
ET.
The ML broker telephoned Soule at Country Hedging's desk at the MGE and
simultaneously placed orders to buy and sell one million bushels of the
March/May spread in Minneapolis wheat for the Omnibus Account. Country
Hedging's floor orders, written by Soule, were price limit orders to buy
the spread at a price differential of six and a quarter cents per bushel
and sell it at six cents. The orders again reflected the instruction to
price the buy at the day's low price and to price the sell at the day's
high price. The same floor broker who received the orders from Soule
executed the two orders by buying and selling simultaneously.
Merrill Lynch carried two accounts for Mitsubishi affiliates, Account
#336, owned by Mitsubishi, and an account with a different number owned by
MIC. Merrill Lynch maintained only the following permanent records to
identify the owner and the person who controlled the trading in both
these accounts: a tax form made out for and signed by Mitsubishi, a
customer agreement form with no account name or number, and a corporate
resolution signed by MIC. These records were identical for both accounts,
and therefore provided no reliable information as to either account. The
records were not sufficient for the staff to identify the owner of
Account #336 definitively.
D. DISCUSSION
1. Liability for Wash Sales
The touchstone of wash sales is the intent not to make a bona fide
trading transaction. In re Three Eight Corporation, [1992-1994
Transfer Binder] Comm. Fut. L. Rep. (CCH) ��25,749 (June 16,
1993); In re Citadel Trading Co., [1986-1987 Transfer Binder] Comm.
Fut. L. Rep. (CCH) ��23,082 at 32,190 (CFTC May 12, 1986); In
re Harold Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)
��22,982 at 31,899 (CFTC Apr. 4, 1986), rev'd on other grounds
sub nom. Stoller v. CFTC, 384 F.2d 262 (2d Cir. 1987) ("Collins I");
In re Goldwurm, 7 A.D. 265, 274 (CEA 1948). "Orders to purchase and
sell for the account of the same customer the identical quantity of the
same futures contract at identical prices . . . entered virtually
simultaneously" are "classic indicia of an intent to avoid making a bona
fide trading transaction." Citadel Trading, ��23,082 at
32,190 (citing Collins I and Goldwurm). Virtually
simultaneous orders to buy and sell the same quantity of the same futures
contract, "with an instruction calculated to enhance the likelihood that
the buy and sell orders would be filled at the same or a similar price," is
"persuasive evidence that [the respondent] did not intend that the orders
result in bona fide trading transactions when he initiated them."
Collins I, ��22,982 at 31,900 (citing Goldwurm, 7 A.D.
at 277). In Collins I, the respondent was "attempting to effect the
buy and sell as close as possible." Id. The Commission observed
that, in a limited series of transactions, a trader may avoid a bona fide
market transaction "merely by structuring the buy and sell orders so they
are simultaneous, or practically so." Id.(6)
In this case, Mitsubishi violated Section 4c(a) of the Act.
The intent to avoid a bona fide market position can be inferred here
from all of the attendant facts and circumstances, including the structure
of the orders involved. The structure of the wheat spread orders given to
the ML broker and the instructions given to the ML broker demonstrated an
intent to avoid making a bona fide trading transaction. Mitsubishi's orders
were structured with the intent to negate risk by eliminating or sharply
reducing the risk of loss. The MIC traders told the ML broker what they
wanted to accomplish and how. They submitted simultaneous orders to buy and
sell identical quantities of the same spreads, giving the broker specific
pricing instructions to maximize the profits on the nearby contracts and
discretion on the spread differentials to pay up to a maximum cost (one
quarter cent to one cent per bushel) to effect the trades. The simultaneous
execution of Mitsubishi's buy and sell spread orders in fact eliminated
market risk; it accomplished Mitsubishi's objective of moving profits to
the nearby futures contracts at the lowest possible cost, the minimum price
fluctuation for wheat.
[T]he use of trading techniques that give the appearance of submitting trades to the open market while negating the risk or price competition incident to such a market [violates Section 4c(a)]. In wash sales . . . purchases and sales are made in the pit, but the financial result is close to or equal to zero. By effectively buying from and selling to himself, a trader eliminates or sharply reduces his risk of loss.
Collins I, ��22,982 at 31,902. See also Three
Eight, ��25,749 at 40,445 (quoting the above language in
Collins I). In Collins I, the Commission found evidence of
negating risk in the respondent's attempt to buy and sell "as close as
possible."(7)
Merrill Lynch, Country Hedging and Soule are also liable under Section
4c(a) of the Act. "A broker is responsible for evaluating the orders he
receives for indications that his participation in the transaction is
legally prohibited." Three Eight, � 25,749 at 40,445. Where
FCMs receive "paired orders for matching executions for a single account,
this information, standing alone, suggests an intent to avoid a bona fide
market position that demands clarification prior to execution." Id.
at 40,445-46. "[F]ailure to undertake such an inquiry in the face of such
facts may support an inference of knowing participation in wash sales."
Id. at 40,446 (citing Citadel, � 23,082 at 32,191). Such an
inference is appropriately made here.
The ML broker knew there was a single customer and knew the customer's
intent. Indeed, from at least March 1985 Merrill Lynch has had a written
policy entitled Futures - "Wash Sales," that stated in part:
To comply with the CFTC's interpretation of "wash sales," the Firm will
not accept or enter an order or orders in futures which (1) are for the
same account or customer, or involve a number of accounts or customers
related in identity or interest and (2) involve a purchase and a
sale, or a sale and a purchase, in the same month for the same commodity,
if such order or orders (a) would be capable of execution at the
same price or approximately the same price, regardless of whether or not
actually executed at different prices during the same days or would
be capable of execution simultaneously or in close succession
(emphasis in the original).
Despite the firm's policy, the ML broker accepted the orders
without question or further inquiry. Indeed, in each instance he thereafter
telephoned Soule at the MGE and placed simultaneous orders to buy and sell
the same quantity of spreads with a requirement that they be executed
at approximately the same price.
Soule made sufficient inquiry to be aware that the orders were for a single customer and that the purpose of the trades was to shift profits and losses. While he made some inquiry of his supervisor and the exchange compliance department, he never received information that provided the basis for placing these simultaneous orders for a single customer. Yet he placed the orders as requested, without making sufficient inquiry to determine if the customer intended to avoid a bona fide trading transaction.
For all the foregoing reasons, and because Mitsubishi, Merrill Lynch and
Country Hedging are responsible for their respective agents' conduct under
Section 2(a)(1) of the Act, Mitsubishi offered to enter into and entered
into, Soule offered to enter into and confirmed the execution of,
and Merrill Lynch and Country Hedging offered to enter into, entered into
and confirmed the execution of transactions involving a commodity which is
or may be used for hedging any transaction in interstate commerce in such
commodity or the products or byproducts thereof, or determining the price
basis of any such transaction in interstate commerce in such commodity, or
delivering any such commodity sold, shipped, or received in interstate
commerce for the fulfillment thereof -- where such transactions are, are of
the character of, or are commonly known to the trade as wash sales, in
violation of Section 4c(a)(A) of the Act.
2. Liability for Failure to Keep Permanent Account Identification
Records
Merrill Lynch failed to keep records in permanent form for the
Mitsubishi account used in these transactions which showed the true name
and address of the person for whom the account was carried, the principal
business of that person, and the name of the person guaranteeing and
exercising trading control of the account, in violation of Commission
Regulation 1.37(a).
IV.
FINDINGS OF VIOLATION
Solely on the basis of the consent evidenced by the Offers, and without any adjudication on the merits, the Commission finds that Mitsubishi offered to enter into and entered into, Soule offered to enter into and confirmed the execution of, and Merrill Lynch and Country Hedging offered to enter into, entered into and confirmed the execution of transactions that are, or are of the character of, or are known to the trade as wash sales, in violation of Section 4c(a)(A) of the Act.
The Commission further finds that Merrill Lynch failed to keep records in permanent form of the name and address of the owner of Account # 336 and the person who exercised trading control of the account, in violation of Commission Regulation 1.37(a).
V.
OFFERS OF SETTLEMENT
Mitsubishi, Merrill Lynch, Country Hedging and Soule have submitted Offers of Settlement in which, without admitting or denying the findings herein, they admit the jurisdiction of the Commission with respect to the matters set forth herein; waive service of a complaint and notice of hearing, a hearing, all post-hearing procedures, judicial review by any court, any objection to the staff's participation in the Commission's consideration of the Offer, any claim that the settlement of this proceeding, including the imposition of any remedy or civil penalty herein, is a punitive penalty, and all claims which they may possess under the Equal Access to Justice Act, 5 U.S.C. � 504 (1994) and 28 U.S.C. SEC 2412 (1994), as amended by Pub. L. No. 104-121, �� 231-32, 110 Stat. 847, and Part 148 of the Commission's Regulations, 17 C.F.R. �� 148.1, et seq., relating to or arising from this action; stipulate that the record basis on which this Order is entered consists solely of this Order and the findings to which they have consented in the Offers, which are incorporated in this Order; and consent to the Commission's issuance of this Order, which makes findings, as set forth above, and orders each of them to cease and desist from violating the provisions of the Act and Commission Regulations each is found to have violated, to pay the civil monetary penalties set forth below, and to comply with their undertakings set forth below.
In addition, Soule consents to the provisions of paragraphs VI.12-VI.14
of this Order which suspend his registration as an AP for three months and
condition his registrations as an AP and as a floor broker for two years
from the date of this Order.
VI.
ORDER
Accordingly, it is hereby ordered that:
Mitsubishi
1. Mitsubishi shall cease and desist from violating Section 4c(a)(A) of
the Act, 7 U.S.C. � 6c(a)(A).
2. Mitsubishi shall pay a civil monetary penalty of $150,000 (one
hundred fifty thousand dollars). Such penalty shall be paid in total within
five business days of the date of this Order and, pursuant to Section
6(e)(2) of the Act, if Mitsubishi fails to pay the full amount of the
within fifteen days of the due date, it shall be automatically prohibited
from trading on all contract markets until it shows to the satisfaction of
the Commission that it has made payment of the full amount of the penalty
with interest thereon to the date of payment.
3. Mitsubishi shall immediately comply with its undertaking to cooperate fully with the staff of the Commission in this proceeding and in such further investigations and other proceedings as the Commission or its staff shall determine to pursue with regard to the factual matters discussed in the Order, by, among other things: (1)�responding promptly, completely, and truthfully to any inquiries or requests for information; (2) providing authentication of documents; (3) providing staff complete and truthful information in response to any inquiries they may have, including providing complete and truthful signed written statements upon request; (4) making its employees and employees of its corporate affiliates available to prepare for testimony and to testify; and (5) using its best efforts to locate its former employees who testified in the investigation. Mitsubishi will make such witnesses available at its own expense for all witness preparation and testimony reasonably requested by the Division, understanding that the Division has agreed that it will use its best efforts to accomplish such witness preparation and testimony during a time period that would not necessitate more than one trip from Japan to the United States for each of the two witnesses.
Merrill Lynch
4. Merrill Lynch shall cease and desist from violating Section 4c(a)(A)
of the Act, 7 U.S.C. ��6c(a)(A), and Regulation 1.37(a), 17
C.F.R. ��1.37(a).
5. Merrill Lynch shall pay a civil monetary penalty of $175,000 (one
hundred seventy-five thousand dollars). Such penalty shall be paid in total
within five business days of the date of this Order and, pursuant to
Section 6(e)(2) of the Act, if Merrill Lynch fails to pay the full amount
of the penalty within fifteen days of the due date, it shall be
automatically prohibited from trading on all contract markets and its
registrations with the Commission shall be automatically suspended until it
shows to the satisfaction of the Commission that it has made payment of the
full amount of such penalty with interest thereon to the date of
payment.
6. Merrill Lynch shall immediately comply with the following
undertakings:
a. To cooperate fully with the staff of the Commission in this
proceeding and in such further investigations and other proceedings as
the Commission or its staff shall determine to pursue with regard to the
factual matters discussed in the Order, by, among other things:
(1)�responding promptly, completely, and truthfully to any inquiries
or requests for information; (2) providing authentication of documents; (3)
providing staff complete and truthful information in response to any
inquiries they may have, including providing complete and truthful signed
written statements upon request; (4) making its employees available to
prepare for testimony and to testify; and (5) using its best efforts to
locate its former employees who testified in the investigation.
b. To continue generating a daily report reflecting all futures day
trades during the trading day by customer account and to make such report
available to Commission staff upon request. For purposes of this
undertaking, "day trade" means offsetting trades in the same contract in
the same customer account during a single trading day. The report includes
and will continue to include the following information for each
trade: (i) Merrill Lynch branch office; (ii) Merrill Lynch account
executive; (iii) customer account number and name; (iv) hedge or non-hedge
account; (v) trade date; (vi) purchase or sale; (vii) contract, quantity
and price, and (viii) exchange. These reports have been and will continue
to be reviewed by Merrill Lynch Compliance Department personnel at least
once per week for purposes of detecting unusual day trading activity in a
customer account.
Country Hedging
7. Country Hedging shall cease and desist from violating Section
4c(a)(A) of the Act, 7 U.S.C. ��6c(a)(A).
8. Country Hedging shall pay a civil monetary penalty of $75,000 (seventy-five thousand dollars). Such penalty shall be paid in total within five business days of the date of this Order, and, pursuant to Section 6(e)(2) of the Act, if Country Hedging fails to pay the full amount of the penalty within fifteen days of the due date, it shall be automatically prohibited from trading on all contract markets and its registrations with the Commission shall be automatically suspended until it shows to the satisfaction of the Commission that it has made payment of the full amount of such penalty with interest thereon to the date of payment.
9. Country Hedging shall immediately comply with the following
undertakings:
a. To implement immediately, to the extent not already in place, and
enforce procedures reasonably designed to prevent and detect the conduct
described in the Order.
b. To provide, to the extent not already provided, training to
its APs concerning their duties when accepting and confirming the execution
of customer orders generally and orders for customer omnibus accounts in
particular.
c. To continue to maintain the staff position of Compliance Officer as
long as Country Hedging carries customer accounts. The position will be
filled by a qualified full time employee of Country Hedging who will be
responsible for overseeing Country Hedging's compliance with its regulatory
obligations, and whose duties shall not include soliciting, accepting or
executing customer orders. The Compliance Officer will report directly to
Country Hedging's general manager. If Country Hedging ceases to carry
customer accounts, it may, in its sole discretion, eliminate the position
of Compliance Officer. In that event, Country Hedging shall immediately
submit written notice to the Chicago Regional Counsel of the Division of
Enforcement that the position has been eliminated and that Country Hedging
has ceased handling customer business.
d. Country Hedging's general manager shall review Country Hedging's
compliance with undertakings A through C on a periodic basis and, within 30
days after the one-year anniversary of the Order, shall deliver a written
report to the Division concerning the results of the reviews.
e. To cooperate fully with the staff of the Commission in this proceeding and in such further investigations and other proceedings as the Commission or its staff shall determine to pursue with regard to the factual matters discussed in the Order, by, among other things: (1)�responding promptly, completely, and truthfully to any inquiries or requests for information;
(2) providing authentication of documents; (3) providing staff complete
and truthful information in response to any inquiries they may have,
including providing complete and truthful signed written statements upon
request; (4) making its employees available to prepare for testimony and to
testify; and (5) using its best efforts to locate its former employees who
testified in the investigation.
Soule
10. Soule shall cease and desist from violating Section 4c(a)(A) of the
Act, 7 U.S.C. ��6c(a)(A).
11. Soule shall pay a civil monetary penalty of $15,000 (fifteen
thousand dollars). Such penalty shall be paid in total within five business
days of the date of this Order and, pursuant to Section 6(e)(2) of the Act,
if Soule fails to pay the full amount of the penalty within fifteen days of
the due date, he shall be automatically prohibited from trading on all
contract markets and his registrations with the Commission shall be
automatically suspended until he shows to the satisfaction of the
Commission that he has made payment of the full amount of such penalty with
interest thereon to the date of payment.
12. Soule's registration as an AP shall be suspended for three months
from the date of this Order.
13. Soule's registration as an AP, after the three-month suspension is
concluded, shall be conditioned in the following manner:
a. Soule may not act as an associated person pursuant to Section 4k of
the Act, and as defined under Regulation 1.3(aa), unless his activities are
subject to a Supplemental Sponsor Certification Statement in the form
attached hereto, executed and submitted to the Commission by a designated
principal of the Commission registrant that employs him ("Sponsor").
Immediately upon the Sponsor's ceasing to serve as Soule's employer, Soule
shall stop acting as an associated person until his activities are once
again subject to a Supplemental Sponsor Certification Statement in the form
attached hereto, executed and submitted to the Commission by a qualified
sponsor;
b. Soule must be strictly supervised by a designated principal of the
Sponsor who shall be a Commission registrant ("Supervisor"). The Supervisor
must be physically present on the exchange trading floor on days when Soule
is acting as an associated person in the trading pit or at the Sponsor's
desk on the exchange floor. The Supervisor must be physically present in
the employer's office on days when Soule is acting as an associated person
in the office;
c. During the three-month suspension of Soule's registration as an
associated person, the Sponsor will not permit Soule to solicit or accept
customer orders or otherwise act in the capacity of an associated person as
defined in Commission Regulation 1.3(aa) either on or off the trading
floor;
d. The Supervisor shall review at least on a monthly basis, and monitor
generally, all transaction slips, including office orders and floor orders,
for all customer orders received by Soule. The Sponsor shall maintain a
written record of these monthly evaluations;
e. The Sponsor shall maintain a separate file of all correspondence and
memoranda of telephone calls concerning problems, complaints, disputes or
claims arising from or related to Soule's handling of any customer
account;
f. The Supervisor shall meet at least once a month with Soule to discuss
any questions, problems, complaints, disputes or claims of which the
Sponsor is aware arising from or related to Soule's handling of any
customer account. The Sponsor shall maintain a written record of these
monthly conferences with Soule;
g. Soule shall not directly or indirectly act in any supervisory
capacity over anyone required to be registered with the Commission;
h. Soule shall not serve on any disciplinary committee, arbitration
panel, oversight panel or governing board of any self-regulatory
organization subject to regulation by the Commission;
i. Soule shall not directly or indirectly act as a principal, partner,
officer, or branch office manager of any entity registered or required to
be registered with the Commission;
j. Soule's registration shall be automatically suspended if he is
charged with a disciplinary offense as defined in Commission Regulation
1.63(a)(6), except that, as to offenses defined in Regulation 1.63(a)(6)(i)
(C), suspension shall occur if fines aggregating $5000 or more are imposed
during the period of these conditions rather than during a calendar
year;
k. If Soule's registration is automatically suspended pursuant to the
preceding subparagraph, the period of suspension shall terminate six months
after the date of the suspension, unless the Commission files within that
period a Notice of Intent to Revoke or Restrict Registration, pursuant to
Commission Regulation 3.60(a); and
l. The conditions set forth in this paragraph VI.13 shall remain in
effect until two years after the date of the Order.
14. Soule's registration as a floor broker as of the date of this Order
shall be conditioned in the following manner:
a. Soule may not act as a floor broker pursuant to Sections 4e and 4f of
the Act, and as defined under Commission Regulation 1.3(n), unless his
activities as a floor broker are subject to a Supplemental Sponsor
Certification Statement in the form attached hereto, executed and submitted
to the Commission by a designated principal of the Commission registrant
that employs him ("Sponsor"). Immediately upon the Sponsor's ceasing to
serve as Soule's employer, Soule shall stop acting as a floor broker until
his activities are once again subject to a Supplemental Sponsor
Certification Statement in the form attached hereto, executed and submitted
to the Commission by a qualified sponsor;
b. Soule must be strictly supervised by a designated principal of the
Sponsor who shall be a Commission registrant ("Supervisor"). The Supervisor
must be physically present on the exchange trading floor on days when Soule
is acting as a floor broker;
c. The Supervisor shall review the floor orders executed by Soule and
other records of his trade executions at least on a weekly basis;
d. The Supervisor shall observe Soule's trading on the exchange floor at
random times at least on a weekly basis;
e. During the three-month suspension of Soule's registration as an
associated person, the Sponsor will permit Soule to execute in the capacity
of a floor broker only those customer orders that he receives from the
Supervisor or any other registrant employed by the Sponsor and designated
by the Supervisor;
f. Soule shall not directly or indirectly act in any supervisory
capacity over anyone required to be registered with the Commission;
g. Soule shall not serve on any disciplinary committee, arbitration
panel, oversight panel or governing board of any self-regulatory
organization subject to regulation by the Commission;
h. Soule shall not directly or indirectly act as a principal, partner,
officer, or branch office manager of any entity registered or required to
be registered with the Commission;
i. Soule's registration shall be automatically suspended if he is
charged with a disciplinary offense as defined in Commission Regulation
1.63(a)(6), except that, as to offenses defined in Regulation 1.63(a)(6)(i)
(C), suspension shall occur if fines aggregating $5000 or more are imposed
during the period of these conditions rather than during a calendar
year;
j. If Soule's registration is automatically suspended pursuant to the
preceding subparagraph, the period of suspension shall terminate six months
after the date of the suspension, unless the Commission files within that
period a Notice of Intent to Revoke or Restrict Registration, pursuant to
Commission Regulation 3.60(a); and
k. The conditions set forth in this paragraph VI.14 shall remain in
effect until two years after the date of the Order.
15. Soule shall comply with his undertaking to cooperate fully with the staff of the Commission in this proceeding and in such further investigations and other proceedings as the Commission or its staff shall determine to pursue with regard to the factual matters discussed in the Order, by, among other things: (1)�responding promptly, completely, and truthfully to any inquiries or requests for information; (2) providing authentication of documents; (3) providing staff complete and truthful information in response to any inquiries they may have, including providing complete and truthful signed written statements upon request; (4) preparing for testimony and testifying completely and truthfully; and (5) not asserting
privileges under the Fifth Amendment of the United States Constitution
in connection with any information or testimony he is asked to provide.
By the Commission.
__________________________
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Dated: June 24, 1997
1 Mitsubishi, Merrill Lynch, Country Hedging and Soule do not consent to the use of their respective Offers or this Order as the sole basis for any other proceeding brought by the Commission. Nor do they consent to the use of their Offers, this Order or the findings made herein by any other party in any other proceeding. The findings made in this Order are not binding on any other person or entity named as a defendant or respondent in this or any other proceeding.
2 As used here, "buy a spread" refers to buying the nearby future and selling the deferred future in a single trade, "sell a spread" refers to selling the nearby future and buying the deferred future in a single trade, "Sep/Dec spread" refers to September 1992 and December 1992 wheat futures contracts, "March/May spread" refers to March 1993 and May 1993 wheat futures contracts, and "price differential" refers to the difference between the nearby and deferred futures contract prices in each spread. The spreads were in hard red spring wheat futures contracts traded on the MGE ("Minneapolis wheat").
3 Mitsubishi's cooperation with the staff's investigation included producing voluntarily for testimony an employee then residing in Japan.
4 Mitsubishi's and MIC's grain futures trading at Merrill Lynch had been handled for more than twenty years by the same financial consultant employed by Merrill Lynch.
5 The MIC trader who had devised the spread strategy and placed the orders of September 2, 1992 had been transferred to Tokyo as an employee of Mitsubishi; he directed the trader who replaced him at MIC to implement the spread strategy to move profits from the May to the March wheat future.
6 Prearrangement among counterparties to the trades is not an essential element of wash sales. Collins I, ��22,982 at 31,900-01 (citing, Secretary of Agriculture v. Nelson, 1 A.D. 362, 369 (1942), aff'd on other grounds, 133 F.2d 452 (7th Cir. 1943)). It is but one method of avoiding a bona fide market transaction. Id.
7 Not all trading techniques
designed to "minimize" risk of loss are impermissible. For example:
Spread trading, for example, is often used to minimize risk, but it clearly does not negate the risk or price competition incident to the market and is not a fictitious trading technique prohibited by Section 4c(a). Similarly, transactions structured to minimize rather than negate risk or price competition in the futures market do not violate Section 4c(a) merely because the transaction also serves to change the individual's position in the delivery line.
In re Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ��23,401 at 33,078 (CFTC Nov. 26, 1986)("Collins II"). Thus, minimizing risk through the technique of spread trading does not, in and of itself, constitute a wash sale.