Whistleblower Law Blog
Federal Court in New York Orders Chicago Resident and Former Floor Broker, Kent R.E. Whitney, to Pay $600,000 for Margin Call Avoidance Scheme
On May 22, 2012 the U.S. Commodity Futures Trading Commission (CFTC) announced that Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York issued a consent order and permanent trading and registration ban on former Chicago, Illinois floor broker Kent R.E. Whitney. As part of an elaborate scheme to trade stock options without posting the required margin, Whitney was accused of making false and misleading statements to Chicago Mercantile Exchange (CME) representatives, futures commission merchants (FCMs), and others.
The consent order found that between May 2008 and April 2010, Whitney fraudulently avoided substantial margin calls when placing orders for commodity options traded on the New York Mercantile Exchange (NYMEX) and the CME by utilizing a margin avoidance scheme with out-of-the-money options that had no intrinsic value. He did this by waiting until the day or two before the front month options expired to sell a large volume of front month out-of-the-money options on the NYMEX and CME trading floors. In order to show that the accounts he sold were open and held sufficient funds, Whitney would provide clearing firms with invalid account numbers for the trading allocations he submitted, however, the accounts he traded were closed and held no funds for margin.
When the clearing firms that received the initial allocations realized that the account numbers Whitney provided were invalid or the accounts were closed, they would return the trades to the clearing firms of the executing floor brokers. Whitney would then provide valid account numbers in order to clear the trade, which ultimately helped him avoid posting margins by shifting the overnight margin risk to the clearing firms of the executing floor broker. This practice allowed Whitney to avoid posting over $96 million in margin calls and made it possible for Whitney to collect the premiums for the accounts he traded.
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