Fed court fines broker $600K
NEW YORK (Legal Newsline) - A New York federal court has ordered broker Kent R.E. Whitney to pay $600,000 for making false and misleading statements to Chicago Mercantile Exchange representatives, futures commission merchants and others in an elaborate margin avoidance plot.
The U.S. Commodity Futures Trading Commission obtained the consent order of permanent injunction, which was entered Tuesday. It also imposes permanent trading and registration bans and permanently prohibits him from further violations of the Commodity Exchange Act and CFTC regulations.
According to the CFTC, Whitney engaged in a fraudulent scheme to avoid substantial margin calls when placing orders for commodity options traded on the New York and Chicago Mercantile Exchanges.
As described in the consent order, one or two business days before expiration of the front month options, Whitney placed to the Exchange trading floors orders to sell a large volume of "front month out-of-the-money options."
He allegedly knowingly provided clearing firms with invalid account numbers for the trade allocations. He allegedly represented that the accounts were open and held sufficient margin to cover the trades and/or deceptively failed to disclose that the accounts were, in fact, closed and thus held no funds for margin.
Because the account numbers Whitney provided were invalid or closed, the clearing firms that received the initial allocations rejected the trades and returned those trades to the executing floor brokers, it was alleged.
The next business day, Whitney allegedly provided valid account numbers to clear the trades. By doing so, Whitney allegedly avoided the posting of margin by shifting the overnight margin risk to the clearing firms of the executing brokers.
According to the CFTC, "Because the next business day was usually the expiration day of the front month options contract - when the clearing firm Whitney used did not require margin calls - neither Whitney nor the accounts he used received any margin calls and the out-of-the-money options usually expired worthless." The consent order states that through this scheme, "Whitney avoided posting over $96 million in margin calls."