On December 16, 2008, the Commission simultaneously filed and settled an administrative enforcement action against the dairy marketing cooperative Dairy Farmers of America, Inc. (DFA), its former Chief Executive Officer Gary Hanman, and its former Chief Financial Officer, Gerald Bos, finding that they tried to manipulate the Class III milk futures contract and exceeding speculative position limits in that contract. Specifically, the Order finds that, from May 21 through June 23, 2004, DFA, Hanman, and Bos attempted to manipulate the price of the Chicago Mercantile Exchange’s (CME) June, July, and August 2004 Class III milk futures contracts through purchases of block cheddar cheese on the CME Cheese Spot Call market. The order finds that the pricing relationship between the CME block cheese market and the Class III milk futures market is well known throughout the industry, and the CME block cheese market price plays a significant part in establishing Class III milk futures prices. Additionally, the DFA order finds that on several days in 2004, DFA’s speculative Class III milk futures contracts exceeded the CME’s speculative position limit, in violation of the Commodity Exchange Act. The Commission assessed sanctions, including: a $12 million civil monetary penalty; a five-year futures trading bar against Hanman and Bos; two-year speculative trading bar against DFA; and order that DFA comply with certain undertakings, including 1) retaining a monitor to ensure that DFA does not engage in speculative trading and that DFA’s Cheese Spot Call market cheese purchases are made for legitimate business purposes, 2) implementing a compliance and ethics program, and 3) providing future cooperation to the CFTC. The Commission received cooperation from the U.S. Department of Agriculture and the CME Group’s Market Regulation Department in connection with this matter. (See also discussion below, of a related enforcement action, In re Otis, et al., CFTC Docket No. 09-03 (CFTC filed Dec. 16, 2008).) In re Dairy Farmers of America, Inc., et al., CFTC Docket No. 09-02 (CFTC filed Dec. 16, 2008).
Other Energy Market Misconduct
CFTC v. Lee, et al.
On November 18, 2008, the Commission filed a civil enforcement action against David P. Lee, a former trader for the Bank of Montreal (BMO), charging him with fraud for mis-marking and mis-valuing the bank’s natural gas options book and deceiving the bank. The complaint also charges Optionable, Inc. (Optionable), and its former senior executives Kevin Cassidy and Edward O’Connor, with deceiving BMO. Robert B. Moore Jr., Lee’s former supervisor, is also named as a defendant with the CFTC. The CFTC complaint alleges that Lee unlawfully mis-marked his natural gas options positions between at least May 2003 and May 2007 and mis-valued other natural gas options positions from October 2006 until May 2007. The complaint alleges that Lee inflated the value of his book so that it would appear to BMO that his trading was more profitable than it was in reality. As a result of Lee’s mis-marking, the BMO natural gas book was unlawfully inflated by approximately $221,875,297 Canadian dollars as of January 31, 2007 and $257,801,706 Canadian dollars as of March 30, 2007. By inflating the value of his book through both his mis-marking and mis-valuation activities, Lee generated a larger bonus for himself and his supervisor, Moore, while hiding losses he had incurred as a result of his unprofitable trading, the complaint alleges. The complaint also alleges that Moore failed to implement an adequate level of supervision over Lee by knowingly allowing Lee and others to violate BMO’s ethical standards and disregarding salient facts that, if they had been investigated, could have led to the detection of Lee’s fraud earlier.
Further, Lee and various brokers allegedly deceived BMO by fabricating purportedly independent broker quotes delivered to BMO’s back office for price verification. BMO employed a process to ensure that trader prices used to value BMO’s trading books were reasonably in line with market prices, and part of that process involved the collection of price quotes from market brokers. As alleged, beginning in at least 2003, Lee and several BMO brokers, including Cassidy and O’Connor—all of whom worked for Optionable—knowingly deceived and defrauded BMO employees, who verified the value of Lee’s natural gas book. Since BMO personnel relied upon the independence of such broker quotes, they used these quotes to verify Lee’s valuation of his natural gas book and therefore believed Lee’s trading to be profitable.
On the same day, the Commission filed its enforcement action, the Manhattan District Attorney Office and the U.S. Attorney for the Southern District of New York also today filed a criminal indictment against Cassidy. The Federal Reserve Board and the SEC also filed related actions. The Commission received cooperation from the Manhattan District Attorney’s Office, Federal Bureau of Investigation (FBI), U.S. Attorney’s Office for the Southern District of New York, Federal Reserve Board, SEC, and the NYMEX in connection with this matter. CFTC v. Lee, et al., No. 08 CIV 9962 (S.D.N.Y. filed Nov. 18, 2008).