David Nasse and Lindsey Sullivan are counsels and Stefan Schropp is an associate at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Nasse, Ms. Sullivan, Mr. Schropp, Debbie Monson, and Dan Ward.
In an opinion released on November 30, 2018, federal Circuit Judge Richard Sullivan dismissed a lawsuit brought by the U.S. Commodity Futures Trading Commission (the “CFTC”) seeking to hold a prominent Chicago trader and his investment firm liable for manipulation and attempted market manipulation of a highly illiquid segment of the interest rate swaps market. The decision—which followed a four-day bench trial conducted in 2016—is noteworthy not only for the setback dealt to the CFTC in its first market manipulation trial since 2008, but also for the overarching tenor of the opinion. The CFTC had argued that defendants, responding to a perceived undervaluing of certain swaps, had engaged in market manipulation by placing bids designed to drive up the price of those swaps, thereby benefiting from gains to preexisting long positions and from daily margin payments. Judge Sullivan pulled no punches in concluding that efforts to drive prices towards their “true” value are not the same thing as manipulation, alternatively describing the CFTC’s arguments and evidence as “absurd,” “sermonizing,” “tautological,” and on par with an “earth is flat” denial of basic facts. In addition to its harsh criticism of the CFTC’s case, the court arguably set a higher bar for the government to establish the artificial price element of market manipulation claims, expressly rejecting the CFTC’s long-held position that proving a defendant’s subjective intent to affect the price of commodity could alone satisfy this requirement. What effect the decision will have on the CFTC’s appetite for pursuing market manipulation—particularly at trial—remains to be seen, but the court’s emphatic dismissal will undeniably serve as an important benchmark for market participants assessing enforcement risk in an area of law with few judicial precedents to draw on for guidance.