San Diego Gas & Electric Co. (SDG&E) has been ordered to pay an $80,000 civil penalty under an agreement with the Commodity Futures Trading Commission (CFTC), which resolves charges that the utility engaged in phony “wash” trades of natural gas futures on the New York Mercantile Exchange (Nymex).
In addition to paying the penalty, SDG&E has agreed to implement procedures to ensure that future transactions that it makes on U.S. futures markets comply with the rules and regulations of those markets, the Commodity Exchange Act and its regulations.
The CFTC order found that the San Diego, CA-based utility, a subsidiary of Sempra Energy, engaged in phony “wash” trades between Jan. 26, 2006 and Feb. 2, 2006 by placing market orders through an introducing broker to simultaneously buy and sell natural gas futures contracts. In each instance, SDG&E gave instructions to place an order to sell and an order to buy futures contracts for delivery months August through October 2006 on the same phone call.
Further, the order found that SDG&E was aware that the introducing broker placed each of the orders with the Nymex floor brokers together and requested that the prices relevant to each of the buy and sell orders be at or near the same price. The orders were then executed by brokers on the Nymex trading floor at or about the same price and approximately at the same time. This had the effect of liquidating and immediately reestablishing Nymex futures contracts previously held by SDG&E.
The CFTC said the transactions constituted prohibited “wash” sales.
A “wash” sale is a transaction in which trades are intentionally undertaken for the purpose of giving the appearance that they have been executed without positions actually having been taken in the market. Wash trades are considered harmful because they create illusory price movement in the market. They also artificially increase the volume of trading transactions done by a company and as a result can boost its position in any industry rankings that are based on volumes of transactions.
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