A long-time trader of 10-year U.S. Treasury note options has been permanently banned from trading and registration after a fraudulent scheme cost his former employer nearly $14 million and led to its closure. Thomas C. Lindstrom, of Winnetka, Illinois, was subject to a Consent Order entered by Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois on October 4, 2018, resolving charges brought by the Commodity Futures Trading Commission (CFTC).
The CFTC initially filed a complaint against Lindstrom on September 29, 2016, alleging fraud in connection with his trading at the Chicago Board of Trade (CBOT). The investigation revealed that in 2014, Lindstrom artificially inflated the value of his options position and misrepresented its risk to his employer, Rock Capital Markets, LLC. This resulted in Rock Capital paying Lindstrom $285,000 in unwarranted draws.
Lindstrom exploited a pricing convention allowing deep out-of-the-money options to settle at a minimum value of $15.625 before expiration. He purchased thousands of these options, creating the illusion of substantial profits. He then provided screenshots of his account to Rock Capital that concealed the true extent of his holdings, omitting the worthless options. As options expired, Lindstrom repeatedly purchased more to mask his losses and maintain the false appearance of profitability, eventually accumulating over 950,000 such options.
The scheme ultimately inflated Lindstrom’s account’s net liquidation value by more than $15 million. Rock Capital ultimately suffered losses of $13,981,478 and was forced to cease operations after 23 years. Lindstrom is required to pay $13,981,478 in restitution and an $855,000 civil monetary penalty.
In addition to the CFTC action, Lindstrom was indicted on criminal charges related to the same conduct in September 2016. He pled guilty to one count of wire fraud on January 23, 2018, and is awaiting sentencing. The CFTC’s Enforcement Division collaborated with the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Northern District of Illinois throughout the investigation.
Source: CFTC.gov
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