A former board member of the New York Mercantile Exchange (Nymex) pleaded guilty last Tuesday to two felonies -- illegal trading in the natural gas market and tampering with physical evidence.
Steven Karvellas of Allendale, NJ, entered his guilty pleas before Acting Supreme Court Justice Daniel Fitzgerald on both counts, which are E felonies. He has been promised a sentence of five months in jail to be followed by five years of probation. Karvellas also will disgorge $850,000 in profits and fines, according to Manhattan District Attorney (DA) Robert M. Morgenthau.
In pleading guilty, Karvellas admitted that from September 2002 to May 2003, while working as a floor broker at Nymex, he intentionally engaged in fraudulent trading in the natural gas market. He conceded that he delayed the execution of customer orders to buy or sell natural gas contracts to see in what direction the market was moving, Morgenthau said.
If the market price moved in a direction that made a customer order immediately profitable, Karvellas would allocate the contracts to himself rather than to the customer. As a result, he violated his obligation to faithfully execute his customers' orders, and stole trading profits that rightly belonged to his customers, the DA's office noted.
Customer orders would either be executed at a less favorable price, executed at a later time or not executed at all. This pattern of misappropriating customer orders enabled him to engage in risk-free investing for his own account and deprive his customers of their profits, according to the DA's office.
Karvellas also admitted to tampering with physical evidence. Once he became aware of the investigation into trading practices on the Nymex floor and that certain records had been subpoenaed by a New York County grand jury, Karvellas ordered a subordinate to destroy a trading ticket that would have exposed his illegal trading practices, prosecutors said.
Karvellas is the owner of two companies, Steven J. Karvellas and Co., a natural gas trading firm, and Commercial Brokerage Corp., an introducing broker, both located in Manhattan.
In addition to Karvellas, three other individuals involved in fraudulent commodities trading at Nymex have pleaded guilty to charges that they traded ahead of customer orders. They are Thomas Maloney, a former floor broker for his company, Maloney Trading; Brian Keane, a former floor clerk for Power Futures Trading Inc.; and Ryan Tremblay, a former floor clerk who worked for several companies.
Maloney of Springfield, NJ, will be sentenced to probation and fined $75,000; Keane is expected to be sentenced to four months in jail; and Tremblay will likely receive probation, the DA's office said.
Two other former floor clerks, John Kozlik, a clerk for Maloney Trading, and Al Demicoli, a clerk for New York Energy and Metals Executions Inc., were arrested previously, also on charges of trading ahead of customer orders. Another former Nymex employee, Alvin Perez, was arrested for the receipt of commercial bribes. Perez is charged with accepting cash or gifts from floor brokers in exchange for sharing information about internal Nymex investigations into brokers' trading practices.
Morgenthau said the guilty pleas and arrests resulted from a referral from the Commodity Futures Trading Commission (CFTC). After the referral, he noted that a joint investigation, which is still ongoing, was undertaken.
The CFTC also charged Karvellas and Maloney with fraudulently allocating trades to their personal accounts and depriving customers of the opportunity to profit. Karvellas was ordered to pay a $375,000 civil penalty and Maloney was ordered to pay a $62,500 civil penalty. Both are permanently barred from trading commodities contracts and registering with the CFTC.
In an unrelated case, Aaristo Commodities and Futures DMCC of Dubai, United Arab Emirates, paid a $100,000 civil penalty for engaging in illegal trading in the U.S. natural gas, oil, copper and gold markets, the CFTC said last Wednesday.
The consent order, entered by Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York, imposes a permanent injunction against Aaristo and finds the company liable for violating federal laws banning wash sales, accommodation trades and fictitious sales, and engaging in improper noncompetitive commodity futures transactions, the agency said.
The order stems from a CFTC complaint filed in April 2007 charging Aaristo, along with two other companies and two individuals, all of Dubai, with the illegal trading of futures contracts offered by Nymex on the Globex electronic trading platform on several days in March and April 2007. Aaristo and the other defendants were charged with passing hundreds of thousands of dollars among their futures trading accounts through these illegal commodity futures transactions.
Specifically, the order finds that on at least six trading days in March and April of last year, Aaristo engaged in a series of futures transactions in which it traded illiquid, distant contracts opposite others at off-the-market prices. The effect of this trading was no net change in open positions of Aaristo but a resulting profit to Aaristo and a loss to the counterparties, according to the CFTC.
The CFTC said it received assistance from Nymex, the Emirates Securities and Commodities Authority and MF Global Inc. in its investigation.
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