Kent R.E. Whitney, a former Chicago floor broker, has been ordered to pay a $600,000 penalty and permanently banned from trading and registration following a federal court consent order entered on May 22, 2012. The U.S. Commodity Futures Trading Commission (CFTC) brought the case against Whitney for an elaborate scheme to avoid posting required margin when trading commodity options.
Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York found that between May 2008 and April 2010, Whitney engaged in fraudulent activity involving out-of-the-money options on the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME). Whitney knowingly made false and misleading statements to CME representatives and futures commission merchants (FCMs) to circumvent margin calls.
The scheme involved placing large volume orders for out-of-the-money options one or two days before expiration. Whitney provided clearing firms with invalid or closed account numbers, falsely representing that these accounts held sufficient margin to cover the trades. When the trades were rejected due to the invalid account information, Whitney would then provide valid account numbers the following day, shifting the overnight margin risk to the executing brokers.
This tactic allowed Whitney to avoid posting over $96 million in margin calls, while the accounts he used collected the premiums. Because the trades were often cleared just before the expiration date, and Whitney used a clearing firm that didn’t require margin calls at that time, the options typically expired worthless, completing the fraudulent cycle. The CFTC alleges that Whitney’s actions violated the Commodity Exchange Act and its regulations.
The CFTC acknowledged the assistance of the CME in this matter. The case was led by CFTC Division of Enforcement staff members including Michael R. Berlowitz, W. Derek Shakabpa, David Acevedo, Michael Geiser, Judith M. Slowly, Trevor Kokal, Lenel Hickson Jr., Stephen J. Obie, and Vincent McGonagle. The order was issued in Washington, D.C. on May 23, 2012.
Source: CFTC.gov
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