CFTC Phone Taps Get the Goods on Traders

MANHATTAN (CN) - Two New York Mercantile Exchange employees supplied a commodities broker with inside information for years, the Commodity Futures Trading Commission claims in court.

The CFTC sued NYMex, its employees William Byrnes and Christopher Curtin, and the trader they allegedly fed the inside information, Ron Eibschutz, in Federal Court.

The 30-page complaint includes transcripts of phone taps. The Mercantile Exchange is referred to as CME NYMEX.

The complaint states: "In a phone conversation on or about March 2, 2009, Defendant Curtin acknowledged to Defendant Eibschutz that his disclosures were improper. The following exchange between Curtin and Eibschutz occurred in that recorded conversation:

"Curtin: By the way, I am going to have to sign a confidentiality agreement soon so our little conversations are going to have to end.

"Eibschutz: Are you serious? What does that mean?

"Curtin: It means that if they ever play the tapes and I sign that piece of paper I could get f[---]ed.

"Nonetheless, Defendant Curtin's disclosures to Defendant Eibschutz continued, and Eibschutz and his employer provided Curtin with meals, drinks and entertainment on multiple occasions during the time Curtin was providing material nonpublic information to Eibschutz.

"In or about April 2009, Defendant Curtin voluntarily resigned from his employment with Defendant CME NYMEX for a job elsewhere in the futures industry."

The complaint summary states: "The New York Mercantile Exchange, Inc. ('CME NYMEX') is one of the world's most widely used commodity futures and options exchanges, serving market participants from around the globe. Defendant CME NYMEX provides a platform to customers named CME ClearPort that provides clearing services, including clearing of futures and options transactions. In using the platform, customers submit trades to CME NYMEX employees who sit on the CME ClearPort Facilitation Desk.

"CME ClearPort customers provide material nonpublic information to Defendant CME NYMEX for the purpose of clearing trades through CME Clear Port and expect and trust that information they provide in confidence to CME NYMEX will be held in confidence, and not disclosed to third parties. The law requires as much. As alleged below, CME NYMEX and two of its employees violated that law.

"This case arises from dozens of unlawful disclosures of material nonpublic trading and customer information by Defendants William Byrnes and Christopher Curtin, employees of Defendant CME NYMEX, to Defendant Ron Eibschutz, a commodity broker, over a period of several years, and Defendant Eibschutz's aiding and abetting of these unlawful disclosures.

"During the relevant period, Defendant CME NYMEX employed Defendants Byrnes and Curtin, who worked on the CME Clear Port Facilitation Desk and were responsible for facilitating customer transactions reported for clearing through the CME ClearPort system. As employees of CME NYMEX, Byrnes and Curtin had lawful access to material nonpublic information that they received from brokers and/or the principals in transactions, which they were required by law to keep confidential.

"As explained on the website of the CME Group, which owns and operates Defendant CME NYMEX, CME ClearPort provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions.

"The information unlawfully disclosed by Defendants Byrnes and Curtin included, among other things, details of recently executed trades, the identities of the parties to specific trades, the buy or sell side of each party to specific trades, the identities of the brokers involved in certain trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants. This information was both nonpublic and material under the Commodity Exchange Act (the 'Act') and Commission Regulations, and the disclosures were made to Defendant Eibschutz, a commodities broker who was not authorized to receive the information.

"Defendant Eibschutz engaged in acts and practices that aided and abetted Defendants Byrnes and Curtin's violations of the Act and Commission Regulations, pursuant to Section 13(a) of the Act, including by repeatedly soliciting Byrnes and Curtin for the specific material nonpublic information they disclosed to him and providing them with certain information they needed to identify and locate the specific trades in which he was interested."

The phone taps are damning. For example, this conversation between Eibschtz and Byrnes allegedly was recorded on May 15, 2009. All the words in brackets and parentheses, and ellipses, are as in the complaint:

"Eibschutz: Quick question. Cal 10 flat [i.e., options related to crude oil futures contracts] calls traded yesterday - one hundred a month - who was it? WA Cal ten flat calls. Tell me what price, what brokers, who bought, who sold ...

"Byrnes: Cal ten flat calls ... one hundred lots ... 55 (inaudible) a month ... January 10 through Dec 10. [States name of the buyer] buys, [states name of the seller] sells. [States name of the broker].

"Eibschutz: Who bought?

"Byrnes: [States name of the buyer]

"Eibschutz: What's his name again?

"Byrnes: [States name of the individual trader at the buyer firm]."

The complaint continues: "Defendants Byrnes and Eibschutz were aware that Byrnes' CME NYMEX telephone line was recorded by Defendant CME NYMEX. To avoid being recorded, from time to time Byrnes and Eibschutz communicated via cell phones so that Byrnes could disclose material nonpublic information about CME NYMEX trading and customers without using a recorded line. In fact, on multiple occasions in 2010, Eibschutz called Byrnes on a recorded telephone line and told Byrnes he was going to call him on his cell phone.

"For example, the following exchange occurred between Defendants Byrnes and Eibschutz in a conversation recorded on or about June 23, 2010:

"Eibschutz: Can you find something out for me? Do you want me to call you on your cell?

"Byrnes: Cell.

"Eibschutz: Okay. Will call you later.

"The following exchange occurred between Defendants Byrnes and Eibschutz in a conversation that was recorded on or about September 21, 2010:

"Eibschutz: You don't have your cell phone?

"Byrnes: No.

"Eibschutz: Bring your cell phone tomorrow. We missed out on some massive trades on Friday and some stuff happened today ... I guess you can't help me now then. Bring your phone tomorrow we definitely want to know."

The CFTC seeks an injunction and fines of up to $140,000 per offense for securities violations and aiding and abetting.

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