A CPO and its principal (the "respondents") agreed to settle CFTC charges for fraudulent misallocation of trades and recordkeeping failures.
According to the CFTC Order, the respondents engaged in a scheme to disproportionately allocate more profitable transactions to an account of the principal's spouse over the accounts of the CPO's other customers. In addition, the respondents allegedly did not keep the records of the orders allocated post-execution.
The intentional allocation of trades to disadvantage one or more customers constitutes fraud under CEA Section 4b(a). The CFTC Order found that the respondents violated CEA Sections 4b(a)(1)(A) & (C), 4o(1)(A) and 4n(3)(A), as well as CFTC Rules 1.31(a) and 1.35(b)(5)(i), (iv), (v)(A) and (v)(B). Without admitting to or denying any of the findings or conclusions, the respondents agreed to pay $315,000 to settle the charges.
Commentary / Nihal Patel
While the conduct at issue in the Order appears to have been somewhat straightforward, the case is a good reminder to managers of commodity accounts as to their obligations with respect to bunched orders under Rule 1.35(b). In particular, firms should regularly consider whether written allocation methodologies satisfy the "fair and equitable" and "sufficiently objective" standards in the rules.
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