Broker Accused of Bilking Bank to Hide Losses
(CN) - The U.S. Commodity Futures Trading Commission accused a commodities broker of defrauding a major bank to hide his $40 million loss in the ethanol market.
In a civil injunction enforcement action filed last week in the U.S. District Court for the Southern District of New York, the commission said that between November 2010 and October 2011 John Aaron Brooks defrauded an affiliate of an unnamed "large commercial bank" where he worked to conceal trading losses. Brooks worked for the bank's Houston affiliate and the bank is headquartered in New York, the complaint states.
Brooks traded ethanol futures for the bank and incurred market-to-market losses, usually on other ethanol futures or forward contracts traded on the Chicago Board of Trade. As his losses grew he falsely inflated the value of his New York Mercantile Exchange ethanol futures to hide them, the commission says in the complaint.
"Given his experience as a senior ethanol trader, Brooks knew that he was responsible for entering the fair market value, as represented by the broker quotations and/or NYMEX settlement prices, of his NYMEX ethanol futures into the bank's computer system. Brooks knew, received, and/or had access to fair market valuations of his NYMEX ethanol futures throughout the relevant period, including broker quotations and/or NYMEX ethanol futures settlement prices," the commission states.
"The amount by which Brooks inflated the value of his NYMEX ethanol futures varied to correspond to the amount of losses in his other positions. In some instances, Brooks' valuations deviated from fair market value, as represented by broker quotations provided to Brooks and/or the daily NYMEX ethanol futures settlement prices, by more than two times.
"At the end of each trading day, month after month Brooks knew or recklessly disregarded the fact that he was entering false values for NYMEX ethanol futures into the bank's computer system futures," the commission says in its complaint.
Brooks' scheme unraveled in October 2011, when he exceeded internal trade limits on cattle futures. In response, his supervisors at the bank ordered him to liquidate all of his positions on the markets.
"Brooks liquidated all of his positions except for his ethanol futures positions. Brooks did not liquidate his ethanol futures position because that liquidation would expose the losses that Brooks was offsetting and masking," the commission says.
The bank suspended Brooks and revoked his trading access, terminating him a week later.
"When Brooks was asked questions under oath about the mismarking of the NYMEX ethanol futures, Brooks repeatedly declined to answer based on his Fifth Amendment and constitutional rights in Ohio v. Reiner," the commission says, adding that the bank suffered a $42.4 million loss because of Brooks' scheme.
The CFTC said in a statement it seeks a civil monetary penalty, restitution, trading and registration bans and a permanent injunction against future violations of federal commodity trading laws.