Dec 3 (Reuters) - A federal judge in Manhattan has dismissed a U.S. regulator’s lawsuit seeking to hold the prominent Chicago trader Donald Wilson and his firm DRW Investments LLC liable for market manipulation.
In a decision made public on Monday, Circuit Judge Richard Sullivan said the Commodity Futures Trading Commission failed to prove that the defendants rigged a market for interest-rate swaps over seven months in 2011, generating about $20 million of illegal profit.
“It is not illegal to be smarter than your counterparties in a swap transaction,” Sullivan wrote.
The decision followed a four-day non-jury trial in December 2016, when Sullivan was a federal district judge. He was elevated in October to the 2nd U.S. Circuit Court of Appeals.
Sullivan’s decision, which is dated Nov. 30, is a setback for CFTC efforts to thwart price-rigging, the subject of a variety of litigation.
Chairman J. Christopher Giancarlo said the regulator was considering its next steps, but would continue pursuing market manipulation cases, including at trial. Its last such trial had been in 2008, the CFTC has said.
“What’s unique about this decision is that it found not merely that the government didn’t meet its burden of proof, but the evidence overwhelmingly established that the defendants acted lawfully,” Andrew Lourie, a lawyer for the defendants, said in an interview.
The CFTC had accused Wilson of exploiting the market for a particular three-month interest rate swap futures contract, and placing trades he knew would never be consummated.
But the judge said the trades had a legitimate economic rationale, including to entice buyers in an illiquid market, and that it was “beyond the shadow of a doubt” that the defendants sincerely believed the contract was worth more than their bids.
The judge said all Wilson did was pursue a trading strategy he thought he understood better than rivals such as Jefferies & Co and Jon Corzine’s former firm MF Global.
He also faulted the CFTC for repeatedly describing the defendants’ alleged misconduct as “banging the close,” saying “a slogan is a poor substitute” for actual evidence.
“It is only the CFTC’s Enforcement Division that has persisted in its cry of market manipulation, based on little more than an ‘earth is flat’-style conviction that such manipulation must have happened because the market remained illiquid,” Sullivan wrote. “Clearly, that is not enough to prove market manipulation or attempted market manipulation.”
The case is CFTC v Wilson et al, U.S. District Court, Southern District of New York, No. 13-07884. (Reporting by Jonathan Stempel in New York; Editing by Lisa Shumaker)