Reddy v. CFTC

The Commodity Futures Trading Commission (CFTC) (plaintiff) filed administrative complaints against Steven F. Reddy, John W. Sorkvist, Solomon Mayer (SMayer), Barry Mayer (BMayer), SHB Commodities, Inc. (SHB), Maye Commodities Corp. (MCC), and Steven Gelbstein (defendants), alleging violations of the Commodity Exchange Act relating to wash sales and bucketing. Regarding Reddy and Sorkvist, the CFTC alleged that Reddy had engaged in 35 trade-practice violations, including bucketing and wash trades in the coffee, sugar, and cocoa exchange. Sorkvist was allegedly the accommodating trader, meaning that Sorkvist took the opposite position so that Reddy could make indirect bucketing trades. An administrative-law judge (ALJ) found Reddy and Sorkvist both liable, imposing a 10-year trading ban and $300,000 fine for Reddy and a five-year trading ban and $150,000 fine for Sorkvist. The findings were based on an expert’s examination of thousands of trading cards evidencing various transactions, which indicated that Reddy and Sorkvist made trades that were identically offsetting to Reddy’s customers and made at nearly the same times. The CFTC affirmed the ALJ’s findings and sanctions. In a similar enforcement action, the CFTC alleged that SMayer, BMayer, SHB, MCC, and Gelbstein engaged in trade-practice violations relating to heating-oil trading. Specifically, according to the complaint, SMayer, BMayer, SHB, and MCC engaged in noncompetitive trading by using SHB and MCC accounts opposite each other, with Gelbstein serving as the accommodating trader. Additionally, the CFTC alleged that SMayer had engaged in indirect bucketing, again with Gelbstein as the accommodating trader. The ALJ found the entire group liable, prohibiting SMayer, BMayer, and SHB from trading for five years. The ALJ also prohibited Gelbstein from trading for 30 days. A fine of $200,000 was assessed against SMayer, $100,000 each against BMayer, SHB, and MCC, and $25,000 against Gelbstein. In issuing this ruling, the ALJ relied on various accounting irregularities. The CFTC affirmed the ALJ’s liability findings but increased the penalties, permanently banning SMayer, SHB, and MCC from trading, and issuing 10-year bans against BMayer and Gelbstein. All defendants petitioned the Second Circuit for review of the CFTC’s order. Reddy and Sorkvist argued that the evidence was insufficient as a matter of law because it could have been indicative of a lawful form of trading known as scalping. SMayer, BMayer, SHB, and MCC argued there was insufficient evidence of common control of the trading accounts, and they further argued that even if the trades were wash sales, there was insufficient evidence that the wash sales were committed knowingly.