By Chris Clayton
DTN Ag Policy Editor
OMAHA (DTN) -- A trading and investment firm in Memphis, Tennessee, and two of the company's senior leaders have been fined more than $5 million by the Commodity Futures Trading Commission for intentionally trying to avoid contract limits on live cattle contracts in 2012 and 2013.
The CFTC entered into an order and settled charges against McVean Trading & Investments LLC of Memphis; its chairman and CEO, Charles Dow McVean Sr.; and firm president, Michael Wharton, as well as a consultant for the investment firm, Samuel Gilmore.
McVean Trading & Investments issued a statement that the investment firm settled with the CFTC without admitting or denying the commission's findings, "avoiding the need for ongoing discussions and litigation that could have created significant distraction from McVean's primary goal of serving its clients."
McVean also noted that the CFTC order did not allege that the company or executives acted contrary to the interest of McVean's clients or affect the trading company's clients or capital.
The CFTC claimed McVean and its executives used feedyards to try to bypass limits on spot month contracts. They reached a point where McVean executives held as much as 43% of the open interest in the February 2013 live cattle contract. It created a false appearance that there was wider market interest and participation in the contract than actually existed.
According to the CFTC, the executives at McVean sought to increase the company's in-house contracts for live cattle futures at or near the delivery month for the contracts above the legal cap on contracts set by the Chicago Mercantile Exchange.
Charles McVean and Wharton worked with Gilmore to sign agreements with four unnamed cattle feedyards "as straw purchasers" to buy hundreds of long live cattle futures contracts. The four feeders were paid a fee of $100 for every live cattle contract they traded at McVean Trading's request. Because the feedyards' transactions were controlled by the trading firm's executives, the company had effectively concealed its positions in the market and made it appear there was more open interest and participation in the spot month of the contract than actually existed.
McVean executives increased the company's total positions in the market through the feedyards in the December 2012 live cattle contract and the February 2013 contract. In each contract, McVean Trading was "over limit" on contracts by several hundred contracts. In February 2013, for instance, Charles McVean and Wharton each held the limit of 300 contracts, but each also had feedyards with hundreds of contracts as well. The CFTC noted that Charles McVean "controlled as much as 23% of the open interest in the February 2013 live cattle futures contract during the delivery period, approximately four times what his control would have been absent the positions in feedyard accounts."
Further, Wharton controlled as much as 20% of the open interest in February, or roughly double what his control would have been without the feedyard accounts.
The CFTC charged that Charles McVean, Wharton and Gilmore violated the Commodity Exchange Act's prohibition against using a manipulative or deceptive device to unlawfully influence the cattle market. McVean Trading is liable for those violations.
Breaking down the fines in the settlement, Charles McVean agreed to pay $2 million and McVean Trading agreed to pay $1.5 million. Wharton agreed to pay $1 million and Gilmore agreed to pay $500,000.
In 1993, McVean Trading, Charles McVean and Wharton were also penalized by the CFTC for violating CME position limits on cattle futures contracts and agreed to stop. That case generated $2.22 million in combined fines.
The full CFTC order on the McVean case can be viewed here: http://www.cftc.gov/…
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
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