U.S. derivatives regulator prepares for courtroom showdowns

Mon Jul 28, 2014 1:00am EDT
 
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By Douwe Miedema and Sarah N. Lynch

WASHINGTON, July 28 (Reuters) - The U.S. federal agency regulating derivatives has fought just three trials since 2011, all against small-time fraudsters in Florida. Now it is poised to take on a series of formidable opponents in the biggest courtroom tests yet of its efforts to crack down on market wrongdoing.

A loss in the courtroom would be a setback for the Commodity Futures Trading Commission as it tries to catch up with its sister agencies, the Securities and Exchange Commission and the Federal Energy Regulatory Commission, which have already adopted more aggressive tactics toward reining in Wall Street excesses.

CFTC lawyers are preparing to confront Brian Hunter, who oversaw the energy desk of hedge fund Amaranth when it collapsed in 2006, in a federal court in Manhattan on Oct. 6. Hunter, accused of attempted manipulation, has sought to dismiss the case, arguing the court has no jurisdiction and that the CFTC does not have enough evidence against him.

On Nov. 3, Royal Bank of Canada is due to go on trial for what the CFTC alleges was an unlawful trading scheme to realize tax benefits. RBC has called the allegations against it "absurd," and said its trading was permissible.

Two weeks later, it will be the turn of futures trader Eric Moncada, who is accused of manipulating wheat prices. Moncada argues that he had good reasons for placing and canceling large orders and did not profit from them.

The regulator is also preparing for the possible trial of Jon Corzine, the former New Jersey Governor and MF Global chief. The CFTC has accused him of failing to supervise employees who, it says, raided customer funds to prop up the failing brokerage. A court date has not yet been set for the trial and a settlement could be reached before then.

Corzine's legal counsel says the CFTC lawsuit is based on "meritless allegations" and that he will be vindicated in court.

The stakes are high for the CFTC, which is slowly shedding its image as a small-time regulator responsible for keeping agriculture and energy futures markets in check. After the 2008-2009 financial crisis, it was put in charge of helping oversee the $710 trillion global market for swaps, a type of derivative.   Continued...