CFTC Securities Fraud Roundup: Commissioner Bart Chilton Wants Financial System to Adopt Risk-Based Compensation System, Agency Nets $3M in Four Speculative Limits Cases, & Two Registered Futures Entities Pay $539K Over Inadequate Supervision Allegations

According to Commodity Futures Trading Commission Bart Chilton, the financial system needs to undergo a “cultural shift” that should include employing a risk-based compensation structure instead of one that is “purely profit-based.” Speaking at the Hard Assets Investment Conference last month, Chilton said that bonus systems and incentives create a “poisonous” system in “our financial corporate culture,” compelling individuals to make earning as money as they can as quickly as they can their main priority.

Chilton also talked about how the system inadequately, if at all, uses “puny penalties” to deal with “bad behaviors” and that short-term profiteering is rewarded. He blames both results on the current compensation system employed by many financial firms. Risk management comes second under profit motive, with inducements generated to increase high risk trading, leverage, and the exploitation of funds. Chilton is recommending the implementation of a compensation system based on risk tolerance, with additional compensation and bonuses to be rewarded gradually. He believes that this will lead to longer-term strategies and actions, as well as “longer-serving employees.” He said that while the government may not be able to obligate financial firms to practice morality, it can takes steps to discourage misconduct by creating rules and laws that mandate good behavior.

In other CFTC news, the agency recently settled four separate speculative limits violation cases for $3 million. On September 21, Citigroup Inc. (C) and affiliate Citigroup Global Markets Ltd. consented to pay $525K to settle allegations that on the Chicago Board of Trade they went beyond the speculative position limits in wheat futures contracts. Four days later, Sheenson Investments Ltd., which is located in China, and its owner Weidong Ge consented to pay $1.5 million over allegations that they violated speculative limits in soybean and cotton futures.

A few days later, Australia and New Zealand Banking Group Ltd. agreed to pay $350K over allegations that they violated cotton and wheat futures speculative position limits when trading on the Intercontinental Exchange US and the Chicago Board of Trade. Also, JP Morgan Chase Bank NA (JPM) consented to pay a $600K penalty over allegations that it went beyond speculative position limits in Cotton No. 2 futures contracts on the IntercontinentalExchange U.S. (ICE). Its automated position limit monitoring system, which had an “inadvertent deficiency” allegedly was the reason the financial firm held the challenged positions. JP Morgan Chase Bank went on to use a manual position limit monitoring procedure after finding out about the problem. The respondents in all four CFTC cases settled without admitting or denying wrongdoing.

Also agreeing to settle with the CFTC without denying/admitting to wrong, Infinity Futures LLC consented to pay $340K for allegedly not diligently supervising the way certain trade accounts were handled. Infinity staffers are accused of disregarding red flags indicating that third party customer accounts were being “improperly deposited” in a proprietary trading account. Also, a customer of Infinity was acting as a commodity trading advisor and trading client accounts even without a power of attorney or the necessary registration.

A second registered futures entity, York Business Associates LLC, has agreed to pay a $130K penalty and disgorge $69K to the CFTC. While doing business as TransAct Futures, the firm allegedly did not properly supervise its employees, who handled an account in the name of Gordon Driver, the man who has been found liable for his involvement in a commodity pool Ponzi scam. The CFTC says that he used his TransAct account to commit the fraud.

Symbols, Cymbals and Systems – A Culture Shift Conversation, CFTC, September 21, 2012

In re Citigroup Inc., CFTC, No. 12-34, 9/21/12 (PDF)

CFTC Orders China-based Weidong Ge and Sheenson Investments, Ltd. to Pay $1.5 Million in Monetary Sanctions for Violating Speculative Position Limits in Cotton And Soybean Futures, CFTC, September 25, 2012

CFTC Orders Australia and New Zealand Banking Group Ltd. to Pay $350,000 Penalty for Violating Wheat and Cotton Futures Speculative Position Limits, CFTC, September 27, 2012

CFTC Orders JP Morgan Chase Bank, N.A. to Pay $600,000 Civil Monetary Penalty for Violating Cotton Futures Speculative Position Limits, CFTC, September 27, 2012

In the Matter of York Business Associates d/b/a TransAct Futures (PDF)

More Blog Posts:
CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012

CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler, Institutional Investor Securities Blog, July 26, 2012