The U.S. Commodity Futures Trading Commission (CFTC) on Thursday filed an enforcement action charging New York Mercantile Exchange Inc. (Nymex), a unit of CME Group, and two former CME Nymex employees, William Byrnes and Christopher Curtin, with violating the Commodity Exchange Act (CEA) and CFTC regulations through the repeated disclosures of nonpublic material customer information over a period of two and a half years to an outside commodity broker. CME Group fired back that not only did it address and handle the issue appropriately, the complaint against Nymex is “neither justified as a matter of law nor consistent with the regulatory structure” established by the CEA.
Under the complaint filed in the U.S. District Court for the Southern District of New York, the CFTC alleges that Byrnes and Curtin worked on the CME ClearPort facilitation desk and were responsible for facilitating customer transactions reported for clearing through the CME ClearPort electronic system. The complaint alleges that from about February 2008 to September 2010, Byrnes “knowingly and willfully disclosed material nonpublic information about CME Nymex trading and customers, including about trades cleared through CME ClearPort, to a commodity broker on at least 60 occasions.” The complaint further alleges that between May 2008 and March 2009, Curtin knowingly and willfully disclosed the same type of information to the same commodity broker on at least 16 additional occasions.
The nonpublic customer information disclosed by Byrnes and Curtin in conversations — often captured on tape — included details of recently executed trades, the identities of the parties to specific trades, the brokers involved in trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants, according to the complaint.
Commodity products offered for trade on Nymex include metals, agriculture and energy. While the commodities involved in the trades were not explicitly highlighted in the complaint, one call that was recorded between Byrnes and Broker X on or about May 15, 2009, referenced options related to crude oil futures. Below is a transcript from the call included in the CFTC complaint.
Broker X: Quick question, Cal 10 flat [i.e., options related to crude oil futures contracts] calls traded yesterday — one hundred a month — who was it? WA Cal 10 flat calls. Tell me what price, what brokers, who bought, who sold…
Byrnes: Cal 10 flat calls…one hundred lots…55 (inaudible) a month…Jan. 10 through Dec. 10. [States name of the buyer] buys, [states name of the seller] sells. [States name of the broker].
Broker X: Who bought?
Byrnes: [States name of the buyer].
Broker X: What’s his name again?
Byrnes: [States name of the individual trader at the buyer firm].
According to the complaint, Byrnes and the broker sometimes communicated via cell phones so that Byrnes could disclose material nonpublic information about CME Nymex trading and customers without being recorded.
The CFTC also alleges that in July 2009, a market participant complained to CME Nymex that the participant believed nonpublic information about trades cleared through CME ClearPort had been disclosed by a CME Nymex employee named “Billy.” Although a CME Nymex managing director who investigated the market participant’s complaint identified “Billy” to be William Byrnes, the CFTC complaint alleges that CME Nymex did not then question Byrnes, and Byrnes’s illegal disclosures continued for over a year, until at least September 2010. Ultimately, the CFTC says, CME Nymex terminated Byrnes’s employment in December 2010 after yet another market participant complained about disclosures of nonpublic customer information. Curtin had previously left voluntarily.
The CFTC said it is seeking civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of federal commodities laws.
Responding to the charges, CME Group said it was disappointed with the CFTC charges because they relate “to incidents that CME Group has already addressed and handled appropriately, and involved no harm to any customer or the markets.”
CME Group said the CFTC is now seeking to hold Nymex liable for the actions of these former employees, “which were contrary to exchange policy and, when discovered, resulted in the immediate termination by us of their employment. Nymex is not being charged with any misconduct, is not being charged with a failure to properly supervise its employees, and is not being charged with a failure to adhere to the DCM core principles. Rather, the CFTC is seeking to impose a monetary penalty against Nymex based solely on these former employees’ improper activities, even though no customer suffered any loss and no third party obtained any improper gain.”
When CME Group learned that Nymex employees had provided information to unauthorized third parties for the purpose of providing business leads to those third parties, the company “immediately terminated” the employees who engaged in the conduct and reported that misconduct to the CFTC.
“Although the information disclosed was not and could not have been used to engage in insider trading or to otherwise affect the market in any way, nor did any customer suffer a financial loss resulting from these disclosures, we took swift action to make clear our commitment to protecting the confidentiality of any information concerning our customers,” CME Group said Thursday afternoon. “We also reinforced procedures and practices to protect against and detect such misconduct in the future.”
Because the “complaint against Nymex is neither justified as a matter of law nor consistent with the regulatory structure established by the Commodity Exchange Act…we have determined that we must oppose this case in court because we simply do not believe the CFTC’s claims in this case are fair to Nymex. We are confident that the company will prevail on these claims,” the exchange owner said.
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