Commissioner Bart Chilton’s Concurring in part and Dissenting in part to the Settlement in the Matter of Martin A. Lorenzen, Respondent
February 8, 2013
While I concur in the terms of the settlement in this matter with regard to the findings of violations and the non-monetary components of the settlement order, I respectfully dissent as to the amount of the civil monetary penalty (CMP). A CMP of $200,000 is wholly inadequate as a penalty for the wash sale activity that Mr. Martin A. Lorenzen directed and oversaw while acting as a manager at the Gelber Group LLC.
Section 4c(a) of the Commodity Exchange Act (CEA) prohibits wash sales. Mr. Lorenzen's program was specifically designed generate cross trades (i.e. trades with Gelber Group LLC traders on opposite sides). From at least March to August 2010, Mr. Lorenzen directed two traders at Gelber Group LLC to trade in Russell 1000 contracts opposite one another until a targeted amount of volume was reached. This kind of wash sales activity, particularly if it accounts for a significant percentage of trade volume, could justifiably lead the public to lose confidence that the prices generated from the market are bona fide and reflect actual market fundamentals. Even if wash sales are not entered into as a part of a manipulative scheme or directly harm any market participants they may undermine the price discovery function of and public confidence in the markets. Wash sale violations are serious and significant violations of federal law. Unfortunately, they are occurring at an unprecedented rate. Accordingly, the penalty for wash sales should be at a level which serves as a strong deterrent.
The CEA provides the Agency with authority to prosecute violations “of any provision of this Act or of the rules [. . .],” and to request civil monetary penalties (CMPs) “for each such violation.” 7 U.S.C. Section 9(c). The total CMP assessed in this case $200,000 is approximately the maximum statutory CMP for one-and-a-half wash sale violations. A starting point for any wash sale violation should be based on the number of individual wash sale violations or each second that such trades occurred, with mitigating factors lowering such an amount. The $200,000 CMP in this case is a small fraction of the maximum the Commission could collect for the number of wash sales directed by Mr. Lorenzen.
The increasing amount of trading activity in Commission-regulated markets is due, in part, to activities like those at the heart of this matter and also in large part due to increased participation by high-frequency "cheetah" traders and automated trading systems. I appreciate and respect the work done by our excellent enforcement staff in this matter. However, I would prefer that the Commission send an even stronger signal that the harm caused by wash sale violations will be taken very seriously. In dissenting, I recognize that our Division of Enforcement is limited by current statutory limits on penalties which are, in my opinion, far too low. I have suggested statutory changes to Congress in this regard and will continue to press for their passage.
Last Updated: February 8, 2013