U.S. Commodity Futures Trading Commission v. Sarvey et al

Filing 111

MEMORANDUM Opinion and Order Signed by the Honorable Virginia M. Kendall on 2/10/2012.(tsa, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

UNITED STATES COMMODITY FUTURES
TRADING COMMISSION,
Plaintiff,
v.
EDWARD SARVEY and DAVID SKLENA,
Defendants.

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Case No. 08 C 192
Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER
The United States Commodity Futures Trading Commission (CFTC or “Commission”) sued
defendants Edward Sarvey and David Sklena, two former traders at the Chicago Board of Trade
(CBOT), in an enforcement action for violations of Commodity Exchange Act (“the Act”) and
various CFTC regulations. Specifically, the Commission asserts that on April 2, 2004, right after
the government released its monthly jobs report, Sarvey and Sklena executed two illegal and
noncompetitive trades of Treasury note futures contracts. According to the CFTC, Sarvey and
Sklena arranged a trade between themselves at a below market price, and as a result, Sarvey’s clients
lost more than $2 million while Sklena netted over $1.6 million. The government indicted both
defendants for the same April 2004 trades and Sklena was convicted of wire fraud, commodity fraud
and non-competitive trading in November 2010 after a bench trial.1 The CFTC now moves for
summary judgment, seeking a permanent injunction banning Sklena from violating the Act, trading
as well as an order requiring him to disgorge his profits from the illegal trades and pay three times

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Sarvey died before the criminal trial.

his gain as a civil monetary penalty under the Act. Sklena, now pro se, did not respond to the
motion, and for the following reasons the Court grants the Commission’s motion (Doc. 104) in its
entirety.
I.

MATERIAL UNDISPUTED FACTS
Because Sklena did not respond to the CFTC Local Rule 56.1 statement of material facts, the

following facts are deemed admitted, and all citations are to the CFTC 56.1 statement (Doc. 104-1).
See L.R. 56.1(b)(3)(C) (“All material facts set forth in the statement required of the moving party
will be deemed to be admitted unless controverted by the statement of the opposing party.”)
A.

Parties and Background

Sklena was a floor broker on the CBOT registered with the Commission between October
1987 until September 2009, when he was suspended by the CFTC pending resolution of his criminal
indictment. (¶ 4.) Sklena began trading in the pit for Five Year Note futures beginning in 1991 or
1992. (Id.) A Five-Year Note is a United States Treasury note that matures in five years. The
contract unit for trading Five-Year Note futures is $100,000 and is quoted in points, with par on the
basis of 100 points. (¶ 1.) In other words, each point equals $1000. (Id.) At the relevant time
period in 2004, Sarvey was a dual trader, meaning he executed orders for his customers as well as
his own account or accounts he held an interest in. (¶ 3.) When he traded for himself, Sarvey
typically traded anywhere from 10 to 500 contracts (or “lots”) per transaction. (Id.) At that time,
Sklena primarily traded for his personal account. (¶ 6.) Sklena and Sarvey are not strangers: besides
working in the same pit, the CBOT brought disciplinary actions against Sklena in 2000 and 2001 for

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noncompetitive trading with Sarvey, which Sklena settled after accepting a fine and a brief trading
suspension. (¶ 5.)2
On the first Friday of every month at 7:30 a.m. Central time, the Bureau of Labor Statistics
releases its jobs report for the previous month, which can lead to significant volatility in the futures
market. (¶ 2.) On the first Friday of March 2004, a month before the day in question, Sklena lost
$320,000 of his own money trading Five-Year Note futures contracts with Sarvey after the February
jobs report came out. (¶ 7.) Sklena had insufficient capital to absorb the loss, so his clearing firm
had to cover it and Sklena had to repay the clearing firm by selling his CBOT membership. (Id.)
Later that month, he had to borrow money from family and take out an additional loan on his house
to buy another seat so he could trade. (Id.) The clearing firm warned Sklena to limit his trading
going forward because he only had $58,000 in equity in his account. (¶ 8.) As the court that
convicted Sklena noted, Sklena told his clearing firm that he would trade only 20 to 50 contracts at
a time. (See Doc. 104-4, ¶ 17.)
B.

Overview of Sklena and Sarvey’s April 2, 2004 Trading

On April 2, 2004, the first Friday of that month, the government released the jobs report for
March at the usual time. (¶ 9.) On that day, Sklena and Sarvey were positioned adjacent to each
other in the trading pit. (¶ 6.) When the report came out, the price for futures contracts of June 2004
Five-Year Notes dropped sharply for 90 seconds. (¶ 9(a).) Over the next 15 seconds, the price
quickly rebounded, though not up to the level it was before the report came out. (¶ 9(b).) During the

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CBOT also fined Sklena $125,000 and suspended him from trading for 75 days based on the April 2, 2004
trades at issue here. (¶5.)

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90 seconds the price dropped, 2,474 “sell stop”3 orders from Sarvey’s customers became “elected,”
making them immediately executable as market trades. (¶¶10, 12.) In other words, when the orders
became elected, Sarvey had an obligation to fill the orders at the best market price. (¶ 12.) Once
elected, orders do not become unelected: even though the market quickly rebounded from its low
right after the report came out, Sarvey still had to fill his orders at the best possible price. (¶ 12.)
Ninety seconds after the 2,474 contracts became elected, Sarvey asked his clerk how many
contracts he need to sell. (¶ 15(a).) At that point, the market price was higher than the price at which
he eventually filled the orders. (Id.) About four minutes later, Sarvey sold 2,274 of his contracts to
Sklena at an agreed price of 111.065. ¶ 15(b).) That transaction was 45 times larger than the largest
trade Sklena told his clearing firm he would make and the price was significantly lower than the
market price at the time of the sale, which was somewhere between 112.010 and 112.025. (Id.)4 Just
seconds later, Sklena sold 485 of the 2,274 contracts back to Sarvey for his personal account at
111.070, a price higher than Sklena had just paid but still lower than the prevailing market price at
the time, leaving Sklena with 1,789 contracts and Sarvey with 485 contracts. (¶ 15(c).) To offset
their below-market purchases, Sklena and Sarvey immediately sold those contracts back into the
market at the higher prevailing prices. (¶ 15(d).) In short, Sklena compensated Sarvey for the lowprice contracts by selling them back to Sarvey at a below market price, knowing that they could both
offset the low-priced contracts in the rallying market and make money. (¶ 17.) Sklena and Sarvey
profited $1,652,187.50 and $357,250, respectively, on the trades. (¶ 18.) However, because

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A “sell stop” order is an order to sell a futures contract if the market reaches a specific price. (¶ 11.)

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Specifically, at that time, the prevailing market price in the CBOT’s live pit was 112.020 to 112.025, and the
prevailing price on CBOT’s electronic exchange was 112.010 to 112.020. (¶ 15(b).)

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Sarvey’s customers’ orders were filled at a non-competitive price near when the prevailing market
was trading considerably higher, his customers were disadvantaged to the tune of $2,048,781. (Id.)
C.

Evidence of Sklena Aiding and Abetting the Scheme

Digging deeper into the events of that the morning, the Commission presents the following
details about the trades to demonstrate that Sklena actively aided and abetted the scheme. First,
based on their history of trading together since 2000, Sklena knew that Sarvey was selling customer
contracts— not trading on his own account—when he sold the 2,274 contracts. (¶ 16.) Sklena also
knew, based on his experience as a broker and handling Sarvey’s orders as his backup broker, that
Sarvey was obligated to fill his customers’ sell orders at the best available price in the prevailing
market. (Id.) Based on recordings of the headset conversations between Sarvey’s assistant and clerk,
Sarvey and Sklena did not discuss a trade when the market price was 111.065, the eventual trading
price. (¶ 20.) It was not until 90 seconds after that price, when the market had rallied and the price
increased, that Sarvey’s clerk started to figure out how many contracts Sarvey needed to sell. (¶ 21.)
About two minutes later, when Sarvey asked his clerk what his lowest sell stop order was, the market
had been above 111.065 for four minutes. (¶ 23.) Sarvey knew what the market price was - he was
in the pit and trading on the CBOT’s electronic exchange and must have known the prevailing prices.
(Id.) Almost six minutes after 111.065 was an active price, and when the prevailing price was over
112 as noted above, Sarvey’s clerk confirmed a price of 111.065 for the contracts. (¶ 22.)
One second after Sarvey sold 2,274 contracts to Sklena, Skelena, acting against his economic
interest, sold 485 contracts back to Sarvey at a below market price; Skelena could have made much
more selling the contracts to someone else at the prevailing price. (¶ 24.) Immediately after he
bought the 2,274 contracts from Sarvey in the pit, Skelena reset his computer from 25-lot sales to
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50-lot sales and started selling them off on the CBOT’s electronic exchange. (¶ 24.) Sklena also
recorded the trade with Sarvey out of sequence on his trading cards, which is an irregularity
associated with noncompetitive trading. (¶¶ 26-28.)
II.

STANDARD
Summary judgment is proper when “the pleadings, the discovery and disclosure materials

on file, and any affidavits show that there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). In determining
whether a genuine issue of fact exists, the Court must view the evidence and draw all reasonable
inferences in favor of the party opposing the motion. See Bennington v. Caterpillar Inc., 275 F.3d
654, 658 (7th Cir. 2001); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
However, the Court will “limit its analysis of the facts on summary judgment to evidence that is
properly identified and supported in the parties’ [Local Rule 56.1] statement.” Bordelon v. Chicago
Sch. Reform Bd. of Trustees, 233 F.3d 524, 529 (7th Cir. 2000). Where a proposed statement of fact
is supported by the record and not adequately rebutted, the court will accept that statement as true
for purposes of summary judgment. An adequate rebuttal requires a citation to specific support in
the record; an unsubstantiated denial is not adequate. See Albiero v. City of Kankakee, 246 F.3d 927,
933 (7th Cir. 2001); Drake v. Minn. Mining & Mfg. Co., 134 F.3d 878, 887 (7th Cir. 1998) (“‘Rule
56 demands something more specific than the bald assertion of the general truth of a particular
matter[;] rather it requires affidavits that cite specific concrete facts establishing the existence of the
truth of the matter asserted.’”).

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III.

DISCUSSION
A.

Sklena’s Participation in the Scheme

The CFTC asserts that Sarvey defrauded his customers and that Sklena aided and abetted that
fraud by participating in Sarvey’s scheme. Sections 4b(a)(2)(i) and (iii) of the Act5 prohibit any
person from cheating, defrauding or deceiving another person in connection with orders for futures
contracts. See 7 U.S.C. § 6b(a)(2)(i), (iii). Traders are fiduciaries of their customers and defraud
their customers when the noncompetitively execute customer orders by picking prices and opposing
traders rather than trading in the open market. United States v. Ashman, 979 F.2d 469 (7th Cir.
1992). In Ashman, the defendants, traders in the CBOT’s soybean futures pit, arranged “matched”
trades after the market closed within the market closing range. Id. at 477-78. The traders asserted
that when a customer’s order was filled at a price within the range, “the customer received exactly
what he asked for” and the traders did not defraud their customers of their property under the wire
fraud statutes. Id. at 477. The court found that “[b]y picking customer prices and opposing traders,
the defendants removed their customers from the pit’s competitive marketplace and forced the
customers to accept the results they selected, guaranteeing profits to the [broker] and denying the
customer the opportunity to obtain a better price.” Id. In other words, “[t]he selection of prices
without competition deprived customers in the instant case of a clear market opportunity to obtain
the best price for their orders. It does not matter if the defendants’ customers were not harmed
financially because of the scheme.” Id. Similarly, “trading ahead” of customers—where the broker
buys for his own account before submitting a customer order that will raise the price—is illegal

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Following the CFTC’s practice, the Court will use the section numbers from the Act, not the numbers from the
United States Code. For instance, § 4b of the Act is § 6b of the relevant code title.

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because it allows the broker to profit from information that comes at no cost to the broker
“automatically in his capacity as a broker” and undermines the customer’s trust in the market.
United States v. Dial, 757 F.2d 163, 166-68 (7th Cir. 1985).
Here, when the market dipped and Sarvey’s stop orders became elected, he had an obligation
to sell them at the best possible price. By the time he went to sell the contracts, the market had
quickly rebounded from the dip, which was good fortune for his customers because they should have
received a better price. However, when he sold them, he did not sell them at the best possible price,
choosing instead to sell them at the lower price that triggered the stop sell order. Any argument that
Sarvey’s customers got what they wanted, namely, a sale at their chosen stop price, is foreclosed by
Ashman. In effect, Sarvey, solely by his position as a broker and in violation of his fiduciary duties,
improperly transferred the benefit of that market rebound from Sarvey’s customers to himself (and,
even more so, to Sklena). See Ashman, 979 F.2d at 477; Dial, 757 F.2d 163, 166-68.
Further, it is clear that Sarvey and Sklena acted with scienter, and that Sklena aided and
abetted Sarvey’s violations. The Commission must demonstrate scienter to show a violation of §
4b. See Hlavinka v. Commodity Futures Trading Comm’n, 867 F.2d 1029, 1033 (7th Cir. 1989)
(“for commodities fraud, negligence is not enough”); Indosuez Carr Futures v. Commodity Futures
Trading Comm’n, 27 F.3d 1260 (7th Cir. 1994) (“commodities laws should track securities laws”);
see also Commodity Futures Trading Comm’n v. Vartuli, 228 F.3d 94, 102 (2d Cir. 2000) (requiring
scienter to demonstrate a violation of § 4b). Under § 13(a) of the Act, “any person who aids or abets
the commission of a violation of the Act, or any of the rules, regulations or orders thereunder, or who
acts in combination or concert with any other person in such violation . . . may be held responsible
for such a violation as a principal.” 7 U.S.C. § 13c(a). To violate § 13(a), Sklena must have known
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of Sarvey’s objective in the scheme and had a desire to help him attain it. See Bosco v. Serhant, 836
F.2d 271, 279 (7th Cir. 1987) (noting Congress modeled § 13(a) on 18 U.S.C. § 2 and intended §
13(a) to be interpreted the same way).
Sklena clearly had a financial motive for the illegal trades. Just a month before, Sklena lost
$320,000 trading after the jobs report. The most obvious indicator of scienter on the part of Sarvey
and Sklena was the timing and the structure of the trades themselves. Sklena knew these were
customer sales - the size of the trade was too large to be out of Sarvey’s personal account. The trade
was not made anywhere close to the prevailing market price and the market’s quick dip and recovery
was an opportunity to meet customer expectations as to the stop sale price but still make a substantial
profit. Further, when he was supposed to be treading carefully and trading lots of no more than 50
contracts, Sklena bought 2,274 contracts. If the trade was made at the prevailing market price,
perhaps Sklena could argue he was a down-on-his-luck trader pushing all his chips into the middle
of the table hoping to win big. However, under the circumstances it was extraordinarily unlikely
that Sklena would undertake such a massive trade unless it had no risk whatsoever. But what truly
shows scienter and that Sklena aided and abetted the scheme was his instant sale of 485 contracts
back to Sarvey at a below market price. Without that sale Sklena might have argued that Sarvey was
confused as to the market price and Sklena took advantage of that confusion when he bought the
2,274 contracts. However, there is no economic justification for the 485 contract sale, and that trade
was made so quickly after the first trade that it was clearly pre-arranged. The second trade was
purely a vehicle to compensate Sarvey for his involvement in the scheme. Finally, Sarvey and
Sklena’s past history of noncompetitive trades and the out of sequence trading cards reflects their

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knowledge of how to conduct such trades together, their ability to conduct such trades together, and
their intent to profit on such trades.6
B.

The CFTC’s Remedies

On February 10, 2008, the Court entered a preliminary consent order enjoining Sklena from,
among other things, violating the commodity trading laws and participating in trading activities, both
for his own account and on behalf of others. (See Doc. 41.) Now, the Commission seeks to make
those terms permanent, and also seeks under the Act the disgorgment of the $1,652,187.50 Sklena
made on the trade as well as a civil monetary penalty of $4,956,562.50, three times Sklena’s gain.7
The Court addresses each in turn.
Section 6c(a) of the Act permits the Court to enjoin Sklena from violating the Act or CFTC
regulations in the future. See 7 U.S.C. § 13a-1(a). The Commission is entitled to injunctive relief
if it shows that a violation has occurred and that there is a reasonable likelihood of future violations.
See Commodity Futures Trading Comm’n v. Hunt, 591 F.2d 1211, 1220 (7th Cir. 1979) (noting that
statutory injunctions like the ones provided for by § 6c(a) “need not meet the requirements for an
injunction imposed by traditional equity jurisprudence.”). Here, Sklena has repeatedly traded in a
non-competitive way. Despite his past disciplinary actions, he has not curbed this behavior and he
has demonstrated that dire financial straights will lead him to violate the Act.
Next, the CFTC seeks an order permanently banning Sklena from trading directly or
indirectly for himself or others and from acting in any capacity that requires registration with the

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Sarvey and Sklena’s below market trade aimed at defrauding investors also violated CFTC Regulation 1.38(a),
which requires all trades to be executed “openly and competitively by open outcry . . . .” 17 C.F.R. § 1.38(a).
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The CFTC does not seek restitution because Sklena must pay restitution as part of his criminal conviction. (See
Doc. 104-2 at 14.)

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Commission. A trading ban is appropriate when there is some sort of nexus between the violation
of the Act and the integrity of the commodity future markets. See Monieson v. Commodity Futures
Trading Comm’n, 996 F.2d 852, 863 (7th Cir. 1993) (finding a trading ban appropriate and noting
the CFTC takes a broad view of what threatens the integrity of the markets). There is no question
that Sklena’s actions undermine the integrity of the commodities market: trading at the prevailing
market price and brokers who faithfully execute their customers orders are, put simply, the
foundations of commodities trading. See Dial, 757 F.2d at 166-68. Given Sklena’s repeated
noncompetitive trading, the significant amount of money he received from his participation in the
scheme, and his criminal conviction based on the April 2004 trades, there is no basis to allow Sklena
to participate in commodities trading in the future.
As for disgorgement, allowing Sklena to retain his ill-gotten gains would “frustrate” the
purposes of the Act. See Hunt, 591 F.2d at 1221-23 (finding that a district court has the power under
the Act to order disgorgement of illegally obtained trading profits); see also Commodity Futures
Trading Comm’n v. British Am. Commodity Options Corp., 788 F.2d 92, 94 (2d Cir. 1986) (noting
that disgorgement provides protection to investors). There is no basis to permit Sklena to benefit
from his illegal trades and he must disgorge his $1,652,187.50 profit from the trade.
Finally, § 6c(d)(1) of the Act permits the Court to assess a civil monetary penalty of up to
three times the monetary gain to Sklena for each violation of the Act and its regulations. See 7
U.S.C. § 13a-1(d)(1); 17 C.F.R. § 143.8(a)(ii) (setting out the maximum civil monetary penalty to
be “not more than the greater of $120,000 or triple the monetary gain to such person for each such
violation.”) As noted above, Sklena is a repeat offender, and his violations are serious because they
undermine the public’s trust in the commodities markets and brokers in general. See Dial, 757 F.2d
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at 166-68. By not responding to the CFTC’s motion, he offers no justification why the Court should
not impose the civil monetary penalty of $4,956,562.50, which is three times his gain from the illegal
trades.8
IV.

CONCLUSION
For the foregoing reasons, the CFTC’s motion for summary judgment (Doc. 104) is granted.

The Court permanently enjoins Sklena from: (1) violating the Act or any CFTC regulation; and (2)
trading commodity futures directly or indirectly for himself, others, or acting in any capacity that
requires registration with the CFTC. The Court orders Sklena to disgorge his $1,652,187.50 in
profits from the trade and pay a civil monetary penalty of $4,956,562.50, plus post-judgment interest.

________________________________________
Virginia M. Kendall
United States District Court Judge
Northern District of Illinois
Date: February 10, 2012

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In determining the amount of the civil monetary penalty, “the financial worth of the defendant or the
collectibility of any fine are no longer relevant considerations.” Brenner v. Commodity Futures Trading Comm’n, 338
F.3d 713, 723 (7th Cir. 2003).

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