Cracking down on firms that are attempting to manipulate the natural gas futures market for financial gain, the U.S. Commodity Futures Trading Commission (CFTC) late last week levied $750,000 in fines on three Canadian companies for "wash" and prearranged trades.
In an order that filed and simultaneously settled charges against Pinemore LP and Birchmore LP, two Canadian limited partnerships based in Calgary, the CFTC said the two firms engaged in unlawful wash sales in the natural gas futures contract on the New York Mercantile Exchange (Nymex) during November and December of 2006.
According to the order, on one or more occasions, Pinemore and Birchmore ordered through their broker certain natural gas futures trades on Nymex that were wash sales. The trades were part of a strategy involving the purchase and sale of the same quantity of Nymex natural gas futures contracts by Pinemore and the opposite sale and purchase of the same quantity of Nymex natural gas futures contracts by Birchmore.
"Because the trades ordered by Pinemore and Birchmore were designed to give the appearance of submitting trades to the open market, while negating the risk incident to the market and producing a virtual financial nullity, they constituted wash sales in violation of the CEA [Commodity Exchange Act]," the CFTC said in its order.
The order imposes a $250,000 civil monetary penalty each on Pinemore and Birchmore, which are two limited partnerships controlled by the same general partner and with substantially identical ownership. Additionally, the firms were ordered to cease and desist from future violations of the CEA.
In a case that may or may not be related, the CFTC also last week issued an order filing and simultaneously settling charges against Scotia Capital Inc. (SCI) for prearranging trades in the natural gas futures contract on Nymex during November and December of 2006.
The CFTC, which refused comment on whether the cases were tied together, said that on one or more occasions SCI prearranged natural gas futures trades on Nymex for its customers. The trades were part of a strategy involving the purchase and sale of the same quantity of Nymex natural gas futures contracts by one customer and the opposite sale and purchase of the same quantity of Nymex natural gas futures contracts by the other customer, according to the order.
Prior to the trades being entered on Nymex, SCI employees arranged for the trades to be executed with a minimal price difference between long and short positions by seeking trades such that there was no more than a half a cent price differential between the buy and sell orders. These prearranged trades negated market risk and price competition and constituted fictitious sales and noncompetitive transactions, according to the order.
The CFTC order imposes a $250,000 civil monetary penalty on SCI, an investment dealer in Toronto and a subsidiary of The Bank of Nova Scotia. Additionally, SCI was ordered to cease and desist from future violations of the CEA.
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