Source: http://www.cftc.gov/ogc/oporders97/ogcrousso072997.htm
Timestamp: 2018-01-22 02:47:27
Document Index: 316723143

Matched Legal Cases: ['§ 6', '§ 1', '§ 6', '§ 166', '§ 10', '§ 10', '§ 10', '§ 10']

In re Rousso - July 2, 1997
DAVID ROUSSO,NEIL T. MCGOLDRICK, CFTC Docket No. 91-3
RICHARD HENRIKSEN, and WILLIAM
J. REIDY, OPINION AND ORDER
From June through November 1988, the time period covered by the complaint, respondents were among the most active traders in the NYMEX crude oil pit.1 Rousso and McGoldrick were dual traders who executed customer orders for RIS Commodities, Inc. and traded for their personal accounts. Henriksen and Farley, also dual traders, executed customer orders for Gerald, Inc. Reidy, a "local," traded only for his personal account.
On January 28, 1991 the Commission issued a complaint charging the respondents, Kathleen Farley, Ris Commodities, Inc., and Gerald, Inc.2 with multiple violations of Sections 4b, 4c(a) and 4g of the Commodity Exchange Act ("CEA" or the "Act"), 7 U.S.C. §§ 6b, 6c(a), and 6g (1988), and Commission regulations 1.31(a)(1) and 1.35(a), 17 C.F.R. §§ 1.31(a)(1) and 1.35(a). Respondent Rousso was additionally charged with trading ahead of his customers' orders in violation of Section 4b(A) of the Act, 7 U.S.C. § 6b(A).3
Prior to the administrative hearing, the Division sought and the ALJ granted summary disposition on behalf of the Division on the recordkeeping charges in Counts Seven and Eight of the complaint.4
During the prehearing period, the Commission accepted offers of settlement from RIS and Gerald, Inc. on charges that they violated Commission Regulations 1.31(a)(1), 1.35(a) and 166.3, 17 C.F.R. § 166.3. The Commission also accepted an offer of settlement from Kathleen Farley, in which she consented to the findings as charged and undertook to testify truthfully at any hearing on the case.5 Farley met with Division staff twice prior to the hearing to provide them with her comments and opinions with respect to the 43 trades in which she participated.6 In its prehearing memorandum, the Division advised that Farley would testify generally that she had participated in noncompetitive trading with the remaining respondents, but would be unable to testify whether some of the charged trades were executed noncompetitively.
Both the Division's expert witness and the expert designated by respondents provided detailed verified statements in advance of the hearing.7 Elizabeth Hastings, a Division senior staff investigator, described the challenged trades and the bases for her opinion that these trades were noncompetitively executed. Through an analysis of the records made by respondents and the NYMEX during the six-month period covered by the Division's investigation,8 Hastings identified in respondents' trading "a pattern of buying and selling the same contract opposite the same trader or affiliated traders at or about the same price." Verified Statement of Elizabeth Hastings ("Hastings") at 26. In her opinion, such trading would, depending on the circumstances, permit the respondents to gain an advantage over the market by (1) profitably offsetting an existing position; (2) reducing the size of an existing position before the market closed; (3) minimizing a loss; or (4) establishing a position that might not be possible through competitive trading.
In most of these sequences, one trade was to fill a customer order and the other trade was for the broker's personal account. In such instances the trades appeared within a few lines of each other on the opposite trader or broker's trading card. Occasionally, Hastings noted two customer orders offset at advantageous prices to the opposite trader or broker, and those trades would be recorded within a few lines on each of the trading cards of both participants. In those instances where an affiliated broker took the opposite side of a broker's customer order, the trades were recorded in close proximity on the affiliated broker's trading card. More than half of the charged trade sequences were characterized by these or other "indicia of noncompetitive execution"9 that added weight to the inference of noncompetitive trading drawn from the pattern.
Respondents' expert, John Schobel, formerly an assistant director of the Commission's Division of Trading and Markets, a floor broker, and a vice president of the New York Coffee and Sugar Exchange, disagreed with Hastings' conclusion that the challenged trades had been executed noncompetitively. In his verified statement, Schobel explained that the pattern described by the Division was neither unusual nor suspicious in the context of trading in the crude oil pit. Schobel, Verified Statement at 21-26 ("Schobel"). According to Schobel, in a one-point market such as crude oil, brokers, local traders, and dual traders frequently buy and sell at the same price with each other.10 Schobel at 18-21, 48. Thus, in his opinion, no inferences could be drawn from the pattern described by Hastings. Moreover, he opined that the audit trail irregularities cited by Hastings were unreliable indicia of noncompetitive execution and were more likely the result of human error, mechanical failure, and chaotic conditions in the crude oil pit. Schobel pointed out that during the period in question, NYMEX had no sequencing rule, no rule prohibiting multiple submissions of pit cards, and no prescribed methods for writing or correcting pit cards. Pit cards frequently missed the net, he testified, and 15 to 20 percent of cards were submitted late.11 Tr. 62, 93, 136. Schobel also cited a report on rule enforcement procedures at the NYMEX prepared by the Commission's Division of Trading and Markets ("T&M") which rated the accuracy of the NYMEX pit card system from December 1989 to May 1990 at 79.7 percent. Schobel at 33-37.
Farley testified that during the relevant time period she was a dual trader executing customer orders for Gerald, Inc. Her normal position in the NYMEX crude oil pit placed her in close proximity to the respondents. While she was unable specifically to recall the noncompetitive trades attributed to her, she testified that she had executed customer orders noncompetitively opposite respondents approximately four to six times a week and that she agreed to trade for her own account noncompetitively opposite Rousso and McGoldrick directly and indirectly through a scheme involving all the respondents.12 She also stated that on some occasions she had both seen and heard Reidy agree to do noncompetitive trades for Rousso and McGoldrick. Tr. 187, 195-96.13 In an attempt to discredit Farley's testimony, respondents requested that the Division produce the notes taken during its pre-hearing meetings with Farley. Following an in camera inspection, the ALJ determined that the Division's notes were not producible under Commission Rule 10.42(b), 17 C.F.R. § 10.42(b).14
Tr. 47. According to Morrisey, it was also suspicious when a trader submitted late pit cards, received a better price for a personal account than for a customer order within a short time span, executed a purchase or sale for a customer and an equal sale or purchase for himself opposite the same broker, or executed such a trade sequence with the second leg split into two parts. Tr. 31, 33, 35.15
Based on his review of the evidence and his own analysis of the trades, the ALJ concluded that all the respondents "knowingly associated themselves with the `shadow market' and sought by their actions to make it succeed." Initial Decision at 29. He found Rousso liable in 86 trading sequences (including 14 as an accommodator); McGoldrick liable in 48 trading sequences (17 as an accommodator); Henriksen liable in 40 trading sequences (12 as an accommodator); and Reidy liable in 83 trading sequences (all as an accommodator). Id. Noting that trade practice violations of the type committed by these respondents damage the integrity of the market and seriously erode the public's confidence in the commodity futures industry, the ALJ suspended respondents' registrations, prohibited them from trading, and ordered each to pay a civil monetary penalty.16 These appeals followed.
We find that the ALJ quite properly curtailed such questioning and ruled that Hastings had been properly qualified as an expert. Hastings had been employed as an investigator in the Division of Enforcement since 1983 (except for one year during which she was employed in a similar capacity at the Securities and Exchange Commission) and had extensive experience in the investigation of trade practice cases. 17
Respondents also contend that the ALJ committed reversible error in allowing James Morrisey, whom the Division did not designate as an expert witness, to testify as an "expert" insofar as he testified concerning suspicious trading patterns. The Division counters that Morrisey merely testified as to his general opinion based on his personal knowledge of trade practices and that opinion testimony is not limited to experts, U.S. v. Garcia, 994 F.2d 1499, 1506 (10th Cir. 1993).18 Clearly, as a NYMEX compliance officer, Morrisey had sufficient knowledge to testify about the types of trading floor practices considered suspicious by the NYMEX compliance department. The ALJ was able to weigh the value and credibility of this evidence properly. Cf. Teen-Ed v. Kimball International, Inc., 620 F.2d 399, 403 (3d Cir. 1980). Furthermore, the respondents were provided an opportunity to cross-examine Morrisey and have not demonstrated any prejudice they suffered as a result of his testimony. Given the general nature of Morrisey's testimony and respondents' failure to demonstrate any prejudice, we conclude that the ALJ committed no reversible error in permitting Morrisey's testimony.
Farley provided the Division with a signed statement dated October 14, 1991, concerning the noncompetitive nature of trades in which she had engaged with each of the respondents and the fact that she had no recollection of certain trades. Consistent with its Brady, Jencks, and Rule 10.42(b) obligations, the Division supplied respondents with this statement and a summary of Farley's anticipated testimony. The Division's Prehearing Memorandum also informed respondents that Farley would testify that she was "unable to state" that twelve trade sequences were executed noncompetitively. Respondents argue that this disclosure did not adequately alert them to its exculpatory nature. However, the disclosure statement provided adequate notice to respondents that Farley either had insufficient information to testify that those 12 trades were illegally executed or believed that they were properly traded. In these circumstances, respondents had a duty to examine Farley about those trades. In re First National Monetary Corp., [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,853 at 27,582 (CFTC Nov. 13, 1981); In re First Guaranty Metals Co., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,074 at 24,341 (CFTC Nov. 13, 1980). The Commission's Brady obligations do not require it to furnish material that a respondent already has or can easily obtain with reasonable diligence. In re First National Monetary Corp, ¶ 21,853 at 27,582. The record indicates that respondents did not attempt to interview Farley prior to the hearing in order to clarify her statements, nor did they pursue the matter at the hearing, either through cross-examination or, as the ALJ suggested, by calling Farley as their witness. Tr. 160-209, 213-18, 291.19 As respondents took no action either prior to or during the hearing to ascertain the meaning of Farley's statement, they can hardly be said to have exercised the requisite reasonable diligence. Furthermore, we have decided not to rely on the 12 trades that are the subject of respondents' disclosure argument in determining the respondents' liability, and thus the respondents clearly have suffered no prejudice.20
As noted, prior to the hearing, the ALJ granted the Division's motion for summary disposition of the recordkeeping and timestamp violations alleged in Counts Seven and Eight of the complaint against Rousso, McGoldrick, Henriksen, and RIS. On appeal, respondents Rousso and McGoldrick argue that the ALJ erred in granting the Division's motion with respect to Count Seven. The recordkeeping violations alleged by the
Division centered on respondents' failure to produce floor order tickets for certain dates in response to a Division subpoena duces tecum. Rousso failed to submit cards for six dates in 1988, McGoldrick for two dates. These respondents contend that no violation should have been found because the missing cards represented an insignificant portion of their records. Moreover, they assert that no violation should have been found because NYMEX rules in effect at the time did not require the maintenance of trading cards. Both arguments were made below and discussed by the ALJ, who observed that neither the Act nor relevant Commission regulations recognize a "de minimis exception" for recordkeeping violations and that respondents were responsible for compliance with Commission regulations regardless of NYMEX rules. Order dated June 17, 1992 at 8. Rousso further argues that summary disposition was improper because there was a question of fact whether Rousso failed to maintain trading records. Appeal Brief of Respondent Rousso at 54-55. However, he acknowledges that "some trading cards were not found." Id. at 7. This argument suggests that the Commission should recognize a good faith effort by respondents to maintain their records. Regulation 1.31, however, requires all records to be maintained. Once respondents conceded that some records were missing, the facts establishing recordkeeping violations became undisputed. In such circumstances, summary disposition is appropriate. See In re Antonacci, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,038 at 32,066 (CFTC Apr. 21, 1986).
Respondents argue on appeal that the ALJ failed to accord appropriate weight to the plausible explanations they advanced for the challenged trades. They contend that the basic flaw in the ALJ's trade practice analysis is his acceptance of the Division's theory that trading patterns are a sufficient basis for the factual inferences necessary to establish liability under the weight of the evidence standard. Further, they challenge the reliability of the inferences drawn from the patterns, contending that the patterns are equally consistent with lawful dual trading among large traders in the crude oil pit. With respect to the audit trail irregularities, respondents assert that "Hastings simply selected, and the ALJ adopted, several different aspects of Respondents' imprecise (but legal) record keeping practices and unilaterally designated them as `audit trail irregularities.'" Appeal Brief of Richard Henriksen at 20. Respondents contend that none of these irregularities had probative value and each was explained by human error, mechanical failure and inadequacies in the audit trail system.
The Division's expert identified repeated instances of trading in which respondents traded opposite each other at about the same price and about the same quantity within a very short period of time.21 Both Hastings and Morrisey testified that this pattern of trading results is unlikely to occur in competitive trading. Schobel contended that the pattern described by the Division is consistent with legitimate trading in the crude oil pit, but did not explain why trading in crude oil is so significantly different from other NYMEX trading that the Division's inferences do not apply.
[P]articipation in prearranged trading, apart from being a violation of law, breached the duty that commodity professionals owe, not only to the futures market but also to those who rely upon their bona fides. . . . `Congress invested the Commission with revocation power to safeguard the public interest in the well being of the nation's commodity futures markets.' [citation omitted] To insure against such conduct in the future and to serve as a warning to others, we conclude that the public policies of the Act can best be served by revocation not merely suspension of registration as a floor broker.
2. Trading Prohibitions. The Commission articulated standards for establishing trading prohibitions in In re Citadel Trading Co. of Chicago, Ltd., [1986-87 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,082 (CFTC May 23, 1986).
The factors to be considered in imposing a contract market trading ban and the length of such a ban include the existence of a nexus between the violation and the integrity of the futures market and, if such a nexus is found, a correlation between the gravity of the offsnse, the length of the ban and the impact the ban will have on the respondent.
Where, as here, the proven offenses directly abuse the respondents' market trading privileges, the nexus requirement is met. In re Murphy, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,798 at 31,355 (CFTC Sept. 25, 1985).
3. Civil Monetary Penalties. All respondents criticize as excessive the civil penalties imposed by the ALJ.22 In setting these penalties, the ALJ did not discuss respondents' net worth.23 With the exception of respondent Henriksen, none of the respondents has, at any stage of these proceedings, requested a net worth hearing or furnished any financial statements. In light of the gravity and number of charges against these respondents, they or their counsel should have anticipated that civil monetary penalties would be imposed and should have requested a net worth hearing, if one was desired. Accordingly, we treat the issue of their net worth as waived by Rousso, McGoldrick and Reidy. As to Henriksen, we hereby order him to show cause, within 30 days of the date of this Order, why the civil penalty imposed against him should be modified in light of his net worth.
In light of the foregoing, the ALJ's initial decision is affirmed. The trading prohibitions, registration revocations and civil penalties as modified herein shall become effective 30 days from the date this order is served,24 except that the civil penalty for Henriksen shall not go into effect pending his compliance with the order to show cause described above and the Commission's further action on such penalty.
Dated: July 29, 1997
1 Rousso alone accounted for as much as 10 percent of the trading volume in the crude oil pit, earning approximately $1 million in 1988. Reidy's trading accounted for 4 to 5 percent of the volume, and in 1988 both he and McGoldrick earned between $800,000 and $900,000. Henriksen earned about $100,000 trading for his own account, and received a $50,000 salary from Gerald, Inc.
2 RIS was an unregistered floor brokerage firm on NYMEX. Respondent McGoldrick was employed by RIS, and respondent Rousso executed orders for RIS under a contractual agreement. Gerald, Inc. was a NYMEX floor brokerage firm registered with the Commission as a futures commission merchant ("FCM"). Farley and Henriksen executed orders for Gerald customers and also traded for their own accounts.
3 The Futures Trading Practices Act of 1992 ("FTPA"), Pub. L. No. 102-546, 106 Stat. 3590, renumbered this section as 4b(a)(1)(C)(i).
4 The affected respondents opposed on the grounds that (1) the missing records represented an insignificant portion of their records; and (2) NYMEX rules then in effect did not require maintenance of trading cards.
5 Among other things, the Commission revoked Farley's floor broker registration and imposed a four-month trading ban.
6 The first of the two meetings was informal, and no notes were taken by Division staff. At the second meeting, which occurred about a week prior to the hearing, some notes were made by the Division.
7 Under Commission Regulation 10.66(d), 17 C.F.R. § 10.66(d), the ALJ may, at his discretion, order that direct testimony of expert witnesses be made by verified written statement rather than presented orally at the hearing. Any expert witness whose testimony is presented in this manner shall be available for cross-examination and may be examined orally upon re-direct following cross-examination.
8 During the relevant time period, NYMEX members submitted trades for clearing through the use of a pit card system. NYMEX traders created two types of trading records: trading cards, the traders' personal record of the trades they made; and pit cards, which identified the seller, buyer, quantity, contract month, and the price at which the trade was executed. Pit cards were timestamped by NYMEX and fed into a NYMEX data base, from which the exchange created the "street book." The street book was used by the exchange's compliance department to detect illegal trading activity. NYMEX also generated a "time and sales" register, which recorded price changes to the nearest second and provided a history of the price changes occurring in a commodity futures contract during trading hours.
9 Hastings identified the following characteristics in respondents' trades which in her opinion suggested noncompetitive execution: (1) the sequence of prices recorded by the trader was inconsistent with the sequence of prices reflected by time and sales; (2) traders did not record a sequence of trades between themselves in a consistent manner; (3) alterations were made to price, quantity, or opposite broker on a trading card; (4) running totals of a respondent's net position written on a trading card did not reflect a particular trade recorded on that card; (5) trade information was recorded in a different handwriting or with a different instrument; (6) trades were recorded between lines already containing trades; (7) pit cards were submitted out of sequence from the rest of the sales on a trader's cards; and (8) a trade deviated from the trader's normal trading strategy. Hastings at 30-33.
10 In a one-point market, the difference between the bid and ask is the smallest allowable increment of price movement for a contract.
11 Pit cards were thrown into a net in the center of the trading ring by the seller upon completion of each trade. The cards were collected, timestamped, and fed into a NYMEX data base from which the "street book" was created.
12 Q: (by the Division) In the June through November time period, did you ever execute any of your customer orders noncompetitively opposite any of the Respondents in this case?
13 A: On some occasions, I both saw and heard Neil McGoldrick and David Rousso ask Billy Reidy to do noncompetitive trades for them. I stood in the middle between those parties, so --
14 Rule 10.42(b) requires the Division to produce "all transcripts of testimony, signed statements, and substantially verbatim reports of [witness] interviews."
15 The Division elicited his opinion with respect to trading scenarios that he might consider suspicious:
16 The judge suspended the registrations of Rousso, McGoldrick, and Henriksen for six months and prohibited them from trading during the same period. Reidy's registration was suspended, and he was prohibited from trading, for two months. Rousso was ordered to pay a $200,000 civil penalty, McGoldrick and Henriksen each were fined $100,000, and Reidy was fined $50,000.
17 Respondent Henriksen challenges Hastings' qualifications to testify as an expert, citing her role as staff investigator. Appeal Brief of Respondent Henriksen at 39-40. It is well settled that government investigators may testify as experts in administrative proceedings, In the Matter of Bear, Stearns & Co., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,994 at 37,662 (CFTC Jan. 25, 1991), and that a witness may offer credible, reliable, and probative expert testimony in a Commission proceeding despite the existence of an ongoing employment relationship with the Division of Enforcement, In the Matter of Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,995 at 37,682 (CFTC Jan 25, 1991); In re Citadel Trading Co., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,082 at 32,189 (CFTC May 12, 1986). We conclude that there is no merit to Henriksen's challenge.
18 Federal Rule of Evidence 701 permits such testimony by a lay witness provided it is rationally based on the perception of the witness and is helpful to the determination of a fact in issue. Trial courts have broad discretion to determine whether a lay witness is qualified to testify on matters of opinion, U.S. v. Borrelli, 621 F.2d 1095 (10th Cir. 1980), cert. denied, 449 U.S. 956 (1981), and whether to permit the witness to testify as to his conclusions, U.S. v. Wheeler, 444 F.2d 385, 390 (10th Cir. 1971).
19 During cross-examination conducted by Rousso's counsel, Farley stated that she had told the Division during a September 16, 1991 meeting that there were trades she had examined which she could not say were executed noncompetitively. Tr. 193-95. In invoking Brady, respondents do not explain why they failed to explore this testimony.
20 Subsequent to the Initial Decision, respondents jointly filed a related motion to reopen the record to admit the Farley Affidavit, also premised on the Division's alleged failure to disclose required information prior to the hearing. However, respondents have failed to establish that the Farley Affidavit contains material evidence that they could not have readily adduced at the hearing, as required by § 10.107 of the Commission's Rules of Practice. Accordingly, respondents' motion is denied.
21 Hastings observed that trades fitting the pattern occurred on roughly 40 percent of the trading days examined. Hastings at 29. In summarizing her conclusions, she stated that the "number of instances found in the record of this type of trading between these traders forms a pattern of conduct that is unlikely to occur in competitive trading." Id. at 128. Although respondents emphasize the relatively small number of trades relative to their overall trading, we note Morrisey's testimony that, in the context of examining trade practice compliance, even a single trade that fits a noncompetitive pattern is suspicious. Tr. 33.
22 On February 11, 1994, following the issuance of the Initial Decision, respondent Henriksen requested modification of the $100,000 civil penalty imposed against him by the ALJ. In support of his request, Henriksen submitted CFTC Form 177 (Financial Statement of Debtor). On February 15, 1994 the ALJ ruled that the information furnished by Henriksen was unpersuasive, and Henriksen's Motion to Modify was denied.
23 This complaint alleges conduct in 1989 and was issued in 1991, well before the effective date of the Futures Trading Practices Act of 1992. Accordingly, in assessing civil sanctions, former section 6(d) of the Act governs rather than current section 6(e)(1). Thus the ALJ should have considered not only the gravity of the offenses, but also the net worth of the offenders. In re Gordon, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,326 (CFTC March 6, 1995).
24 A motion to stay the effect of this decision pending reconsideration by the Commission or review by a court must be filed within 15 days of the date this order is served. Compare Commission Rule 10.106, 17 C.F.R. § 10.106 (1996).