Commodity Futures Trading Comm'n v. Gorman

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COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. JOHN PATRICK GORMAN III, Defendant.

No. 21 Civ. 870 (VM)

United States District Court, S.D. New York

March 24, 2023

DECISION AND ORDER

VICTOR MARRERO, United States District Judge.

Plaintiff Commodity Futures Trading Commission (“CFTC” or “Commission”) brings this action against defendant John Patrick Gorman III (“Gorman”) asserting violations of the Commodity Exchange Act (“CEA”) and the CFTC's regulations promulgated thereunder. (See “Complaint” or “Compl.,” Dkt. No. 1.) Now before the Court is Gorman's renewed, fully briefed Motion to Dismiss Counts One and Two of the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6) (“Rule 12(b)(6)”). (See “Motion” or “Mot.,” Dkt. No. 43; “Br.,” Dkt. No. 44.) For the reasons stated below, the Motion is DENIED, in part and GRANTED, in part.

I. BACKGROUND

A. FACTUAL BACKGROUND

The Court assumes the parties are familiar with the facts alleged in the Complaint and so provides only a high-level summary of the key factual allegations. For a complete 1 recitation, the Court refers to and incorporates the factual background as set forth in the Court's previous Order in this matter. See CFTC v. Gorman, 587 F.Supp.3d 24, 29-38 (S.D.N.Y. 2022) (“Gorman I”).^[1]

The CFTC alleges Gorman engaged in a scheme to manipulate the price of Ten-Year Swap Spreads while working as a managing director and U.S. Dollar swaps trader on the swaps desk for a global investment bank. While working for that bank in Tokyo, Japan, Gorman represented the bank's Japanese Affiliate (the “Bank”) during an interest rate swap transaction (“Issuer Swap”) between the Bank and a Japanbased bond issuer (the “Issuer”), during which the Issuer would issue U.S. dollar-denominated bonds with a ten-year maturity and a notional value of $1 billion (the “Bond Issuance”) .

The core of the CFTC's claims involves events that occurred leading up to and during the Pricing Call. At that time, the prices of the Issuer Swap and Bond Issuance would be set based on the then-current price for Ten-Year Swap Spreads that were displayed on a particular trading screen (the “19901 Screen”) that was operated by a swap execution facility broker firm (“SEF Firm”). Although the SEF Firm had locations in both the United Kingdom and the United States, the CFTC alleges that Gorman chose to trade through a United States-based broker, a choice that was atypical for him, because the U.S. office “had the screen” -- referring to the 19901 Screen -- and thus could change the price displayed on “the screen the quickest.” (Compl. ¶ 29.)

The CFTC alleges that, before the Pricing Call, Gorman and the Bank's head of the swaps desk (“Desk Head”) knew that there was a large amount of buying interest in Ten-Year Swap Spreads and that, due to the increased demand and smaller supply, prices were increasing. Gorman described to the Desk Head, via text messages on their personal phones, a plan to get the price of Ten-Year Swap Spreads down to 13.25 BPs^[2]during the Pricing Call. Gorman could generate greater profits for the Bank by helping the Bank buy the Issuer Swap at the lowest possible price. The Desk Head warned Gorman to not “waste to[o] many bullets” -- i.e., not sell too many Ten-Year Swap Spreads -- trying to get the price to 13.25 BPs, because the Bank could also generate profits by selling Ten-Year Swap Spreads as prices rose throughout the day, a trend that both Gorman and the Desk Head expected. (Id. ¶¶ 3334 and n.5.) The Desk Head was skeptical that Gorman could get the price down to 13.25 BPs. The Desk Head texted Gorman that Gorman was “not gonna get 10s down at 13.25,” since there were “too many buyers.” (Id. ¶ 33.)

Gorman set up a direct line with the Broker at the SEF Firm during the Pricing Call. The SEF Firm's Broker could provide Gorman real-time information about supply and demand for Ten-Year Swap Spreads, information that would not be disclosed on the 19901 Screen, and thus unavailable to the Bank or the Issuer during the Pricing Call.

As the Pricing Call began and throughout its duration, Gorman traded Ten-Year Swap Spreads through the SEF Firm's Broker. When Gorman made trades, the price displayed on the 19901 Screen changed. Gorman first traded when the Pricing Call began to move the price displayed on the 19901 Screen from 13.75 BPs down to 13.5 BPs. Then, when the dry run for the Issuer Swap pricing began, Gorman again traded at 13.5 BPs and quoted the price for Ten-Year Swap Spreads on the call as 13.5 BPs.

After quoting the price during the dry run, Gorman sold more Ten-Year Swap Spreads at 13.75 BPs -- an increase from Gorman's three previous trades at 13.5 BPs. After Gorman sold at 13.75 BPs, the 19901 Screen displayed 13.75 BPs as the price for Ten-Year Swap Spreads.

When the live pricing began, during which the price for the Issuer Swap and Bond Issuance would be set in stone, Gorman sold more Ten-Year Swap Spreads at 13.5 BPs, again moving the price displayed on the 19901 Screen from 13.75 BPs down to 13.5 BPs. Gorman then quoted the price for Ten-Year Swap Spreads as 13.5 BPs, and the other participants on the Pricing Call agreed that 13.5 BPs was the price displayed on the 19901 Screen and would be the figure used to price the Issuer Swap. Gorman disclosed only the price to the participants on the Pricing Call despite knowing from the SEF Firm's Broker that there were more bidders than sellers in the Ten-Year Swap Spread market.

After Gorman quoted the price at 13.5 BPs, he sold more Ten-Year Swap Spreads at 13.75 BPs before telling the SEF Broker he wanted to stop selling entirely. The CFTC alleges that “[o]nce Gorman stopped selling for the purpose of moving the price of Ten-Year Swap Spreads on the 19901 [S]creen down to 13.5 [BPs], the price on the 19901 [S]creen immediately rose and for over 18 hours did not return to the 13.5 level to which Gorman's trading had moved it.” (Compl. ¶ 49.)

B. PROCEDURAL HISTORY

Consistent with the Court's Individual Practices, on May 21, 2021, Gorman wrote to the CFTC regarding an anticipated motion to dismiss Counts One and Two of the Complaint under Rule 12(b)(6). (See Dkt. No. 14.) The CFTC opposed the premotion letter, and the parties exchanged another two letters setting forth their respective arguments on the dispute. (See Dkt. Nos. 16-18.) The Court then construed Gorman's May 21 letter as a motion to dismiss under Rule 12(b)(6) and denied Gorman's motion on the basis of the pre-motion letters and the pertinent materials in the record. See Gorman I, 587 F.Supp.3d 24.

On March 14, 2022, Gorman moved for reconsideration of the Court's Order in Gorman I. (See Dkt. Nos. 24-25.) The CFTC also submitted a letter identifying one aspect of Gorman I that the Court might consider modifying related to the proper standard to apply to alleged violations of 17 C.F.R. Section 180.1 (“Rule 180.1”) in contrast to the standard applied to claims arising under 17 C.F.R. Section 180.2 (“Rule 180.2”). (See Dkt. No. 26.) After considering further briefing from both parties on whether reconsideration or modification of Gorman I was appropriate, as well as the standard for manipulation under Rule 180.1 (see Dkt. Nos. 33-36), the Court granted the Motion for Reconsideration (see Dkt. No. 39).

The Court's Order directed Gorman to “file a full motion to dismiss.” (Id.) It further explained that “[a]t the conclusion of the parties' briefing on Gorman's proposed motion, the Court will determine whether dismissal is warranted, and whether to modify the Court's prior Decision and Order [(i.e., Gorman I)] regarding the elements necessary to establish liability under CFTC [Rule] 180.1(a)(1) and (3).” (Id.) Gorman filed his Motion and accompanying materials on September 30, 2022. (See Mot.; Br.) The CFTC filed its Opposition on November 18, 2022. (See “Oppo.,” Dkt. No. 50.) And Gorman filed his Reply on December 9, 2022. (See “Reply,” Dkt. No. 52.)

II. LEGAL STANDARD

The Court refers to and applies the legal standard on a Motion to Dismiss under Rule 12(b)(6) as articulated in Gorman I, including the relevant application of Federal Rule of Civil Procedure 9(b). See Gorman I, 587 F.Supp.3d at 38-39.

III. DISCUSSION

A. ELEMENTS OF MANIPULATION UNDER RULES 180.1 AND 180.2

Rule 180.1(a)(1) and (3) make it unlawful

for any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly:

(1) Use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud; . . . [or]

(3) Engage, or attempt to engage, in any act, practice or course of business, which operates or would operate as a fraud or deceit upon any person[.]^[3]

17 C.F.R. §§ 180.1(a)(1), (3). In assessing whether the CFTC sufficiently pled “scheme liability” under Regulation 180.1(a)(1) and (3) in Gorman I this Court articulated the standard as requiring the CFTC to allege that Gorman “(i) committed a manipulative or deceptive act, (ii) in furtherance of the alleged scheme, and (iii) with scienter.” 587 F.Supp.3d at 40 (citing SEC v. Sason, 433 F.Supp.3d 496, 508-09 (S.D.N.Y. 2020)). Then, because the manipulative or deceptive act alleged was Gorman's “open market manipulation” of the price of Ten-Year Swap Spreads, the Court explained that the CFTC must also show that “(1) Defendant[] possessed an ability to influence market prices; (2) an artificial price existed; (3) Defendant[] caused the artificial prices; and (4) Defendant[] specifically intended to cause the artificial price.” Id. at 41 (citing In re Amaranth Nat. Gas Commodities Litig., 730 F.3d 170, 173 ...