Judge Grills Futures Trader on 'Suckers' Email

The head of DRW Investments LLC fielded questions this week in a market-manipulation trial about trades that took place six years ago with Jefferies and MF Global, which one DRW trader described as a "suckers" bet in an e-mail displayed in court.

Donald Wilson Jr., founder and chief executive of the Chicago trading firm DRW, faces the possibility of a lifetime trading ban if he's found to have directed an alleged scheme to manipulate an interest-rate contract. He denies the civil allegations from the Commodity Futures Trading Commission, which sued Mr. Wilson and his firm in 2013.

U.S. District Judge Richard Sullivan, who is presiding over the bench trial, asked on Thursday in a Manhattan federal court about an email in which one of DRW's traders referred to companies that took the other side of a large futures transaction as "suckers."

"Did you consider potential counterparties to be suckers?" the judge asked. Mr. Wilson replied: "I wouldn't put it that way."

Most traders faced with such charges settle, but Mr. Wilson didn't, setting the stage for a rare CFTC manipulation trial. The last time a similar case went to trial was eight years ago, according to a CFTC spokesman.

Court filings in the CFTC's legal battle with Mr. Wilson show DRW entered the big futures trades in September 2010 with investment bank Jefferies and MF Global, a now-defunct brokerage firm, taking the other side. DRW bought $350 million of the futures in a bet that interest rates would rise, while the other two firms bet that rates would fall.

But DRW had concluded that the contract they were trading had a design flaw, according to court filings made by the CFTC. The contract was listed on an exchange owned by Nasdaq Inc.

In DRW's view, the flaw was that the price of the futures contract needed to be different from the price of similar interest-rate swap contracts traded outside of the exchange, but Nasdaq treated the two as equivalent. DRW expected its bet would climb in value as more people understood the design flaw, according to the CFTC's lawsuit.

In court on Thursday, the agency shared a September 2010 email in which DRW trader Brian Vander Luitgaren asked a colleague whether "any more suckers" were willing to enter the same trade as Jefferies and MF Global.

The judge asked Mr. Wilson about a February 2011 phone call in which MF Global general counsel Laurie Ferber accused DRW of a tactic that "screws other people", according to a transcript released by the CFTC.

Mr. Wilson downplayed Ms. Ferber's accusation. "People accuse people in the marketplace of manipulation all the time," he said.

The tactic that upset MF Global's Ms. Ferber is the behavior that the CFTC describes as illegal manipulation. It involved placing electronic bids during a 15-minute settlement window that a Nasdaq subsidiary used to calculate the daily closing value of the interest rate contract.

DRW placed such bids more than 1,000 times from January to August 2011, according to the CFTC. The agency says the bids set the contract's price and enhanced the value of the $350 million of futures DRW bought.

"There is no invisible hand here," CFTC lawyer Dan Ullman said in his opening argument. "It is DRW's hand, pointing to the prices it wanted and setting them illegally."

DRW admits entering bids but denies the tactic was illegal. The firm says its bids were actually beneficial for the marketplace, helping to correct a mispricing caused by the design flaw.

A DRW lawyer said Thursday there was nothing wrong with the firm's dealings with Jefferies and MF Global.

In the summer of 2010, DRW "did their homework and rigorously analyzed the fair value of the three-month contract," then found two counterparties who "apparently hadn't done their homework," said Jonathan Cogan, an attorney with law firm Kobre & Kim LLP.

Jefferies and Nasdaq declined to comment.

Write to Alexander Osipovich at [e-mail]

(END) Dow Jones Newswires

December 02, 2016 11:15 ET (16:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.