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Commodity Futures Trading Commission v. Trade Exchange Network Ltd.

United States District Court, District of Columbia

July 5, 2018

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
TRADE EXCHANGE NETWORK LIMITED and INTRADE THE PREDICTION MARKET LIMITED, Defendants.

          MEMORANDUM OPINION

          ROYCE C. LAMBERTH UNITED STATES DISTRICT JUDGE

         Before the Court is plaintiff Commodity Futures Trading Commission's Motion and Brief in Support as to the Appropriate Amount of Disgorgement and Civil Monetary Penalties for defendants Intrade The Prediction Market Limited and Trade Exchange Network's Violations of the Commodity Exchange Act and Commission Regulations. ECF No. 71. Upon consideration, the Court GRANTS plaintiffs Motion for an assessment of a civil monetary penalty ("CMP") of $3 million and post-judgment interest against defendants; for which they are to be held jointly and severally liable.

         I. BACKGROUND

         A. Parties

         The plaintiff Commodity Futures Trading Commission ("CFTC") ("plaintiff) is an independent federal regulatory agency tasked by Congress with overseeing and enforcing the Commodity Exchange Act ("CEA"), the CEA as Amended by the Dodd-Frank Act, and the regulations enacted thereunder ("Commission Regulations"). ECF No. 1 at ¶ 13.

         Defendants Intrade The Prediction Market Limited ("Intrade") and Trade Exchange Network ("TEN") are companies organized under the laws of Ireland. ECF No. 7 at ¶¶ 14-15. In 2007, TEN deconsolidated into three distinct entities. TEN's 3d Supp. Resp. Interrog. No. 6, ECF No. 51-2. Following this deconsolidation, "which took effect on or about February 28, 2007, TEN transferred its non-sports prediction markets and technology-related intellectual property to defendant Intrade." Id. Following this transfer, a majority of Intrade's shareholders also held shares of TEN. ECF No. 47-1 at ¶ 47. Additionally, defendants had the same overlapping directors and officers. ECF No. 47-1 at ¶ 48. Defendants also operated from "the same premises" during the period pertinent to plaintiffs complaint. ECF No. 47-1 at ¶¶ 51, 64.

         B. Procedural History

         On November 26, 2012, plaintiff CFTC filed its three-count Complaint for Permanent Injunction, Civil Monetary Penalty, and Other Equitable Relief ("Complaint") against defendants TEN and Intrade in this Court. ECF No. 1.

         Count I of the Complaint alleges that during the period of September 2007 through June 25, 2012 ("the relevant period"), defendants offered, solicited, and accepted orders from U.S. customers via www.intrade.com for the trading of off-exchange binary option contracts, allowing U.S. customers to predict whether or not a certain event would occur in the future. ECF No. 1 at ¶¶ 5, 17, 19-25. These binary options included predictions regarding future crude oil prices, fluctuations in the U.S. unemployment rate, and the probability of future acts of war. Id. at ¶¶ 5, 20. By allowing U.S. customers to trade these binary options, the Complaint alleges, defendants violated Section 4c(b) of the CEA and Commission Regulation ("Regulation") 32.11, 17 C.F.R. § 32.11. ECF No. 1 at ¶¶41-43.

         Count II of the Complaint alleges that TEN defied a 2005 administrative order entered against it by the CFTC ("2005 Commission Order"). Id. at ¶¶ 47-51. The 2005 Commission Order alleged that TEN violated Section 4c(b) of the CEA, 7 U.S.C. § 6c(b), and Regulation 32.11, by "soliciting and accepting orders from U.S. residents for commodity options not otherwise excepted or exempted from the Commission's ban on options" through its affiliated websites including intrade.com. Trade Exchange Network, Comm. Fut. L. Rep. ¶ 30135 (CFTC Sept. 29, 2005) ("2005 Commission Order"), ECF No. 47-3; ECF No. 1 ¶ 1. TEN consented to the entry of the 2005 Commission Order. 2005 Commission Order; ECF No. 47-2 ¶ 1. As part of the 2005 Commission Order, TEN agreed not to violate Section 4c(b) of the CEA and Regulation 32.11 in the future, to pay a CMP of $150, 000, and to carry out additional requirements, including notifying its U.S. customers that certain contracts were off limits for trading on TEN's trading platforms via a pop-up notice. 2005 Commission Order at 3, 5. The Complaint alleges that TEN offered contracts for trade to U.S. customers that were off limits under the 2005 Commission Order, failed to provide the aforementioned pop-up notices to users of its website during the relevant period, neglected to notify the CFTC of its intent to change the individual designated to receive written requests arising from the 2005 Commission Order, and failed to designate a new representative following the prior designee's withdrawal. ECF No. 1 at ¶¶ 29-33, 47-51.

         The Court granted plaintiffs Motion for Summary Judgment as to Counts I and II of the Complaint (ECF No. 47) and found that TEN and Intrade violated Section 4c(b) of the CEA and Regulation 32.11 by permitting U.S. customers to trade 5, 503 option contracts involving Commission-regulated commodities during the relevant period. ECF No. 60. The Court also found that TEN violated the 2005 Commission Order by (1) allowing for U.S. customers to trade those 5, 503 option contracts, (2) failing to have blocks in place for U.S. customers on 2, 027 prohibited option contracts, (3) lifting blocks on prohibited option contracts, and (4) failing to notify the CFTC of its intent to change its U.S. representative within fourteen days of the change. ECF No. 60.

         Plaintiff filed its Motion as to the Appropriate Amount of Disgorgement and Civil Monetary Penalties for Defendants' Violations of the Commodity Exchange Act and Commission Regulations. ECF No. 71. With regard to the appropriate CMP, plaintiff argued that the Court should impose a CMP, jointly and severally, of "not less than $3 [million]" against defendants. ECF No. 71 at 2.

         As to the appropriate amount of disgorgement, the Court granted the parties' Joint Motion for Entry of Consent Order Regarding Distribution of Disgorgement Amount, in which they agreed to disgorge $248, 334.74 of defendants' funds held in an affiliate company's bank account. ECF Nos. 87 and 88.

         Plaintiff, without opposition from defendants, filed a motion to vacate the portion of the Court's Consent Order terminating the case, which the Court granted. ECF Nos. 89 and 90. Plaintiff notified the Court that defendants' appointed liquidator-Bermingham & Company-had made a complete disbursement of the disgorgement fund specified in the Court's Order and identified the proper amount for a CMP ...


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