Release: #4031-97 (CFTC Docket #97-10)
For Release: June 24, 1997
CFTC Files and Settles Administrative Proceeding Against Mitsubishi Corp., Merrill Lynch Futures, Inc., Country Hedging, Inc., and Charles B. Soule for Wash Sales Violations
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it has issued an order instituting administrative proceedings against Mitsubishi Corporation of Tokyo, Japan; Merrill Lynch Futures Inc. of New York, New York; Country Hedging, Inc. of St. Paul, Minnesota; and Charles B. Soule of Plymouth, Minnesota, and simultaneously accepted offers of settlement from them.
The order, based on the settlement, finds that the respondents had engaged in wash sales in violation of the Commodity Exchange Act (CEA). Merrill Lynch additionally is found to have violated certain regulatory recordkeeping requirements.
Under terms of the settlement order, the respondents are ordered to cease and desist from violating the CEA and to pay civil penalties. Mitsubishi will pay $150,000, Merrill Lynch will pay $175,000; Country Hedging will pay $75,000; and Soule will pay $15,000.
Merrill Lynch and Country Hedging were also ordered to comply with certain undertakings related to their compliance procedures to prevent similar violations in the future. Soule's registration as an Associated Person (AP) was suspended for three months, and both of his CFTC registrations (he is also registered as a Floor Broker) are subject to conditions for two years. All parties agreed to cooperate with the Commission in related proceedings.
Geoffrey Aronow, the CFTC's Director of Enforcement, commented on the settlement order: "The Commission's order addresses an important and difficult area that lies at the core of the CEA -- wash sales. The substantial sanctions here demonstrate the Commission's continuing commitment to attack misuse of the markets. The record-keeping finding addresses the critical importance of accuracy in identifying owners and controllers of regulated trading accounts."
The CFTC's findings in the order, based upon the settlement offers, relate to two occasions when Mitsubishi sought to shift futures trading profits from one reporting period to another for accounting purposes by placing simultaneous orders with its brokerage firm, Merrill Lynch, to buy and sell equal quantities of wheat futures spreads at approximately the same price. The CFTC found that Mitsubishi was willing to accept small net losses on the spread transactions in order to show profits in the nearby futures contract and corresponding losses in the deferred contract; and that Mitsubishi gave instructions to price the purchase of the nearby contract at the day's low price and the sale of the nearby contract at the day's high price to accomplish that objective.
According to the CFTC's findings, Merrill Lynch accepted Mitsubishi's simultaneous spread orders and transmitted them simultaneously to Soule, an employee of Country Hedging, a brokerage firm at the Minneapolis Grain Exchange. Soule, in turn, gave the orders simultaneously to an independent floor broker who executed them by buying and selling the spreads.
According to the CFTC order, the actions by each entity and person in the chain of conduct violated the statutory provision that prohibits wash sales. The Commission also found that Merrill Lynch violated a CFTC regulation by failing to keep permanent records identifying owners and controllers of corporate trading accounts.
In addition to the cease and desist orders and the imposition of civil penalties, the Commission ordered Merrill Lynch and Country Hedging, both registered futures commission merchants, to comply with undertakings to implement and/or maintain certain compliance procedures. The CFTC ordered Merrill Lynch to use a daily trade report to monitor customer accounts for unusual day trading activity. Country Hedging is required to employ a compliance officer as long as the firm carries customer accounts, to implement compliance procedures and to train its staff in the proper handling of customer orders.
In addition to the three-month suspension of his registration as an AP,
Soule's registrations as an AP and as a Floor Broker were conditioned for
two years by requiring that he be supervised by a Country Hedging manager
and by prohibiting him from supervising registrants and serving on exchange
disciplinary, arbitration and oversight committees.
CFTC Files Related Action Against Alfred R. Piasio and
Donald W. Wilson
In a related action, the CFTC announced that it filed a two-count complaint against Alfred R. Piasio of Old Brookville, New York and Donald W. Wilson of Long Lake, Minnesota, alleging that each violated the CEA's wash sale prohibition in connection with simultaneous orders to buy and sell equal quantities of wheat spreads at approximately the same price.
The CFTC complaint alleges that, on eleven occasions in 1992 and 1993, Piasio, then a registered AP employed by Merrill Lynch, accepted such simultaneous orders from his customer, Mitsubishi, and transmitted them to Soule on the MGE trading floor.
The complaint further alleges that Wilson, an independent floor broker at the MGE who is registered with the Commission as a floor broker and an AP, accepted the eleven pairs of simultaneous orders from Soule and executed eight of them by buying and selling spreads simultaneously. According to the complaint, Piasio and Wilson violated their duties by accepting such simultaneous orders without seeking clarification of the customer's intent.
A hearing in the case will be held before an administrative law judge to determine whether the allegations are true and, if so, whether remedial sanctions should be imposed against Piasio and Wilson. Possible sanctions include civil monetary penalties, cease and desist orders, registration restrictions and trading prohibitions. No date has been set for the hearing.