This past week the Chicago Mercantile Exchange issued its long awaited final rules addressing so-called transitory EFRPs, while the European Parliament passed important measures dealing with trading venues, algorithmic trading and commodity position limits, among other topics. In addition, once again, the judge in NYC hearing many of the private lawsuits involving MF Global issued a ruling that helped narrow the focus of one of the many very protracted and contentious litigations.
As a result, the following stories are covered this week on Gary DeWaal’s Bridging the Week:
This week only, information regarding some particularly helpful charities to consider for donations is also included in the Totally Aside section near the end of this blog. Please take a look and consider helping out!
Many Defendants Are Dismissed from MF Global Individual Customer Action; Five, including Corzine, Remain
Last week multiple defendants, including private investment firm JC Flowers, were dismissed entirely from an individual customer action arising from the collapse of MF Global in October 2011. Five defendants, including senior officers Jon Corzine, Bradley Abelow and Henri Steenkamp had some allegations dismissed but remain in the litigation. Generally, the plaintiff, Sapere CTA Fund L.P., claimed that all the defendants had violated various provisions of the Commodity Exchange Act and New York State statutory and common law.
Just a few weeks ago, the same judge in this matter, the Hon. Victor Marrero of the Federal District Court in New York City, issued a non-holds barred decision dismissing some defendants entirely, but authorizing proceeding against at least some other defendants in part, in connection with a customer class action lawsuit (“Commodities Customer Action") involving the firm (for details of this other matter, see “Some Defendants and Former Accounting Firm Dismissed in Private Class Action Lawsuit Involving Customers of MF Global; Not John Corzine and Certain Other Former Officers,” within Bridging the Week February 10 to 14, 2014, by clicking Here). Around the same time, the MF Global Inc. Trustee announced he would make a full distribution to all of the firm's prior customers (see the article on this website, "MF Global Inc. Trustee Announces Final 100% Distribution to Customers" by clicking Here).
The plaintiff in this action previously had an account at MF Global for trading domestic and foreign futures and related options. Sapere’s complaint incorporated many of the same allegations addressed in the Commodities Customer Action, but raised new claims regarding fraud and for violation of New York law, as well as included additional defendants.
JC Flowers was named in the Sapere’s complaint, among other reasons, under the theory that it was “…negligent in selecting, supervising, or otherwise controlling” Corzine and therefore responsible for Corzine’s alleged wrongful conduct. However the Court dismissed these charges entirely on the grounds that the plaintiff failed adequately to plead that Corzine “had any propensity to commit any of his alleged misconduct, much less that JCF know of any such propensity.” The Court also rejected the plaintiff’s claim that Corzine acted as JCF’s agent “...within the scope of [Corzine’s] authority in committing the wrong acts that harmed Sapere.”
The Court completely discharged from this matter: David Bolger, Eileen Fusco, David Gelber, Martin Glynn, Edward Goldberg, David Schamis, and Robert Sloan, all previously independent directors; Michael Stockman, former Chief Risk Officer; and Dennis Klejna, former Deputy General Counsel. The court maintained as parties in the litigation: Corzine, Abelow, and Steenkamp, the three top former senior officers; Edith O’Brien, former Assistant Treasurer and David Dunne, former Treasurer.
Compliance Weeds, High Frequency Trading: Active debate regarding low latency trading shows no signs of abating although a few weeks have now passed since the release of Michael Lewis’ “Flash Boys.” Moreover, last week the media reported that at least six high frequency trading firms were served with subpoenas by the NY Attorney General to determine whether any of the firms have an illicit advantage over other traders (see, e.g., http://online.wsj.com/news/articles/SB10001424052702304626304579505931086501344?mg=reno64-wsj). The current environment should prompt firms with access to trading securities directly on an exchange or ATS to double check that (1) they have robust policies and procedures that cover all applicable regulatory requirements; (2) their employees routinely are reminded about these internal rules; (3) they follow their internal rules; and (4) they routinely conduct adequate surveillance to ensure their ongoing compliance. Unfortunately, given the high political temperature, even de minimis violations may give rise to enforcement actions to generate public approbation.
Compliance Weeds: Every firm in the financial services industry should be augmenting its controls around cyber security, its ability to detect actual and potential breaches, and its periodic reviews of these controls and detection abilities. OCIE’s schedule of items for review in its Risk Alert provides a useful checklist even for firms not under the SEC’s jurisdiction and SEC-overseen firms not selected for review, let alone firms that are targeted.
Compliance Weeds: Operations staff dealing with Open Interest and Large Trader submissions must comply not only with deadlines for initial submissions, but for subsequent adjustments too. Accurate mapping of customer accounts through omnibus accounts within large group organization with numerous futures subsidiaries is critical to ensure that open interest for specific customers and omnibus accounts are aligned in order to avoid inconsistent and inaccurate reporting.
For additional information, see:
FAQ re: Liquidity Coverage Ratio:
Measuring and Controlling Large Exposures:
CME Position Adjustments:
ESMA Consults on Non-Cleared Swaps Margin:
MF Global Individual Customer Action Motion:
SEC Cyber Security Preparedness Initiative:
SEC Market Access Q&A:
SEC Proposed Recordkeeping and Reporting Rules for Security Based Swap Dealers:
SEC v. Total Wealth Management, Jacob Cooper:
The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of April 19, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
September 17, 2014
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March 13, 2014
February 25, 2014
November 15, 2013
June 25, 2013
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Gary DeWaal’s Bridging the Week April 14 to 18 and 21, 2014 (MF Global Private Litigation Trudges Along; CME EFRPs, Cyber Security)Jump to: Bridging the Week Compliance Weeds High Frequency Trading