The U.S. Commodity Futures Trading Commission (CFTC) said it has accepted a settlement offer from former Avista Vice President Williams H. Thomas, who was charged with manipulation of the settlement prices of the now defunct Palo Verde and California-Oregon-Border (COB) electricity futures contracts, traded on the New York Mercantile Exchange (Nymex) from April 1998 through July 1998.
The order finds that on three days in 1998 (April 24, May 22 and July 27), Taylor manipulated the settlement prices in the illiquid electricity futures markets to increase Avista Energy’s net gain on its cash-settled, over-the-counter options contracts, the value of which was based on the daily settlement prices of the electricity futures contracts.
The CFTC order requires Taylor to cease violating the commodity laws and to pay a civil penalty of $155,000. Taylor is also barred from trading on CFTC-regulated markets for 30 months. In consenting to the order, Taylor neither admitted nor denied the findings in the order or the allegations of the complaint.
The CFTC previously settled related charges against Avista Energy, former Avista Vice President Thomas Johns, former Avista power trader Michael T. Griswold, and former Avista power trader Robert S. Kristufek for participating in the market manipulation scheme. They were all changed with helping to create “artificial settlement prices” by placing large futures orders on the day options were scheduled to expire in April, May and July 1998.
The commission explained that during the relevant period, COB and Palo Verde futures were extremely illiquid with low volume and open interest and wide bid-ask spreads. “Experienced floor brokers and traders generally considered an order of 25 or 30 contracts to be large enough so that it could move prices materially in the Nymex western U.S. electricity futures contracts,” the CFTC said.
“In light of the illiquidity of the market…Avista Energy’s strategy was that under certain circumstances it might be possible to materially raise or lower the settlement price of Nymex western electricity futures contracts on options expiration day with a large buy or sell order to profit via an artificially created increase in the value of its OTC derivatives contracts,” according to the order.
The CFTC said the Avista trading group sold May and June Palo Verde futures at prices less than the prevailing bids during the close on the April and May 1998 options expiration days. In addition, they purchased August 1998 Palo Verde futures at prices higher than the prevailing offers during the close on the July 1998 options expiration day, and they purchased August 1998 COB futures at prices higher than the prevailing orders during the close on the July 1998 options expiration day.
“This repeated trading by Taylor and other of Avista Energy’s traders at his direction and with his knowledge, at prices worse than what was being bid or offered, had no apparent business or economic rational other than an intent to affect the prices of the electricity futures contracts and thus increase Avista Energy’s financial gain on its OTC derivatives contracts,” the CFTC order said.
The CFTC said Taylor helped devise the “manipulative scheme” with other Avista personnel. He supervised traders who placed orders and placed orders himself, according to the CFTC. “Taylor also advised and counseled on and aided the design, coordination and implementation of Avista Energy’s trading strategy…,” the CFTC said.
In addition to Taylor’s $155,000 settlement fee, Avista Energy paid a $2.1 million civil penalty. Griswold was ordered to pay a $110,000 fine and stop trading for 18 months. Kristufek agreed to pay a $155,000 fine and stop trading in CFTC regulated markets for two years, and Johns was ordered to pay a fine of $50,000 and to stop trading for 12 months. Nymex floor broker Anthony J. DiPlacido of Bellmore, NY, also was charged with participating in the manipulative scheme.
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