Commodity Futures Trading Commission v. Gorman

Background

The Commodity Futures Trading Commission (CFTC) sued John Patrick Gorman III under the Commodity Exchange Act and CFTC regulations. The CFTC alleges that Gorman worked as a managing director and U.S. dollar swaps trader for a global investment bank and participated in an interest-rate swap transaction connected to a $1 billion bond issuance by an Asian public financial institution.

According to the complaint, the price of the interest-rate swap depended in part on prices for ten-year U.S. dollar interest-rate swap spreads displayed on a trading screen. The CFTC alleges that Gorman used information about buying interest in those swap spreads, traded through a broker who could move the displayed price quickly, and planned and timed sales to push the displayed price down during a pricing call. The lower displayed price allegedly allowed the Bank to purchase the interest-rate swap for less, although the Bank still lost money on the transactions and the trading reduced what would otherwise have been a greater loss.

The CFTC also alleges that Gorman did not disclose his trading strategy, the heavy buying interest, or the reason the displayed price had fallen when he quoted the price during the pricing call. Separately, the CFTC alleges that Gorman deleted messages after receiving preservation requests and subpoenas and later made false or misleading statements about deleting messages and complying with those requests.

Motion and Legal Standard

Gorman’s pre-motion letter was treated as a motion to dismiss Counts I and II under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court had to accept well-pleaded factual allegations as true and draw reasonable inferences for the CFTC, but it did not have to accept legal conclusions presented as facts. The court evaluated whether the allegations were legally plausible, not whether the evidence ultimately proved them.

Count I alleges that Gorman used a manipulative or deceptive device in connection with a swap, violating Section 6(c)(1) of the Commodity Exchange Act and Rule 180.1. Count II alleges attempted price manipulation, violating Sections 6(c)(3) and 9(a)(2) of the Act and Rule 180.2. Count III alleges that Gorman made false statements to the CFTC, but Gorman did not move to dismiss Count III, so the court did not address it.

Court’s Analysis

For the market-manipulation theory in Count I, the court explained that open-market trading can support a manipulation claim when it is combined with an intent to create a false impression of market value. The court rejected Gorman’s argument that his trades could not be manipulative because they had a legitimate purpose of hedging the Bank’s risk. A legitimate transaction may still be manipulative if accompanied by an improper intent.

The court found the allegations sufficient to support an inference that Gorman intended to create an artificial price. The complaint alleged that he chose a broker who could move the trading screen quickly, discussed how far he could lower the displayed price, traded against a rising market despite warnings not to sell too much, and made trades that allegedly moved the price from 13.75 basis points to 13.5 basis points immediately before price quotes were used during the pricing call. The complaint also alleged that the price rose after Gorman stopped trading and did not return to 13.5 basis points for more than 18 hours. The court therefore found that the CFTC plausibly alleged a scheme-liability claim under Rule 180.1(a)(1) and (3).

For the omission theory under Rule 180.1(a)(2), the court stated that the law does not generally require a person to disclose every material piece of nonpublic information. But when a person speaks about a transaction, the person may have to provide information needed to prevent the statement from being materially misleading. The court found the CFTC plausibly alleged that Gorman’s price quotes were misleading half-truths because he allegedly quoted a price without disclosing that he had traded to depress it and intended to benefit the Bank. The court also found the allegations sufficient to support materiality because the Issuer allegedly would have wanted the information to decide whether and how to proceed with the bond issuance and interest-rate swap.

For Count II, the court stated that an attempted-manipulation claim requires an intent to affect the market price and an overt act furthering that intent. For the same reasons supporting Count I, the court found that the CFTC plausibly alleged that Gorman intended to move the price of the ten-year swap spreads and took trades to further that intent.

Disposition

Judge Victor Marrero denied Gorman’s motion to dismiss. The court ordered Gorman to file and serve an answer to the complaint within 15 days of the order. The decision was made at the pleading stage and did not determine whether the CFTC would ultimately prove its claims.

The opinion’s discussion refers to the complaint, while the concluding order refers to an “Amended Complaint.” The text does not explain that discrepancy. The order also contains apparent transcription errors in referring to the Commodity Exchange Act and in the signature block; this summary follows the opinion’s stated ruling.