Appendix — DiPlacido v. Commodity Futures Trading Commission

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APPENDIX A — SUMMARY ORDER OF THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT DATED OCTOBER 16, 2009

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 08-5559-ag

ANTHONY DiPLACIDO,

Petitioner,

V.

COMMODITY FUTURES TRADING

COMMISSION,

Respondent.

PRESENT:

REENA RAGGI,

DEBRA ANN LIVINGSTON,

Circuit Judges,

BRIAN M. COGAN,”

District Judge.

* District Judge Brian M. Cogan of the United States

District Court for the Eastern District of New York, sitting by

designation.

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Appendix A

SUMMARY ORDER

UPON DUE CONSIDERATION of this petition for

review of a November 5, 2008 decision of the Commodity

Futures Trading Commission (the “Commission”), IT IS

HEREBY ORDERED, ADJUDGED, AND DECREED

that the petition is GRANTED, the decision is ©

MODIFIED, and as modified the decision is

AFFIRMED.

Anthony J. DiPlacido seeks review of the

Commission’s 79-page decision affirming an

administrative law judge’s (“ALJ”) determination that

he manipulated settlement prices for electricity futures

contracts. DiPlacido argues that (1) the decision violates

due process, because he lacked notice of the theory of

manipulation under which he was found liable; (2) the

applied theory of manipulation was erroneous as a

matter of law; (3) the weight of the evidence does not

support a finding of liability; (4) the ALJ made improper

evidentiary rulings and exhibited bias; and (5) the

sanctions imposed were excessive. We assume familiarity

with the facts and the record of prior proceedings, which

we reference only as necessary to explain our decision.

1. Due Process

DiPlacido’s due process challenge is without merit.

Due process requires that. “a regulation carrying penal

sanctions . . . give fair warning of the conduct it prohibits

or requires.” Rollins Envtl. Servs. (NJ) Inc. v. U.S.

EPA, 937 F.2d 649, 653 n.2 (D.C. Cir. 1991) (internal

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Appendix A

quotation marks omitted). Although “[aJn agency is free

.. . to interpret its governing statute case by case

through adjudicatory proceedings rather than by

rulemaking,” if it “suddenly changes its view . . . with

respect to what transactions are bona fide trading

transactions,” it may not then “charge a knowing

violation of that revised standard and thereby cause

undue prejudice to a litigant who may have relied on

[its] prior policy or interpretation.” Stoller v. CF'TC, 834

F.2d 262, 265-66 (2d Cir. 1987) (internal quotation marks

and citations omitted).

Citing the Commission’s observation that his case

raised “issues of first impression,” Jn re DiPlacido,

Comm. Fut. L. Rep. (CCH) 930,970, 2008 WL 4831204,

at * 1,2008 CFTC LEXIS 101, at *1 (CFTC Nov. 5, 2008),

DiPlacido complains that this is the first time the

Commission has found manipulation “based solely on

trade practices,” Appellant’s Br. 11. We disagree. As the

Commission itself observed, the theory applied in this

case was adopted in /n re Henner, a case brought by its

predecessor agency under a statute that is the

substantive equivalent of the one at issue here, and

concerning closely analogous facts. 30 Agric. Dec. 1151

(1971) (finding manipulation where trader “intentionally

paid more than he would have had to pay .. . for the

purpose of causing the closing quotation [to increase]”);

see also In re Zenith-Godley, 6 Agric. Dec. 900 (1947)

(holding that actions of trader constituted manipulation).

The Commission also noted that, subsequent to Henner,

it had pursued trade-based manipulation cases.

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Appendix A

DiPlacido argues further that the Commission

denied due process by abandoning an existing

requirement for proof of defendant’s control over the

relevant market. The Commission’s well-established

precedents are plainly to the contrary, indicating that

market control may be a feature of some forms of

manipulation, e.g., a “corner” or “squeeze,” but is net a

requirement of manipulation in all its forms. See, e.g.,

In re Hohenberg Bros. Co., {1975-1977 Transfer Binder]

No. 75-4, Comm. Fut. L. Rep. (CCH) 4 20,271, 1977 WL

13562, at *7, 1977 CFTC LEXIS 123, at *24 (CFTC Feb.

18, 1977) (“A dominant or controlling position in the

market is not a requisite element to either manipulation

or attempted manipulation. . . .”).'

Thus, this is not a case like Stoller v. CF' TC, in which

the agency suddenly changed its position and banned a

1. Vitanza v. Board of Trade of the City of New York, No.

00-CV-7393, 2002 WL 424699 (S.D.N.Y. Mar. 18, 2002), cited by

DiPlacido for the proposition that a “settlement price” is not

susceptible to manipulation as a matter of law, is distinguishable.

The question in that case was whether defendants’ alleged

manipulation of settlement prices fell within the meaning of

7 U.S.C. § 25(a)(1)(D), which creates a private right of action

where defendants manipulate “the price of [futures] contracts,

or the price of the commodity underlying such contracts.”

Vitanza v. Bd. of Trade of City of N_Y., at *5. On the commodities

exchange at issue in Vitanza, settlement prices were

determined by use of an arithmetical formula, rather than (as

here) by trading. See id. at * 1. Thus the court found that

plaintiffs had failed to state a claim under Section 25(a)(1)(D)

where they alleged manipulation of the settlement price.

Id. at *5.

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Appendix A

“commonplace” practice. 834 F-2d at 265. Rather, the

Commission’s reading of the broad language of 7 U.S.C.

§ 13(a) is consistent with prior readings and with its own

practice. See, e.g., In re Indiana Farm Bureau Coop.

Ass’n, Inc., [1982-1984 Transfer Binder] No. 75-14,

Comm. Fut. L. Rep. (CCH) 9 21,796, 1982 WL 30249, at

*3, 1982 CFTC LEXIS 25, at *8 (CFTC Dec. 17, 1982)

(citing definition of manipulation as “any and every

operation or transaction or practice, the purpose of

which is not primarily to facilitate the movement of the

commodity at prices freely responsive to the forces of

supply and demand; but, on the contrary, is calculated

to produce a price distortion”). Further, DiPlacido’s own

actions, not least his instruction to Livingston to use

the code words “don’t be shy,” rather than instructing

him to “buy contracts worst or sell them worst,” Arb.

Tr. 107, suggest actual notice that his conduct was

wrongful.

Accordingly, we identify no denial of due process.

2. Applicable Legal Standard

DiPlacido claims that the Commission’s definition

of manipulation is arbitrary and capricious. Our review

of the Commission’s legal judgments is plenary, Piccolo

v. CFTC, 388 F.3d 387, 389 (2d Cir .2004), but “where a

question implicates Commission expertise, we defer to

the Commission’s decision if it is reasonable,” id.;

see also Chevron, U.S.A., Inc. v. Natural Res. Defense

Council, 467 U.S. 837, 844 (1984).

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Appendix A

In the absence of a statutory definition of

“manipulation,” the Commission has established a four-

part test under which it will find manipulation where a

preponderance of the evidence shows “(1) that the

accused had the ability to influence market prices;

(2) that [he] specifically intended to do so; (3) that

artificial prices existed; and (4) that the accused caused

the artificial prices.” Jn re Coz [1986-1987 Transfer

Binder] No. 75-16, Comm. Fut. L. Rep. (CCH) 9 23,786,

1987 WL 106879, at *3, 1987 CFTC LEXIS 3285, at *9

(CFTC July 15, 1987). It applied this test in DiPlacido’s

case.

DiPlacido argues that because “[e]veryone in the

market has the ability to affect the market price,” the

Commission erred in not imposing a further market

control requirement. Appellant’s Br. 35. Even supposing

that all large traders in illiquid markets possess the

ability to influence those markets, the Commission’s

inclusion of “the ability to influence the market price,”

rather than market control, as an element of

manipulation is hardly arbitrary or capricious, as three

other elements, including specific intent, must also be

satisfied to establish liability. Cf Colautti vu. Franklin,

439 U.S. 379, 395 (1979) (collecting cases and recognizing

that “constitutionality of a vague statutory standard is

closely related to whether that standard incorporates a

requirement of mens rea “); United States v. Curcio,

712 F.2d 1532, 1543 (2d Cir. 1983) (Friendly, J.) (same).

DiPlacido further challenges the Commission’s

standard on the ground that the elements of the four

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Appendix A

part test “collapse[ |” into one-uneconomic trading-so

that a violation exists wherever bids and offers are

violated, and even lawful hedging may constitute

manipulation. Appellant’s Br. 39. We are not persuaded.

The Commission stated that “violating bids and offers

in order to influence prices “ was “sufficient to show

manipulative intent.” Jn re DiPlacido, 2008 WL

4831204, at *26 (emphasis added). Its finding of intent

thus depended not merely on DiPlacido’s having violated

bids and offers, but also on taped conversations signaling

manipulative intent and the ALJ’s finding that

DiPlacido’s denial of intent lacked credibility. Further,

the Commission cited evidence (including expert

testimony) that artificial prices were a “reasonably

probable consequence” of DiPlacido’s large trades made

during the Ciose in an illiquid market. /d. at *32. Thus

the Commission carefully applied all four elements of

the traditional test, and DiPlacido’s challenge to the

reasonableness of the Commission’s “new theory,”

Appellant’s Br. 39, misses its mark.

3. Weight of the Evidence

We reject DiPlacido’s claim that the evidence does

not support a finding of liability for manipulation.* The

2. DiPlacido offers no separate argument as to his liability

for the offense of attempted manipulation, but instead relies

on his argument with regard to manipulation. Thus, to the extent

he has not abandoned the former claim, our conclusions apply

to both. As for aiding and abetting liability, DiPlacido has not

demonstrated that the Commission erred in determining that

(Cont’d)

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Appendix A

Commission’s findings of fact, “if supported by the

weight of the evidence, shall . . . be conclusive.” 7 U.S.C.

§ 9. Our review of such findings is “narrow.” Reddy v.

CFTC, 191 F.3d 109, 117 (2d Cir. 1999); see also Haltmier

v. CFTC, 554 F.2d 556, 560 (2d Cir. 1977) (describing

court’s role as “something other than that of

mechanically reweighing the evidence to ascertain in

which direction it preponderates; it is rather to review

the record with the purpose of determining whether the

finder of the fact was justified, i.e. acted reasonably”

(internal quotation marks omitted)).

The Commission acted reasonably in concluding that

DiPlacido had the ability to influence prices where, on

the relevant dates, his trades over two minutes at the

Close accounted for an average 14% of a full day’s

volume. Likewise reasonable was the determination that

DiPlacido’s trades established artificial prices, given that

several witnesses testified that he violated bids and

(Cont'd)

he waived direct appeal from the ALJ’s finding on that issue.

DiPlacido’s cursory treatment of aiding and abetting liability

in his main brief does not mention the Commission’s waiver

finding, and while he insists in his reply that he has not waived

any such claim, he is careful not to claim that he mentioned it in

his briefing before the Commission. Nevertheless, we reach

and reverse the Commission’s decision on aiding and abetting

liability. See Anderson v. Branen, 27 F.3d 29 (2d Cir.1994).

DiPlacido should not have been charged as an accomplice and a

principal for the same underlying conduct. See United States v.

Mucciante, 21 F.3d 1228, 1234 (2d Cir.1994) (observing that

federal aiding and abetting statute “does not penalize conduct

apart from the substantive crime with which it is coupled”).

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Appendix A

offers. See In re Eisler, No. 01-14, Comm. Fut. L. Rep.

(CCH) 1 29,664, 2004 WL 77924, at *6, 2004 CFTC

LEXIS 9, at *18 (CFTC Jan. 20, 2004) (discussing

artificial prices). Finally, we detect no unreasonableness

either in the Commission’s intent finding, based in part

on the referenced taped telephone calls, or in its reliance

on expert testimony that DiPlacido’s actions were a

likely cause of artificial prices.

4. Fair Hearing

DiPlacido has not shown that he did not receive “a

fair trial, conducted in accordance with fundamental

principles of fair play and applicable procedural

standards established by law.” Lloyd Carr & Co. v.

CFTC, 567 F.2d 1193, 1196 (2d Cir. 1977) (internal

quotation marks omitted). The transcript shows that the

ALJ’s handling of cross-examination, and his limitation

of speculative and repetitive questioning, were within

his “wide discretion.” Guttman v. CFTC, 197 F.3d 33, 38

(2d Cir. 1999). As the Commission observed, the tape

recordings were authenticated by four witnesses with

knowledge of their creation and preservation, satisfying

the reliability requirement of applicable agency rules.

See 17 C.E.R. § 10.67(a). Further, the incidents on which

DiPlacido bases his allegations of bias do not nearly

establish “pervasive bias” sufficient to have warranted

disqualification or other relief. Olson v. Ulmer, [1990-

1992 Transfer Binder] No 87-R-46, Comm. Fut. L. Rep.

(CCH) 4 24,987, 1991 WL 83515, at *3, 1991 CFTC

LEXIS 50, at *7-8 (CFTC Jan. 23, 1991).

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Appendix A

5. Sanctions

Finally, DiPlacido challenges the sanctions imposed

on him. We review the imposition of sanctions for abuse

of discretion. Reddy v. CFTC, 191 F.3d at 123. Abuse of

discretion “(t]lypically . . . will involve either a sanction

palpably disproportionate to the violation or a failure to

support the sanction chosen with a meaningful

statement of ‘findings and conclusions, and the reasons

or basis therefor, on all the material issues of fact, law,

or discretion presented on the record.” /d. (quoting

5 U.S.C. § 557(c)(3)(A)).

On the whole, the Commission’s decision

demonstrates thoughtful consideration of the

relationship between DiPlacido’s conduct and the

purposes of the statute, as well as the evidence that he

knowingly participated in unlawful conduct, that he

sought to conceal that conduct and obstruct

investigators, and that the conduct recurred over a

period of several months. It explains the basis for each

of the sanctions imposed. None of its findings is

disturbed by the delay in imposing a sanction, the fact

that this was DiPlacido’s first offense, or the transition

to computerized trading. Nor is there any merit in

DiPlacido’s arguments that the Commission exceeded

its discretion by fining him for after-hours trading even

though NYMEX had also imposed a fine on that basis,

by adjusting the sanction amount for inflation, or by

imposing lesser penalties on co-defendants who settled.

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Appendix A

However, the Commission did err by fining DiPlacido

both for the substantive offense of manipulation and for

aiding and abetting, where the underlying conduct was

the same. As noted already, aiding and abetting “does

not constitute a discrete .. . offense”; rather, it is a

theory of liability. United States v. Smith, 198 F.3d 377,

383 (2d Cir. 1999). Thus we remit the civil penalty by

$320,000, the amount imposed on the basis of aiding and

abetting liability. In all other respects, we affirm the

Commission’s decision as to sanctions.

We have reviewed DiPlacido’s remaining arguments

and find them to be without merit. Accordingly, the

petition for review is GRANTED, the Commission’s

decision is MODIFIED to reduce the civil penalty by

$320,000, and the decision of the Commission as modified

is AFFIRMED.

FOR THE COURT:

CATHERINE O’HAGAN WOLFE,

Clerk of Court

By:

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APPENDIX B — OPINION AND ORDER OF THE

UNITED STATES OF AMERICA BEFORE THE

COMMODITY FUTURES TRADING COMMISSION

DATED NOVEMBER 5, 2008

UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING

COMMISSION

CFTC Docket No. 01-23

In the Matter of:

ANTHONY J. DIPLACIDO

OPINION AND ORDER

INTRODUCTION

This appeal arises from a ten-count Complaint issued

by the Commission on August 21, 2001, charging that

Anthony J. DiPlacido (“DiPlacido”), the sole remaining

respondent in this case, manipulated and attempted to

manipulate the settlement prices of electricity futures

contracts on five occasions in 1998. The contracts in

question were the Palo Verde (“PV”) and California

Oregon Border (“COB”) contracts traded on the New

York Mercantile Exchange (““NYMEX”).' The case

1. In re DiPlacido, et al., [2000-2002 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9 28,625 (CFTC Aug. 21, 2001).

DiPlacido had been registered since 1979 as a NYMEX floor

broker, whose NYMEX trading badge is “JADE.” He also owned

and was President of Energex, Ltd.,a NYMEX registered floor

broker association.

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Appendix B

presents issues of first impression: the Commission has

never considered a manipulation case based on allegedly

manipulative trading floor practices in an adjudicated

decision.

The Complaint also charged DiPlacido with aiding

and abetting Robert S. Kristufek (“Kristufek”), an

energy trader at Avista Energy Incorporated (“Avista”),

and William H. Taylor (“Taylor”), an Avista Vice

President, both of whom were named as respondents

with DiPlacido,? in manipulating and attempting to

manipulate the PV and COB settlement prices.*

2. The Commission entered into settlements with Kristufek

and Taylor, on September 12, 2002, and September 30, 2003,

respectively. See In re DiPlacido, et al., [2002-2003 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 4 29,153 (CFTC Sept. 12,

2002) and In re William H. Taylor, (2003-2004 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 1 29,594 (CFTC Sept. 30, 2003). The

Commission found that both Kristufek and Taylor manipulated

the settlement prices of NYMEX PV and COB electricity futures

contracts on the dates at issue. Kristufek agreed to pay a

$155,000 civil money penalty and to accept a

24-month trading ban, and Taylor agreed to pay a $155,000 civil

money penalty and to accept a 30-month trading ban.

3. At the same time this Complaint was filed, the

Commission filed and simultaneously settled administrative

proceedings against Avista, Former Avista Vice President of

Trading Thomas Johns, and former Avista trader Michael T.

Griswold, alleging the same manipulative scheme as in the

DiPlacido Complaint. See In re Avista Energy, Inc. and Michael

T. Griswold, 2001 WL 951736 (CFTC Aug. 21, 2001) and Jn re

Thomas A. Johns, 2001 WL 951733 (CFTC Aug. 21, "a oo

ont’

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Appendix B

In addition, DiPlacido was charged with non-competitive

trading in furtherance of the alleged instance of

manipulation that took place on July 27, 1998; and with

recording and reporting the noncompetitively

determined price as bona fide. Finally, DiPlacido was

charged with failure to promptly produce documents

during the Division of Enforcement’s (“Division”)

investigation.

The manipulative misconduct in which DiPlacido was

alleged to have engaged involved uneconomic trades

executed on the NYMEX trading floor purportedly

made with the specific intent to create artificial prices.*

After conducting an oral hearing and reviewing the

record created by the parties, an Administrative Law

(Cont’d)

Commission found that on the occasions at issue, Avista

manipulated the settlement prices of the PV and COB

electricity futures contracts. Avista agreed to a cease and desist

order and a $2.1 million civil money penalty, Griswold agreed to

an 18-month trading ban and a $110,000 civil money penalty

and Johns agreed to a 12-month trading ban and a $50,000 civil

money penalty.

4. It should be noted that the NYMEX Floor Committee,

which has responsibility for punishing trading violations on the

NYMEX trading floor, see NYMEX Rule 3.20, took no action

against DiPlacido for his conduct on the settlement dates at

issue. DiPlacido later was charged with attempted manipulation

by NYMEX Compliance for one of the settlement dates, and

for the non-competitive trade and false reporting. Although

NYMEX dismissed the attempted manipulation charge, it fined

DiPlacido $50,000 and suspended him for 2 months for the non-

competitive trade and false reporting charges.

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Appendix B

Judge (“ALJ”) found DiPlacido liable for all counts of

the Complaint. The ALJ imposed sanctions including a

cease and desist order, a 20-year trading ban, a

registration revocation, and a $500,000 civil money

penalty.

DiPlacido raises both procedural and substantive

challenges to the ALJ’s decision. Procedurally, DiPlacido

contends that the Commission was collaterally estopped

from filing a complaint against him because NYMEX

Compliance brought an action against him for the same

conduct. In addition, DiPlacido argues that the ALJ

denied him minimal due process, that the ALJ was

biased, and that the ALJ improperly admitted certain

tapes of telephone conversations into evidence.

Substantively, DiPlacido contends that the ALJ

failed to apply the correct legal standard for

manipulation, that the Division failed to prove that

DiPlacido manipulated the settlement prices as alleged,

that he had no notice that his conduct was improper

and that even if he could be found liable, the ALJ

imposed excessive sanctions. The Division defends the

ALJ’s liability findings and choice of nonmonetary

sanctions, but cross-appeals the $500,000 civil money

penalty and urges the imposition of a $1.1 million

penalty on DiPlacido.

As noted above, this is the first time that the

Commission has considered a manipulation case based

on trading floor practices in an adjudicated decision.

Those manipulation cases the Commission has decided

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Appendix B

were based on allegations of manipulation involving

traditional market “corners” or “squeezes,” through

which the alleged manipulator unlawfully creates

artificial prices on the futures market through control

of the cash market, or by obtaining futures contracts

requiring delivery of commodities greater than available

supply. The trade practice based manipulation at issue

in this case is based on the manipulation theory adopted

by the Judicial Officer of the U.S. Department of

Agriculture in In re Henner, 30 Agric. Dec. 1151 (1971),

a case brought by the Commission’s predecessor agency,

the Commodity Exchange Authority.

In that case, the Judicial Officer, whose decision was

the final decision of the agency,’ concluded that Henner,

through his trading activity on the trading floor of the

Chicago Mercantile Exchange, “paid more than he had

to... for the purpose of causing the closing price to be

at [a] high level,” and on that basis found Henner liable

for manipulation. Jd. at 1194.°

Based on our review of the record, we believe that

DiPlacido’s procedural challenges are unpersuasive, and

that on the merits, the evidence supports a finding that

6. Henner has been mentioned by the Commission on

occasion, but never exhaustively discussed in an adjudicated

decision. See, e.g., In re Indiana Farm Bureau Cooperative

Assoc,, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH)

1 21,796 at 27,282 (CFTC Dec. 17, 1982).

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Appendix B

settlement prices on four of the five occasions at issue.

DiPlacido does not address the ALJ’s liability finding

that DiPlacido aided and abetted Kristufek and Taylor

in manipulating PV and COB settlement prices, which

may be deemed admitted pursuant to Commission

Regulation 10.102(d)(3),’ and we believe is supported

by the weight of the evidence.

DiPlacido also does not address his liability for the

non-competitive, after hours trade in his appeal brief

or reply brief and likewise pursuant to Commission

Regulation 10.102(d)(8), the violations based on that

trade are deemed admitted. The evidence also supports

a finding that DiPlacido failed to produce documents in

a timely manner. Based on our independent assessment

of the record, we affirm the ALJ’s cease and desist order

and registration revocation, modify the ALJ’s trading

prohibition, and impose a civil money penalty of

$1 million.

BACKGROUND

A. Procedural Background

The first five counts of the ten-count Complaint

issued by the Commission focused on DiPlacido’s alleged

manipulative misconduct, charging him with

manipulating and attempting to manipulate the

settlement price of the PV electricity contract for the

7. Commission Regulation 10.102(d)(3) provides that “[a]ny

matter not briefed shall be deemed waived, and may not be

argued before the Commission.” 17 C.F-R. § 10.201(d)(3).

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Appendix B

nearby delivery month on April 24, May 22, July 27, and

August 25, 1998, and the COB settlement price on July

27, 1998, in violation of Sections 6(c), 6(d) and 9(a)(2) of

the Commodity Exchange Act (“CEA” or “Act” ).*

Counts VI through VIII of the Complaint all

stemmed from a single allegedly noncompetitive trade

executed in furtherance of the manipulation on July 27,

1998, in violation of Sections 4c(a)(A) and 4c(a)(B) of the

Act and Commission Regulation 1.38(a). Count [X, based

on the same trade, charged DiPlacido with violating

Section 4g of the Act and Commission regulation 1.35(d)

by falsely recording and reporting the noncompetitively

determined price.

Yount X charged DiPlacido with violating Section

4g of the Act and Commission Regulation 1.31(a) by

failing to promptly produce trading documents as

required in response to a Commission-issued subpoena.

Nature of the Manipulative Scheme. With regard

to the manipulative scheme, the Complaint alleged that

prior to September 1998, Avista entered into over-the-

counter (“OTC”) derivative contracts, whose value at

expiration was based on the daily settlement price of

the NYMEX PV or COB electricity futures contracts

on the last day of options trading (the “Options

Expiration Day”), which was also the penultimate day

8. Each of these counts also charged DiPlacido, pursuant

to Section 13(a) of the Act, with aiding and abetting Kristufek

and/or Taylor in attempting to manipulate or manipulating the

settlement prices on these dates.

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Appendix B

of futures trading. The April, May, July and August

dates on which the Complaint alleged that the

manipulations occurred were the Option Expiration

Days. On each of these days, the Complaint alleged that

the daily settlement price was calculated by determining

the weighted average of the prices of all trades executed

during the last two minutes of the trading day (“the

Close”). The Complaint further alleged that in

comparison to other NYMEX energy futures contracts,

such as natural gas or crude oil, the market for NYMEX

PV and COB futures contracts in 1998 was small and

illiquid.

The manipulative scheme alleged in the Complaint

involved a variety of practices, including:

e selling NYMEX PV electricity futures

contracts at prices less than the

prevailing price during the April and May

1998 Options Expiration Days;

purchasing NYMEX PV electricity

futures contracts at prices higher than

the prevailing price during the July and

August 1998 Options Expiration Days;

purchasing NYMEX COB electricity

futures contracts at prices higher than

the prevailing price during the July 1998

Options Expiration Day;

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Appendix B

entering into a noncompetitive trade; and

placing large orders for NYMEX Western

U.S. electricity futures contracts on the

Options Expiration Days in April, May,

July, and August 1998 without legitimate,

economic reasons or considerations.

These strategies were employed in order to increase

the value of Avista’s OTC positions.

DiPlacido filed an Answer on March 6, 2002, in which

he denied every count of wrongdoing and moved for

dismissal of the Complaint based on various grounds,

including that the allegations of the Complaint, even if

true, did not meet the standards of manipulation under

the Act and that the Complaint was barred by collateral

estoppel by the NYMEX enforcement action.’

The ALJ conducted an oral hearing on December

2-3, 2003, during which the Division presented its case,

and January 12-13, 2004, when DiPlacido presented his

case. The Division’s case consisted of CDs of recorded

telephone conversations that Avista recorded of its

9. The ALJ considered DiPlacido’s motion for dismissal as

a motion for summary disposition pursuant to Commission

Regulation 10.91. On April 24, 2002, the Division filed an Answer

and Cross-Motion for Summary Disposition on Counts VI

through X of the Complaint. DiPlacido filed a memorandum in

opposition to the Division’s cross-motion on September 16, 2002.

The ALJ denied both motions on January 8, 2003, and indicated

that the matter would proceed to hearing.

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Appendix B

traders, which included conversations between

DiPlacido, his confederates at Avista and other NYMEX

floor personnel. The Division called four authentication

witnesses who testified regarding how the tape

recordings were made of all Avista traders’ telephone

conversations, how they were stored, how they were

prepared in response to the Division’s request and the

chain of custody between the time the tapes were

produced to the Division and the hearing. In addition,

the Division submitted the Declaration of Robert

Livingstone (“Livingstone Declaration”), DiPlacido’s

floor clerk, who also gave live testimony. The Division

also called four NYMEX floor brokers, who testified

regarding their observation of DiPlacido’s alleged

misconduct; Kristufek; and DiPlacido himself. Finally,

the Division called Dr. Hendrik Bessembinder

(“Bessembinder”) as its expert witness.

DiPlacido called three witnesses, including himself;

Sanford Goldfarb, a NYMEX floor trader; and his expert

witness, Dr. Albert S. Kyle (“Kyle”). Each of the experts

filed written reports with the parties’ pre-hearing

memoranda in accordance with a pre-hearing order

issued by the ALJ, and these reports were admitted into

evidence at the hearing. The parties also filed exhibits.'®

10. At the hearing, DiPlacido filed a motion, described as

an Offer of Proof, to place in the record a 16-page unsigned and

undated document that purports to be a supplement to the

direct written testimony of his expert witness, Kyle. On January

26, 2004, the ALJ rejected DiPlacido’s Offer of Proof. By letter

dated January 27, 2004, DiPlacido again requested that the

(Cont'd)

per

22a

Appendix B

Evidence

The evidence shows the following with regard to the

five Closes at issue, the after-hours non-competitive

trade and the failure to comply with the Commission’s

subpoena

April 24, 1998 PV Close

Immediately prior to the beginning of the April 24,

1998 Close, Taylor, the Avista Vice President, spoke with

DiPlacido and placed an order for him to sell 50 May PV

futures contracts. Tr. at 319-20; Ex. 19, p. 2." Taylor

instructed DiPlacido to “sell them down as hard as we

(Cont’d)

Court admit the supplement to Kyle’s testimony into evidence.

The ALJ deemed the letter to be a motion to reopen the

evidentiary record, and denied the Motion on February 4, 2004.

11. Citations to the record are as follows: “Tr. at ” refers

to the hearing transcript. “Ex. |[number/letter]” refers to the

exhibits introduced at the hearing. Numbered exhibits were

introduced by the Division, and lettered exhibits were

introduced by DiPlacido, In addition, seven CDs containing the

recordings of the telephone conversations were admitted in their

entirety as: Exhibits 100-106, and written transcriptions of most

of the relevant portions of these recordings were admitted as

Exhibits 19-29, 31, 32, 34 and 38. Not all portions of the voice

recordings were transcribed, however, and accordingly some of

the citations refer to the recordings themselves. In these cases,

the citation includes the exhibit number and the counter times

of recorded conversations in minutes and seconds (7e., Ex. 100a

at 0:00-1:00).

23a

Appendix B

can during the close,” to which DiPlacido inquired

“what’s my limit down to?” Ex. 19, p. 2. Taylor told

DiPlacido to “sell any number” because “we’re trying

to get a settlement,” Tr. at 319-20; Ex. 19, p. 2, and that

he wanted the sales to be “as low as possible.” Tr. at

319-20; Ex. 19, p. 2. DiPlacido replied “OK, alright.” Ex.

19, p. 2. Taylor placed an order to sell 10 more PV futures

contracts at “market worst,” which Livingstone,

DiPlacido’s floor clerk, relayed to DiPlacido. Livingstone

indicated that although this instruction had little

meaning to him at the time, he had come to understand

based on his experience on the trading floor that this

instruction to sell worst meant to sell at the lowest price

possible. Tr. at 107, Livingstone Declaration, Ex. 1, 1 8.

Sometime after the April 24 Close, DiPlacido advised

Livingstone not to use the term “worst” in relaying

customer orders to him on the trading floor because

DiPlacido might get in trouble with NYMEX for taking

that kind of order from a customer. /d. Instead of saying

“worst,” DiPlacido instructed Livingstone to say “don’t

be shy,” and DiPlacido would know that the customer

wanted to be filled at the worst price. /d. DiPlacido also

explained to Livingstone that he executed Avista’s

instructions to sell “worst” by taking out all existing bids

(or offers, depending on what result Avista sought to

achieve), or not acknowledging them, and then bidding

(or offering) to trade at prices beyond those normally

shown to the ring, instead of obtaining the best possible

price for the customer. /d. As an example, if DiPlacido

were trying to move prices lower and if a buyer was

bidding at a certain price, DiPlacido would hit that bid

24a

Appendix B

(z.e. sell). Then, rather than offering to sell at what was

typically the next increment, he would offer several

increments lower. Jd. At some point, DiPlacido explained

to Livingstone that the reason Avista wanted to trade

in this way had to do with its OTC option positions.

Id.; Tr. at 125.

Livingstone testified that he observed DiPlacido

trading in this manner during the April 24, 1998 Close,

taking out bids and then offering at a much lower

increment. Tr. at 124; Ex. 1, 18. DiPlacido sold 65 PV

futures contracts for Avista during the April PV Close,

generally at progressively lower prices. Ex. 15a; Ex. C;

Declaration of Dr. Hendrik Bessembinder, (“Ex. 2”),

1 64. Another NYMEX member, Brian Caesar, acting at

Avista’s behest,” sold 20 contracts during the close. Ex.

14a; Ex. 14b; Ex. 2, 9 64. DiPlacido’s trades accounted

for 30.8% of the total trading volume. Ex. 2, 1 64. The

settlement price of the May 1998 PV futures contract

on April 24, 1998, was $24.14, a decrease of $.16 from

the previous trading day. Ex. 2, 1 59, and p. 32 Table 1.

The price was also $.41 less than the price of the last

trade before the Close and $.31 less than the average

price in the hour prior to the Close. Ex. 2, 1 45 and p. 32

Table 1. The settlement price decrease was completely

reversed the next trading day, increasing to $25.03,

which according to the Division’s expert was one

12. Caesar’s trading badge was “BWC.”

25a

Appendix B

indication, among others, of price artificiality. Ex. 2,

7 55, and p. 32, Table 1."

2. May 22, 1998 PV Close

Kristufek placed orders with both DiPlacido and

Caesar to sell June PV futures contracts “worst” during

the May 22, 1998 Close. Tr. at 324; Ex. 24, p. 3; Ex. 23,

p. 1. DiPlacido sold 150 PV futures contracts during the

May 22 Close for Avista. Ex. 2, 164; Ex. 15b. Livingstone

observed DiPlacido “violating bids” by offering at prices

below the prevailing bid price in the pit. Ex. 1,910. Ina

telephone conversation with Taylor after the May 22

Close, DiPlacido described how he executed Avista’s

orders. He compared himself to an aircraft carrier

entering New York harbor and the other traders in the

ring to sailboats trying to cross as he went by. Ex. 20,

p. 1. DiPlacido added that “whatever bid they gave me,

cause they were bidding for three’s and two’s, I offered

right through them ... I said ‘sold,’ ‘at 20’, they gave

me a 40 bid, ‘at 20,’ what do you guys want, so that made

it very simple.” Tr. at 326; Ex. 20, pp. 1-2. Livingstone

testified that DiPlacido’s statement that he “offered

right through them” refers to violating bids or offering

at prices below the prevailing bid, and that he observed

13. With regard to each of the Closes at issue, the Division’s

expert also noted that DiPlacido’s orders in total were large

relative to typical trading in the NYMEX electricity futures

contracts, were all in the same direction (selling orders on the

April and May Closes and buy orders during the July and

August expirations), and were concentrated during the Closes.

Ex. 2, 9 62.

26a

Appendix B

DiPlacido trading in this manner during the May 22

Close. Tr. at 129-31.

During the May 22 PV Close, DiPlacido’s trading

represented 52.4% of the total trading volume in the

Close. Ex. 2 19 62, 64. The daily settlement price was

$28.09 on May 22, 1998, a decrease of $.50 in the

settlement price for the same contract on the previous

trading day. Ex. 2, 159 and p. 32, Table 1. The settlement

price decreased by $.53 relative to the average price

during the hour before the Close, while the settlement

price of the next nearby contract (July) increased over

that same interval. Ex. 2, 7 46 and p. 32, Table 1.

3. July 27, 1998 PV and COB Closes

On the morning of July 27, 1998, DiPlacido told

Livingstone he expected an electricity futures contract

order from Avista, to be executed in the same manner

as on the Option Expiration Days in April and May 1998.

Tr. at 94-95, Ex. 1, 11 12-13. DiPlacido directed

Livingstone to find out if Avista wanted an additional

broker to help DiPlacido execute its order. Ex. 1, 113.

When Kristufek called Livingstone to say that he needed

DiPlacido for the electricity futures closes that day,

Livingstone asked him if he needed two traders. Ex. 28,

p. 1. Livingstone told Kristufek he would contact

NYMEX member Alfredo Dinten” to help DiPlacido with

the order, and Kristufek was receptive to using two

brokers. Ex. 28, p. 1. DiPlacido later told Livingstone

14. Dinten’s NYMEX trading badge was “F RDO.” Ex. 1, 112.

27a

Appendix B

he had decided that instead of Dinten, NYMEX member

Sanford Goldfarb" should be the additional trader to

assist with Avista’s order. Tr. at 97; Ex. 1, 114; Ex. 3,

1 15. DiPlacido told Livingstone he wanted to use

Goldfarb because he was a well-respected trader whom

others in the ring would think had information about

the direction of the markets. Tr. at 97-98, Ex. 1, 4 14.

DiPlacido explained to Kristufek that using Goldfarb

would be “a lot more believable if he walks in there first

and starts selling it, the whole ring will think he’s up or

buying whatever way you want to go, the whole ring will

think he knows something. . . . ’ll walk in there behind

him doing it... . Forget it, it’s ike murder.” Ex. 38, p. 1.

Immediately before the PV close, Kristufek told

Livingstone he wanted the settlement price to “go to

the moon.” Ex. 27, p. 1; Ex. 1, 1 16. Kristufek gave

Livingstone an order to buy 250 PV futures contracts

during the July Close, and to split up the order as

Livingstone determined. /d. Livingstone then gave an

order ticket to DiPlacido to buy 150 PV futures

contracts, and one to Goldfarb to buy 100 contracts.

Tr. at 100; Ex: 1, 116. Kristufek remained on the phone

with Livingstone during the PV Close, instructing him

that he wanted an “ugly” close, which Livingstone

understood to mean disruptive, and to buy contracts at

increasingly higher prices. Ex. 1, 117; Ex. 104m at 1:02-

3:00.

Livingstone stood immediately behind DiPlacido

and could see his trading card from his location. Ex. 1, 1]

15. Coldfarb’s NYMEX iodien badge was TROT. Ex. 1, 414.

28a

Appendix B

17. He observed DiPlacido violate offers by bidding

higher than the offers made during the July PV Close.

Tr. at 102; Ex. 1,119. He also testified that other traders

came over to him and complained about the way

DiPlacido had traded, specificauy that DiPlacido was

bidding through their offers. /d. In addition, NYMEX

member John McCann testified that he observed

DiPlacido violate broker NNJA by bidding to buy at

$58.00 while NNJA was offering to sell at $57.00. Tr. 223-

24. In a contemporaneous taped telephone conversation

with Kristufek after the Closes, Caesar told him that he

could have bought 2 PV contracts at $55.10, but then

“all of a sudden, JADE went 55, 56, 56 bid, 57 bid, 58

bid.” Ex. 25, p. 1.

DiPlacido bought 107 August PV futures contracts

during the July 27 close for Avista, and Goldfarb

purchased 100 contracts. Ex. 2, 7 64. Their combined

purchases accounted for 60.5% of the total trading

volume during the July PV Close. Jd. The settlement

price of the August PV futures contract on July 27 was

$56.81, an increase of $2.89 from the previous day.

Ex. 2, 1 58 and p. 32, Table 1. The following day, the

settlement price decreased by $5.39, completely

reversing the rise in settlement price. /d.

Following the PV close but before the start of the

COB close, Kristufek told DiPlacido he needed him to

have purchased all 250 PV futures contracts he ordered.

Ex. 104m at 4:12-4:14. DiPlacido expressed surprise,

asking “what do you mean you needed them all?”

Ex. 10m at 4:14-4:17. Livingstone, who was present with

29a

Appendix B

DiPlacido during this conversation, believes DiPlacido

was surprised because he understood that Avista’s

traders wanted to manipulate the settlement price, and

not to just purchase a set number of futures contracts.

Ex. 1, 117. Livingstone offered to get more PV futures

contracts, but Kristufek told Livingstone not to buy

more PV futures contracts unless they counted in the

Close in determining the settlement price. Ex. 104m at

4:44-4:49; Ex. 1, 417.

Kristufek then gave Livingstone an order to buy

150 August COB futures contracts and said that he

wanted the COB Close to be “ugly.” Ex. 104m at 5:13-

5:29; Ex. 1, 118. Just before the COB Close began,

Livingstone verbally conveyed the order to DiPlacido,

and added “don’t be shy,” the phrase DiPlacido had

instructed Livingstone to use when an order was to be

executed at the worst possible price. Ex. 1, 7 18.

Kristufek remained on the phone instructing

Livingstone during the COB Close to bid at higher

prices, Ex. 104m at 6:01-6:54, and near the end of the

close, instructed him to buy an additional 50 COB

contracts.

Livingstone observed DiPlacido during the COB

close violate offers by bidding at higher than the

prevailing offers in the ring, Tr. at 102 and Ex. 1, 7 19,

and heard complaints from other traders regarding

DiPlacido’s trading. Jd. In addition, NYMEX Member

McCann testified that he observed DiPlacido violate

broker WLSH. Tr. at 224-25. Also in the COB Close,

NYMEX member Anthony Birbilis testified that he

30a

Appendix B

observed DiPlacido violate broker GRAM by bidding to

buy at $46.00, while GRAM was offering to sell at $45.50.

Tr. at 241-42. In addition, Birbilis testified that he

himself was violated by DiPlacido during the COB close,

by bidding to buy at $46.00, while Birbilis was offering

at $45.50. Tr. at 249.16

DiPlacido bought 182 August COB futures contracts

during the July Close for Avista. Ex. 2, 164. His trading

accounted for 34.7% of the trading volume during the

July Close. Jd. On July 27, the COB futures contract

settlement price was $45.28, an increase of $3.26 from

the settlement price of that contract on the previous

trading day. Ex. 2, 1 58 and p. 32, Table [1. The following

day the COB settlement price decreased by $4.79,

completely reversing the rise in settlement price. /d.

4. After hours, noncompetitive trade on July 27,

1998

After the conclusion of both Closes, NYMEX

member Patrick McHugh, who had a long position in

COB futures contracts, approached Livingstone and

offered to sell COB futures contracts. Tr. at 199-200;

Ex. 1, 1 19. Livingstone called Kristufek and inquired

whether he wanted to purchase more COB contracts.

Ex. 1, 9 19. Livingstone told Kristufek that McHugh

16. Birbilis also testified that he heard complaints by

traders that DiPlacido had violated offers during the July PV

Close by aggressively bidding while the traders were offering

at lower prices, although he did not directly observe DiPlacido

making these trades. Tr. at 240-41.

3la

Appendix B

had a “problem” because he had overbought COB, and

that “he'll get settlement wherever you want it .. . he’ll

work with us and get the settlement where we need it.”

Ex. 29, pp. 1-2. Kristufek then spoke with DiPlacido,

who was with McHugh. Ex. 1, 1 19. Kristufek declined

to purchase COB futures contracts from McHugh, but

did agree to buy 25 more PV futures contracts from him,

provided that the sale would count in the calculation of

the settlement price. Ex. 1, 119; Ex. 1041 at 2:00-2:33.

Kristufek, who told DiPlacido “I want the Palo close to

be up there,” initially proposed buying the 25 contracts

from McHugh at a price of $57.00. Ex. 1041 at 2:21-2:37;

Ex. 29, p. 3. DiPlacido then reminded Kristufek that, as

things stood, the PV settlement was going to be above

$57.00, and thus that price would “go the other way,”

(z.e., reduce the settlement price) if they bought the

additional contracts at $57.00. Ex. 1041 at 2:56-3:02;

Ex. 29, p. 3. In response to DiPlacido’s statement,

Kristufek agreed to a purchase price of $58.00. Ex. 29,

p. 3.

DiPlacido had purchased 10 PV futures contracts

from McHugh during the PV close. Tr. at 202. After

DiPlacido negotiated the additional 25-contract trade

with McHugh after the end of trading for the day,

DiPlacido altered his trading card, changing the

quantity of the 10-contract trade to 35, in order to make

it appear that all of his trading with McHugh was actually

done on the floor during the July Close. Tr. at 202; Tr. at

294; Tr. at 296-97; Ex. 15c.

32a

Appendix B

5. August 25, 1998 PV Close

On August 25, 1998, DiPlacido instructed

Livingstone to call Kristufek to inform him that in view

of a NYMEX investigation into DiPlacido’s electricity

futures trading of July 27, it would look good if Avista

gave DiPlacido an order, as had been done on prior

Options Expiration Days. Ex. 1,123, Ex. 106a. Kristufek

placed an order with DiPlacido to buy 75 September

PV futures contracts during the August Close. Ex. 106g

at 0:30-0:55 and 1:39-1:44. Livingstone indicated that

there were complaints about the manner in which

DiPlacido traded during the August Close. Ex. 1, 9 23.

DiPlacido’s trading accounted for 28.4% of the trading

volume during the August Close. Ex. 2, 1 64. The

settlement price of the September PV futures contract

increased by $2.22 from the previous trading day. Ex. 2,

158 and p. 32, Table 1. The following day the settlement

price decreased by $3.05, completely reversing the price

increase. /d.

6. Failure to Comply Promptly with the

Commission’s Subpoena

On August 4, 2000, Commission representatives

issued a subpoena to DiPlacido for production of certain

books and records that he was required to maintain

under the Act, including all records relating to his

trading of PV and COB futures contracts for Avista in

1998. Tr. at 396; see also Ex. 8; Ex. 9, 1 86; Ex. 10, 4 86;

Ex. 5c. The subpoena required DiPlacido to produce

these documents by August 16, 2000. Ex. 8, p. 1.

33a

Appendix B

DiPlacido did not comply with this deadline. Tr. at 396.

In October 2001, more than a year after the subpoena

was issued, DiPlacido produced the documents

responsive to the subpoena. /d.

C. DiPlacido’s Testimony

DiPlacido testified regarding delays in obtaining

records responsive to the Commission’s subpoena from

storage, and that he produced them to his attorney as

soon as he received them. Tr. at 423-24. He also testified

regarding a meeting between himself, his then attorney

and trader Birbilis, during which DiPlacido claimed that

Birbilis denied that he had been violated by DiPlacido

or had seen others violated by him during the July Close.

Tr. at 431-32. DiPlacido testified that he did not violate

bids or offers during any of the Closes, Tr. at 433, 452,

480, and denied that he intended to manipulate

settlement prices. Tr. at 480. He also testified regarding

various terms used in the telephone conversations. For

example, he claimed that when Taylor told him to sell

market “worst” that meant to trade aggressively, Tr. at

443, that making a Close “ugly” meant active and noisy,

Tr. at 462. He also provided generally innocent

explanations to the telephone conversations noted

above. DiPlacido further testified that he did not trade

the low of either day and “beat” settlement during the

April and May Closes, meaning that the average of his

trades exceeded the settlement price, Tr. at 449, 452,

34a

Appendix B

and that he beat settlement during the July PV Close

as well. Tr. at 467."

D. Initial Decision

The ALJ issued his Initial Decision (“ID”) on

September 14, 2004."* The ALJ concluded that the

testimony of the witnesses who testified on behalf of the

Division was “credible, reliable and honest.” /d. at 5.

On the other hand, the ALJ found the testimony of

DePlacido to be “self serving and unreliable.” /d. The

ALJ found that Bessembinder’s expert testimony was

informed and persuasive, but that Kyle’s expert

testimony lacked specificity and dealt directly with only

the PV Close of July 27, 1998. Jd. He thus accorded

Kyle’s testimony very little weight. /d.

After making findings of fact generally consistent

with the narrative above, the ALJ concluded that

DiPlacido had violated Sections 6(c), 6(d) and 9(a)(2) of

the Act during each of the 5 Closes at issue. /d. at 17

17. Goldfarb also testified on DiPlacido’s behalf. Although

he stated that he did not observe DiPlacido violating offers

during the July PV Close, he indicated that he was paying

attention to what he was doing and not paying much attention

to others. Tr. at 519. Goldfarb also testified that he would not

have executed the order during the July PV Close had he known

of the conversation between DiPlacido and Kristufek noted

above. Tr. at 521.

18. In re DiPlacido, [2003-2004 Transfer Binder] Comm.

Fut. L. Rep. (CCH) 1 29,866 (ALJ Sept. 14, 2004). Citations are

to the slip opinion.

35a

Appendix B

18. In reaching this conclusion, the ALJ noted that in

order for a charge of manipulation to be sustained, the

Division must establish four elements by a

preponderance of the evidence: (1) that the respondent

had the ability to influence market prices; (2) that the

respondent specifically intended to influence market

prices; (3) an artificial price existed; and (4) the

respondent caused the artificial price. /d. at 11 (citing

In re Coz, [1986-1987 Transfer Binder] Comm. Fut. L.

Rep. (CCH) 9 23,786 at 34,061 (CFTC July 15, 1987).

With regard to the first element, DiPlacido’s ability

to influence market prices, the ALJ noted that

DiPlacido executed large orders during the Closes,

violating offers and bids to raise or lower the settlement

prices. Because of the illiquidity of the markets for PV

and COB futures contracts, the ALJ found that

DiPlacido had the ability to influence prices by executing

the relatively large orders for Avista during the Closes.

Id. at 11.

Concerning the second element, whether DiPlacido

had the specific intent to influence market prices, the

ALJ noted that proving intent requires a showing that

DiPlacido acted (or failed to act) with the purpose or

conscious object of causing or effecting a price or price

trend in the market that did not reflect the legitimate

forces of supply and demand. /d. at 12 (citing /n re

Indiana Farm Bureau Cooperative Assn, [1982-1984

Transfer Binder] Comm. Fut. L. Rep. (CCH) 9 21,796 at

27,283 (CFTC Dec. 17, 1982). The ALJ found that

DiPlacido specifically intended to influence market

s6a

Appendix B

prices through repeatedly violating bids and offers by

offering at prices higher or lower than outstanding

prices, and that his actions had no apparent business

or economic rationale except to influence market prices.

Id. at 12.

With respect to the third element, that artificial

prices existed, the ALJ noted that an artificial price is

one “that does not reflect the market or economic forces

of supply and demand” and that is created by illegitimate

factors not intrinsic to the market. /d. at 12-13. The ALJ

found that DiPlacido’s violation of bids and offers during

the Closes and his non-competitive, after-hours trades

were illegitimate factors, and concluded that the prices

were artificial. /d. at 13. Moreover, the ALJ found that

artificial prices were created because on each date at

issue, DiPlacido had paid more or less than was required,

creating illegitimate factors and making the settlement

prices artificial. Jd. (citing Henner and the Judicial

Officer’s finding that “[t]he inference is inescapable that

the respondent paid more than he had to .. . for the

purpose of causing the closing price to be at that high

level. No further proof is needed to show that the

settlement price was artificial.”).

Finally, with regard to the fourth element, causation,

the ALJ noted that “causation of artificial prices is

established when it is shown that artificial prices

resulted from the conduct of a trader, or group of traders

acting in concert, rather than from the legitimate forces

of supply and demand.” /d. at 13 (citing Cargill v.

Hardin, 452 F.2d 1154, 1171-72 (8th Cir. 1971). The ALJ

s/a

Appendix B

found that DiPlacido caused the artificial prices during

all of the Closes, by executing orders, all in one direction,

outside prevailing prices, and which he knew would

influence prices. /d. at 14.

Having found that DiPlacido manipulated the

settlement prices, the ALJ concluded that DiPlacido was

additionally liable for attempted manipulation of the

settlement prices during each of the Closes at issue. Jd

The ALJ noted that proving attempted manipulation

requires establishing only “an intent to affect the market

price of the commodity and some overt act in

furtherance of that intent.” /d. (citing /n re Hohenberg

Brothers, |1975-1977 Transfer Binder] Comm. Fut. L.

Rep. (CCH) @ 20,271 at 21,477 (CFTC Feb. 18, 1977).

The ALJ found that DiPlacido had the specific intent to

affect market prices and that “[aJll of the steps DiPlacido

took to carry out the manipulative scheme and cover it

up constitute overt acts sufficient to sustain a count of

attempted manipulation.” /d. at 14.

Citing the elements for aiding and abetting liability,

the ALJ also found that DiPlacido aided and abetted

the manipulation violations committed by Taylor and

Kristufek."® Jd. at 15. In this regard, the ALJ concluded

that the evidence established that the Act was violated,

19. Citing /n re Nikkhah, [1999-2000 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 1 28,129 at 49,888 n.28 (CFTC May

12, 2000) (aiding and abetting requires proof that “(1) the Act

was violated .. . (2) the named respondent had knowledge of

the wrongdoing underlying the violation, and (3) the named

respondent intentionally assisted the primary wrongdoer.”).

38a

Appendix B

that DiPlacido had knowledge of the manipulation and

DiPlacido intentionally assisted Taylor and Kristufek in

manipulating the settlement prices. Jd.

With regard to the non-competitive trade allegation,

the ALJ found that DiPlacido executed a 25 PV futures

contract noncompetitive trade with NYMEX member

McHugh after the end of the trading on July 27, 1998,

which was negotiated between them and not done by

open outcry in the trading ring. Jd. Accordingly, the ALJ

found that DiPlacido violated Section 4e(a)(A) of the Act,

which prohibits accommodation trades, as charged in

Count VI of the Complaint. Jd. at 15-16. Further, the

ALJ found that DiPlacido falsified his trading card to

make it appear as though the negotiated, after hours

trade had occurred on the trading floor and had been

subject to open outcry. Because DiPlacido had falsified

his trading card to report to NYMEX the

noncompetitively determined price of the after-hours

trade, the ALJ found that the price reported to the

exchange and other market participants was not bona

fide. The ALJ therefore concluded that DiPlacido had

violated Section 4c(a)(B)’s prohibition against

confirming the execution of transactions used to cause

the reporting of a non-bona fide price, as charged in

Count VII of the Complaint. Jd. at 16. Also with regard

to the non-competitive trade, the ALJ found that

DiPlacido had violated Commission Regulation 1.38(a),

which requires that trading be conducted openly and

competitively, as charged in Count VIII of the

Complaint. /d.

39a

Appendix B

The ALJ also found that DiPlacide had violated

Section 4g of the Act, which requires every registered

floor broker to make reports as required by the

Commission and to keep such books and records open

to inspection by any representative of the Commission,

and Commission Regulation 1.35(d), which requires that

members of contract markets document their trades

through trading cards or similar records and that these

records include certain information about these trades,

as charged in Count IX of the Complaint. Jd. The ALJ

concluded that by falsely recording and reporting the

July 27, 1998 non-competitive trade as bona fide and

altering his trading card to conceal! the trade, DiPlacido

had violated Section 4g and Commission Regulation

1.35(d). 7d. at 16-17.

In addition, the ALJ found that, as charged in Count

X of the Complaint, DiPlacido violated Section 4g and

Commission Regulation 1.31(a), the latter of which

specifically requires registrants to promptly provide

records when requested by Commission subpoena. The

ALJ found that the Commission had subpoenaed

DiPlacido to produce certain records on August 4, 2000,

and DiPlacido did not complete production of records

pursuant to that subpoena until October 2001. In this

regard, the ALJ noted that the Commission had

previously. found that “[rlegistrants are strictly liable

for recordkeeping violations, for which a showing of

scienter is not required.” /d. at 17 (quoting In re Kelly,

[1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH)

q 27,514 at 47,373 (CFTC Nov. 19, 1998).

40a

Appendix B

After concluding that the Division had proven by a

preponderance of the evidence that DiPlacido had

violated the Act and regulations as charged in the

Complaint, the ALJ turned to sanctions, noting that

DiPlacido’s violative conduct was “deliberate, flagrant

and egregious,” that DiPlacido had not exhibited

“a scintilla of remorse” for his wrongful conduct, and

that there was nothing in the record to show

rehabilitation. Jd. at 19. Finding that DiPlacido’s

violations occurred repeatedly over several months and

did not appear likely to stop without NYMEX’s or the

Commission’s intervention, the ALJ concluded that a

cease and desist order was appropriate. Jd. at 19-20. In

addition, by repeatedly manipulating and attempting to

manipulate settlement prices, DiPlacido demonstrated

a disregard for rules designed to protect the futures

market and investor interest, and accordingly the ALJ

imposed a 20-year trading prohibition. Jd. at 20-21.

Because DiPlacido had repeatedly violated the Act and

Commission regulations, the ALJ revoked DiPlacido’s

registration.

Finally, with regard to monetary sanctions, the ALJ

noted that civil money penalties are imposed to deter

the wrongdoer from repeating the violations and to deter

others from engaging in similar activity, and that the

penalty should be sufficiently high to make the unlawful

activity unprofitable. Citing Section 6(e)(1) of the Act’s

requirement that the appropriateness of the penalty to

the gravity of the violation must be weighed, the ALJ

found that DiPlacido’s violations were “deliberate,

extremely serious, and inflicted great harm to the

4la

Appendix B

integrity” of the futures industry generally and to

NYMEX. The ALJ ordered DiPlacido to pay a civil

money penalty of $50,000 for each of the counts in the

Complaint, for a total of $500,000. Jd. at 22.

E. Arguments on Appeal

On appeal, DiPlacido argues that procedurally the

Commission was collaterally estopped from bringing the

present action against him on the basis of the findings

of the NYMEX disciplinary proceeding that he did not

manipulate the market. Respondent’s Appeal Brief

(“R.App.”) at 6 n.2 and 35. Further, DiPlacido contends

that the ALJ’s conduct of the hearing denied him his

due process rights as evidenced by the ALJ’s evidentiary

rulings and limitation of cross-examination. In addition

to these issues, DiPlacido argues that the ALJ possessed

a bias against him. R.App. at 26-27. DiPlacido also

contends that the ALJ improperly admitted the Avista

telephone voice recordings into evidence. R.App. at 29.

Substantively, DiPlacido argues that the Division

failed to prove the existence of a scheme to manipulate

the NYMEX PV and COB futures contract settlement

prices. R.App. at 36. He contends that the credible

evidence shows only that DiPlacido placed large orders

on behalf of Avista during each of the Closes at issue. In

addition, DiPlacido claims that the Division failed to

prove the four required elements of manipulation. In

this regard, DiPlacido maintains that “market power”

is a required component of the ability to influence prices,

the first element of a manipulation charge, R.App. at

38, and that the evidence does not show this.

42a

Appendix B

Moreover, DiPlacido contends that the evidence

does not show that he intended to influence prices

improperly, the second element of manipulation. He

claims that there is no direct evidence of intent, because

Kristufek and DiPlacido at the hearing denied any intent

to manipulate settlement prices. R.App. at 48. DiPlacido

also argues that the intent element requires proof of

motive for the manipulation, and that there is no

evidence regarding Avista’s OTC positions that allegedly

benefited from the manipulated prices. R.App. at 48.

Further, DiPlacido claims that the evidence that

DiPlacido violated bids and offers is equivocal, based

on facially ambiguous broker’s jargon, uncorroborated

hearsay complaints or perjury. R.App. at 51.

With regard to the third element, that an artificial

price existed, DiPlacido contends that settlement prices

are not legally cognizable as to being manipulated under

the CEA. R.App. at 54. DiPlacido also argues that

Bessembinder’s report does not show that the

settlement prices were artificial—that is, that they did

not reflect the forces of supply and demand—but rather

show only that the settlement prices were statistically

unusual on the dates at issue.

Concerning the final element, causation, DiPlacido

contends that, even if artificial prices were established,

he did not cause the artificial prices. R.App. at 60. In

this regard, DiPlacido contends that the average prices

of DiPlacido’s sales were above the settlement prices of

the April and May Closes, which he claims had the effect

cof raising rather than lowering settlement prices as

43a

Appendix B

Avista allegedly desired, that the average price of

DiPlacido’s bids equaled the settlement prices of the

July PV Close and thus had no effect on price, and that

there was no direct evidence of DiPlacido’s August

trades.

DiPlacido also argues that he did not have proper

notice of the Division’s interpretation of manipulation

law, and that the Henner case was decided under a

“predecessor” statute and represents questionable

authority. R.App. at 63 et sey

In addition, DiPlacido contends that he did not

violate the requirements to produce records promptly,

on the basis that the records sought by the Division

were not required to be kept by Commission Regulation

1.35(a). He claims that the subpoenaed records were not

readily accessible when the subpoena was received, and

that he made a good faith effort to retrieve and promptly

produce documents. R.App. at 71 et seq.

Finally, DiPlacido contends that the sanctions

imposed by the ALJ were excessive. R.App. at 74 et seq.

In this regard, DiPlacido argues that imposing the same

$50,000 penalty for each count of the Complaint is unfair,

because the charged «ffenses ranged from manipulation

to recordkeeping violations, and these offenses are not

equally blameworthy. DiPlacido also contends that the

CFTC must consider financial consequences in setting

a penalty as a deterrent, and there is no evidence in the

record regarding financial benefit to DiPlacido. Arguing

that the CFTC has a duty to ensure that similar

+4a

Appendix B

misconduct is given consistent treatment, DiPlacido

states that punishing him at a higher level than the

settling respondents is contrary to this duty. Finally,

DiPlacido asserts that his “extensive disciplinary

history” cited by the Division consists mainly of decorum

and minor record keeping violations, and that he has

already been punished by the NYMEX for the after-

hours trade.

DISCUSSION

I. Procedural Challenges

A. Collateral E'stoppel

DiPlacido contends that the Commission should have

been collaterally estopped from issuing a Complaint

against him, on the basis of the findings of the NYMEX

Disciplinary Committee with regard to the same

conduct at issue in this proceeding. In order for

collateral estoppel to apply, the litigant against which it

is asserted must have been either a party to the prior

proceeding or be in privity with a party to that

proceeding. In re Murphy, [1984-1986 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 4 22,798 at 31,345 (CFTC

Sept. 25, 1985). Because the Commission was not a party

to the NYMEX Disciplinary Committee proceeding

regarding DiPlacido, the Commission may only be

collaterally estopped if it was in privity with the

NYMEX. In Murphy, the Commission held:

45a

Appendix B

[wle conclude that exchanges and futures

associations conducting disciplinary

proceedings involving violations of their own

rules do not act as representatives of this

Commission, are not “in privity” with this

Commission, and cannot bind this

Commission’s hands in subsequent

administrative enforcement proceedings

arising out of the same circumstances.

Id. at 31,346. In this case, the NYMEX Complaint

charged DiPlacido with violations of exchanges rules; it

did not charge DiPlacido with violations of the Act or

Regulations that are at issue in the Commission’s

Complaint. See Exhibit B to DiPlacido’s Motion to

Dismiss the Complaint.” Even if this were the case, the

Commission is not in privity with the NYMEX under

Murphy, and therefore we conclude that collateral

estoppel is inapplicable to the Commission’s Complaint

based on the NYMEX disciplinary action.

B. Bias

Preliminarily, with respect to the ALJ’s bias,

DiPlacido attaches to his brief an Affidavit of Joseph S.

Rosenthal (“Rosenthal Affidavit”), DiPlacido’s counsel

20. It should also be noted that the NYMEX Complaint

charged DiPlacido with attempted manipulation of the

settlement price for only one of the dates at issue and for the

non-competitive trade. Thus the NYMEX charges did not

encompass all of conduct charged in the Commission’s

Complaint.

46a

Appendix B

at the hearing, which documents allegedly abusive

behavior committed by the ALJ. The Rosenthal Affidavit

is the subject of the Division’s January 28, 2005 Motion

to Strike, on the basis that the filing of the Rosenthal

Affidavit after the close of the hearing represents an

impermissible attempt to supplement the record without

leave of the Commission, in contravention of Commission

Regulation 10.107.

Under Commission Regulation 10.67(f), affidavits

may be admitted only if the evidence is otherwise

admissible and the parties agree that affidavits may be

used. As has been noted by the Commission, this

limitation is consistent with the right to cross-examine

witnesses conferred in Commission Regulation 10.66(b).

In re R&W Technical Services, Ltd., [2003-2004

Transfer Binder] Comm. Fut. L. Rep. (CCH) 9 29,556 at

55,390 n.9 (CFTC Aug. 6, 2003). The Division has not

agreed to the use of the Affidavit, and has had no

opportunity to cross-examine Rosenthal with respect to

its contents. Accordingly, we grant the Division’s Motion

to Strike the Rosenthal Affidavit.

In general with regard to bias, DiPlacido contends

that the entire conduct of the hearing was “replete with

displays of biased and unfair treatment.” R.App. at 27.

DiPlacido specifically alleges that the ALJ prejudged

the case as evidenced by a remark made by the ALJ

that DiPlacido’s counsel “had a tough job here” because

of what the ALJ had read in the record before the

hearing, that the ALJ has a “long history of antipathy

toward floor brokers,” that a disproportionate number

Ala

Appendix B

of DiPlacido’s objections were overruled compared to

the Division, and that the ALJ conducted a “coercive,”

off-the-record conference during the hearing in which

he threatened counsel with contempt if he would not

stop objecting.

Under Commission Rule 10.8(b), disqualification of

a presiding officer is appropriate when the record

establishes that he has either (1) a personal bias

stemming from an extrajudicial source, or (2) a deep-

seated favoritism or antagonism that would make fair

judgment impossible. Jn re R&W Technical Services,

Ltd., [1998-1999 Transfer Binder] Comm. Fut. L. Rep.

(CCH) 9 27,582 at 47,746 (CFTC Mar. 16, 1999), aff’d in

relevant part, R&W Technical Servs. v. CFTC, 205 F.3d

165 (5" Cir. 2000). As DiPlacido’s allegation does not

arise from an extrajudicial source, his showing must be

based upon application of the latter standard. In

applying the latter standard, we look for evidence that

the presiding officer has an “unfavorable disposition”

toward a party that is undeserved or excessive in

degree. Jn re Mayer, CFTC Docket No. 92-21, 1998 WL

80513 at *16 (CFTC Feb. 28, 1998), aff'd sub nom. Reddy

v. CFTC, 191 F.3d 109 (2d Cir. 1999).

As a general rule, views expressed in earlier

decisions are not considered evidence that a

decisionmaker has preconceived notions as to either

culpability or sanctions. See Garver v. U_S., 846 F.2d 1029,

1031 (6th Cir. 1988). Moreover, a showing of disqualifying

bias requires more than references to unfavorable

rulings or intemperate, impatient, or inappropriate

48a

Appendix B

remarks. See Olson v. Ulmer, [1990-1992 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 9 24,987 at 37,627

(CFTC Jan. 23, 1991). Rather, “the ALJ’s conduct must

be so extreme that it deprives the hearing of that

fairness and impartiality necessary to that fundamental

fairness required by due process.” Gimbel v. CF'TC, 872

F:2d 196, 198 (7 Cir. 1989).

The points that DiPlacido raises concerning the

history of antagonism to floor brokers, the

disproportionately unfavorable rulings to him, and the

“tough job” remark, do not establish that the ALJ had

the type of deep-seated favoritism or antagonism that

would merit disqualification consistent with Commission

or court precedent. With regard to the off-the-record

conference conducted by the ALJ, we generally do not

favor such conferences because they are an impediment

to review. See, e.g., McDaniel, Trustees v. Amerivest

Brokerage Services, et al., [1999-2000 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9 28,264 (CFTC Sept. 26,

2000) (directing Commission presiding officers to record

certain off-the-record telephone conferences). However,

DiPlacido’s counsel did not object to the off-the-record

conference at the hearing. In these circumstances, these

claims are deemed waived. See Drew v. First Nat'l

Monetary Corp. et al., [1984-1986 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9% 22,859 at 31,530 (CFTC

Jan. 10, 1986) (failure to challenge off-the-record

remarks made by ALJ at the hearing constituted waiver

49a

Appendix B

of the claim).*' Accordingly, we conclude that

disqualification of the ALJ is not warranted.

Due Process

In addition to bias, DiPlacido contends that the ALJ

denied him minimal due process. DiPlacido alleges

several errors: that the Livingstone Declaration, which

he claims was not properly authenticated, should not

have been admitted into evidence; that Livingstone

improperly gave “expert opinion” in his direct testimony

regarding conversations on the tapes even though he

was not an expert witness; and that the ALJ improperly

limited DiPlacido’s cross-examination of Livingstone.

R.App. at 12-21.

Moreover, DiPlacido contends that the ALJ

improperly limited his cross-examination of the

Division’s expert, Bessembinder, R.App. at 21-23.

DiPlacido also argues that the ALJ improperly refused

to allow live testimony by DiPlacido’s expert, Kyle, to

supplement his expert report and to comment on

21. Moreover, DiPlacido alleges that the ALJ engaged in

ex parte communications with the Division’s expert in this case.

R.App. at 6. Again, however, he made no attempt to object at

the time of the hearing, and the only evidence of these

communications in the record is contained in the Rosenthal

Affidavit, which we have stricken from the record and in any

event is unsupported. Accordingly, this claim likewise is deemed

waived. See Drew, 1 22,859 at 31,530 (assertions of bias must be

made as soon as practicable after a party has reasonable cause

to believe that grounds for disqualification exist).

Wa

Appendix B

evidence presented at the hearing to rebut

Bessembinder’s testimony, R.App. at 23-26. He also

contended that the tape recordings of telephone

conversations should not have been admitted into

evidence. R.App. at 29-34.

l. Livingstone

The Livingstone Declaration. With regard to the

Livingstone Declaration, DiPlacido claims that the

admission of and the ALJ’s reliance on the Declaration

were unfair because “one cannot cross-examine” an

Affidavit, R.App. at 12, and there was “little justification

for allowing the Division to present evidence on some of

the most important issues in this case by written

declaration.” R.App. at 14. However, the hearing

transcript shows that DiPlacido agreed to the admission

of the Declaration. When the Division moved to admit

the Declaration into evidence, DiPlacido’s counsel

responded, “You can put it in. I'll question him about

it.” Tr. at 134.

As noted above, Commission Regulation 10.67(f)

provides that affidavits may be admitted by the ALJ,

(1) if the evidence is otherwise admissible and (2) the

parties agree that affidavits may be used. Commission

Regulation 10.67(a) provides that “[rjelevant, material

and reliable evidence shall be admitted. Irrelevant,

immaterial, unreliable and unduly repetitious evidence

shall be excluded.” The evidence contained in

Livingstone’s Declaration is hearsay and double hearsay,

but such evidence may be admitted in Commission

dla

Appendix B

proceedings if it is otherwise truthful, reasonable and

credible. Jn re Stotler, [1986-1987 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 4 23,298 (CFTC Sept. 30,

1986).

There is no reason to believe that Livingstone’s

Declaration does not meet these requirements, in light

of the ALJ’s determination that Livingstone was a

“eredible, reliable and honest” witness and the other

corroborative evidence in the record. Livingstone

testified on direct to matters contained in the

Declaration and was cross-examined by DiPlacido

concerning the Declaration, at the ALJ’s direction. Tr.

at 134 (“If you have a question about Exhibit 1 [the

Livingstone Declaration], you may inquire”). DiPlacido

cross-examined Livingstone regarding both the

circumstances under which the Declaration was

prepared and its substance. Tr. at 150-152. Although

DiPlacido attempts to impugn Livingstone’s credibility

in his appeal brief by suggesting that Livingstone now

works for one of DiPlacido’s “bitterest business rivals,”

he makes this assertion without any foundation in the

record. R.App. at 12.

In addition, the Declaration was properly

authenticated as a predicate to its admission. When

examined, Livingstone testified that he signed the

Declaration in August 2001, Tr. at 118, that the Division’s

Exhibit 1 was, in fact, that Declaration, Tr. at 150-51,

and that he had “no problem with what this statement

says.” Tr. at 152. Having agreed at the hearing to the

admission of Livingstone’s Declaration, which is

52a

Appendix B

otherwise admissible, DiPlacido cannot now claim that

the document was improperly admitted.”

Livingstone’s “Expert” Testimony. DiPlacido also

claims that during direct examination, Livingstone was

permitted to give expert opinion testimony even though

he was not an expert witness. In this regard, DiPlacido

contends that at the hearing, the Division played

recordings of telephone conversations that included

DiPlacido speaking to others at Avista and then asked

Livingstone what DiPlacido meant by his words. R.App.

at 13.¥ The specific instance to which DiPlacido objects

occurred when the Division asked Livingstone about

what DiPlacido meant in the recorded conversation

when DiPlacido said “I offered right through them.”

22. In his Reply Brief, DiPlacido mentions that he formally

objected to the Livingstone Declaration’s admission prior to

the hearing and characterizes his agreement to the admission

of the document at the hearing as an “offhand attempt to placate

a hostile judge.” Respondent’s Reply Brief (“R.Reply”) at 5.

Nonetheless, after agreeing to its admission, DiPlacido cross-

examined Livingstone extensively regarding the contents of

the Declaration. Accordingly, he made a valid, knowing

agreement as to its admission, and should not now be heard to

claim otherwise.

23. Although DiPlacido objects that the recordings were

not transcribed during the hearing and that the parties used

transcripts that were not entered as exhibits, R.App. at 13 n.4,

the transcripts of the portions of CDs that were played at the

hearing were in fact admitted into evidence. Tr. at 381 (admitting

transcribed portions of recordings as Exhibits 19 through 29,

31, 32, 34, 35 and 38).

53a

Appendix B

Tr. at 129-130. Over DiPlacido’s objection, Livingstone

testified that DiPlacido meant that he violated bids by

offering at lower prices than were currently bid.

Tr. at 130.

We have permitted lay witnesses to give opinion

testimony in our proceedings, and we have noted that

“trial courts have broad discretion to determine whether

a lay witness is qualified to testify on matters of opinion,

and whether to permit the witness to testify as to his

conclusions.” In re Roussa, [1996-1998 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 4 27,133 (CFTC July 29, 1997)

(citations omitted). Rule 701 of the Federal Rules of

Evidence provides that opinion testimony by lay

witnesses is admissible in certain circumstances.

Although the Commission is not required to follow the

Federal Rules of Evidence, Peabody Coal Co. v. Jane W.

McCandless and Director, Office of Workers’

Compensation Programs, 255 F.3d 465, 469 (7th Cir.

2001), we have looked to the Federal Rules of Evidence

as “guidance and support” in considering whether

certain evidence is admissible. /n re Gorski, 2004 WL

584254 at *23 (CFTC Mar. 24, 2004); see Rousso, 127,133

at 45,307 n.18 (specifically citing Rule 701 and discussing

admissibility of lay witness testimony).

Rule 701 provides that lay witness opinion testimony

is admissible if it is “(a) rationally based on the

perception of the witness, (b) helpful to a clear

understanding of the witness’ testimony or the

determination of a fact in issue, and (c) not based on

scientific, technical, or other specialized knowledge

54a

Appendix B

within the scope of Rule 702.”“% In applying these

standards, courts have permitted lay witnesses to give

their opinion regarding the meaning of terms in

recorded conversations, even where the witness was not

present during the conversation, provided that the

witness had personai knowledge of the subject discussed

and the persons involved. U.S v. Saulter, 60 F.3d 270,

276 (7 Cir. 1995); see also U.S. v. Flores, 63 F.3d 1342,

1359 (5“ Cir. 1995). As the Advisory Committee Notes

to the Federal Rules of Evidence make clear, such

testimony is not scientific, technical or specialized within

Rule 702’s ambit if the witness has “particularized

knowledge” by virtue of his or her employment.

24. The latter requirement was added with the 2000

amendments to the Federal Rules of Evidence. The Advisory

Committee Notes indicate that the amendment was not

intended to affect the “prototypical example[s] of the type of

evidence contemplated by the adoption of Rule 701 relating]

to the appearance 7f persons or things, identity, the manner of

conduct, competency of a person, degrees of light or darkness,

sound, size, weight, distance, and an endless number of items

that cannot be described factually in words apart from

inferences.” As an example, the Advisory Committee noted that

“most courts ave permitted the owner or officer of a business

to testify to the value or projected profits of the business,

without the necessity of qualifying the witness as an accountant,

appraiser, or similar expert. Such opinion testimony is admitted

not because of experience, training or specialized knowledge

within the realm of an expert, but because of the particularized

knowledge that the witness has by virtue of his or her position

in the business. The amendment does not purport to change

this analysis.” (citation omitted).

55a

Appendix B

In this case, Livingstone was present during the

recorded conversation, had personal knowledge of the

subject discussed and the persons involved in the

conversation, and thus his opinion was rationally related

to his perception. Moreover, his testimony was helpful

to a clear understanding of a fact in issue, namely

whether DiPlacido violated bids by offering at lower

prices. Finally, his testimony was not of the type within

the scope of Rule 702, because Livingstone had

particularized knowledge based on his position as

DiPlacido’s floor clerk on the NYMEX trading floor.

Accordingly, we find that the ALJ did not abuse his

discretion in admitting this testimony.

Cross-Examination of Livingstone. DiPlacido

further claims that the ALJ improperly limited his cross-

examination of Livingstone by not permitting him to

inquire about Livingstone’s credibility and by cutting

short his cross-examination. We have stated that “[c}ross-

examination should be limited to the subject matter of

the direct examination and matters affecting the

credibility of the witness.” /n re Reddy, [1996-1998

Transfer Binder] Comm. Fut. L. Rep. (CCH) 9 27,271

(CFTC Feb. 4, 1998). See also Commission Regulation

10.66(b) (authorizing ALJ “to limit cross-examination

to the subject matter of the direct examination and

matters affecting the credibility of the witness.”). Thus,

the right to cross-examine a witness does not mean that

a party can do so in “whatever way, and to whatever

extent” it desires. Douglas v. Owens, 50 F.3d 1226, 1230

(3d Cir. 1995). Rather, a party is guaranteed only

“an opportunity for effective cross examination,” and

56a

Appendix B

the trier of fact may properly exercise discretion to

impose reasonable limits on the scope of cross-

examination. /d.; see also Maatschappij v. A.O. Smith

Corp., 590 F.2d 415, 421 (2d Cir. 1978); accord, In re Air

Disaster at Lockerbie, Scotland on December 21, 1988,

37 F.3d 804, 825 (2d Cir. 1994). The question is whether

the ALJ’s decision to limit the scope of questioning so

prejudiced the substantial rights of the respondents

that it amounted to an abuse of discretion. Rousso,

1 27,133 at 45,306.

DiPlacido claims that the ALJ prohibited him from

cross-examining Livingstone on his credibility, pointing

to the ALJ’s statement at the hearing that “[ilf [the

cross-examination] strays beyond the direct, you are in

trouble. That’s all I’m going to tell you.” Tr. at 133. The

full exchange between the ALJ and DiPlacido’s counsel

shows that the ALJ’s direction was not as categorical

as DiPlacido represents.” In any event, the hearing

25. The full exchange was as follows:

ALJ PAINTER: On the cross, who will be doing the

cross?

MR. ROSENTHAL: Can we take a brief break,

Your Honor?

ALJ PAINTER: How about ten minutes? I’m going

to ask you to try to limit your cross to matters that

came up on the direct.

MR. ROSENTHAL: I assume I can also go into

matters that are not collaterai which affect this

witness’ credibility?

(Cont’d)

S7a

Appendix B

record reveals that the ALJ permitted DiPlacido to

cross-examine Livingstone regarding his credibility.

DiPlacido was permitted to question Livingstone

regarding the agreement he entered into with the

Division conferring limited immunity. Tr. at 136, 160.

He was also allowed to question Livingstone

regarding his disciplinary history with the NYMEX, Tr.

at 139-141, 157-58, including the fact that Livingstone

was fined $10,000 and suspended for his conduct on July

27, 1998, as well as other violative conduct in which

Livingstone might have engaged, Tr. at 141-145.

Further, DiPlacido was permitted to ask whether

Livingstone had given any false statement to the

Commission during this proceeding, Tr. at 150. All of

these questions clearly were designed to probe the

credibility of the witness. Although DiPlacido complains

that while cross-examining Livingstone regarding his

(Cont'd)

ALJ PAINTER: If it strays beyond the direct, you

are in trouble. That’s alli I’m going to tell you.

MR. ROSENTHAL: I use the word “collateral”

because clearly if it’s or collateral matters—

ALJ PAINTER: We will see what surfaces. You’ve

got ten minutes to think it over, how you want to do

it.

(Recess taken).

Tr. at 133. Thus, the ALJ did not completely foreclose cross-

examination on matters outside the direct, but stated that “we

will see what surfaces.”

58a

Appendix B

Declaration and the foundation for its statements, the

ALJ cut off examination and directed Livingstone to

read from the Declaration, the record shows that

DiPlacido’s counsel was permitted to inquire about the

foundation of statements in the Declaration, including

whether Livingstone could specifically name any brokers

who were violated, Tr. at 154.

DiPlacido also complains that lines of inquiry during

his cross-examination of Livingstone were unreasonably

cut off and that the examination was unreasonably cut

short by the ALJ. Commission Regulation 10.8 makes

the ALJ responsible for the “fair and orderly conduct

of the proceeding,” and grants him the authority to

“regulate the course of the hearing.” If the ALJ provides

an opportunity for “effective” cross-examination, the

Commission will not interfere with his efforts to impose

reasonable limits on the scope of counsel’s examination.

In re Fisher, (2003-2004 Transfer Binder] Comm. Fut.

L. Rep. (CCH) 9 29,725 (CFTC Mar. 24, 2004). Our review

of the hearing transcript leads us to conclude that the

ALJ imposed reasonable limitations on the cross-

examination of Livingstone, and these limitations did

not prejudice the respondents.”

26. Moreover, it appears that at the hearing, while

DiPlacido was still permitted to ask a question, DiPlacido’s

counse] refused to question Livingstone on the basis that he

had “at least 15 or 20 questions,” and that “[t]he time you

allotted me of cross-examination was substantially less than

the time the government spent on their case.” Tr. at 160-61.

Where DiPlacido refused to use the opportunity given to him

for cross-examination, his complaint that his cross-examination

of Livingstone was unduly cut short should not be entertained.

59a

Appendix B

2. Bessembinder

DiPlacido argues that the ALJ unreasonably cut off

his cross-examination of the Division’s expert witness.

He also alleges that the ALJ refused to allow cross-

examination by hypothetical questions and on the

subject of DiPlacido’s expert, Kyle, and directed

DiPlacido to seek only clarification or explanation of

Bessembinder’s report. R.App. at 21-23.

We have held that “ALJ has broad discretion to

determine the scope of expert testimony and to limit

cross-examination to the issues raised in the direct

testimony.” Reddy, 1 27,271 at 46,209. As noted above,

the ALJ required the parties to file written expert

reports in advance of the hearing, pursuant to

Commission Regulation 10.66(d).”’ In the instant case,

the Division on direct examination asked Bessembinder

to authenticate his written statement, inquired whether

anything he had heard during the hearing had changed

his opinion, and then moved the document into evidence.

Tr. at 336-37. Accordingly, direct examination essentially

was limited to Bessembinder’s written testimony.

During cross-examination, the ALJ permitted

DiPlacido’s counsel to pursue numerous lines of inquiry,

27. Commission Regulation 10.66(d) provides that the ALJ

“at his discretion, may order that direct testimony of expert

witnesses be made by verified written statement rather than

presented orally at the hearing. Any expert witness whose

testimony is presented in this manner shall be available for

oral cross-examination, and may be examined orally upon re

direct following cross-examination.

60a

Appendix B

including questions regarding Bessembinder’s opinions

in his written statement, the materials reviewed in its

preparation, and Bessembinder’s methodology.

Contrary to DiPlacido’s contention, the ALJ permitted

DiPlacido to ask many hypothetical questions, twelve of

which are documented in the Division’s answering brief

(“D.Ans.”) at 10 n.9. The ALJ only intervened when

DiPlacido’s counsel questioned Bessembinder about

NYMEX Member Goldfarb’s potential liability for

manipulation, at which point he directed DiPlacido’s

counsel to “give me the page and the line of his

[Bessembinder’s] Declaration that they are inquiring

about, and to limit it to an explanation of what was

meant.” Tr. at 351. DiPlacido’s counsel did not comply

with this direction, and the ALJ did not enforce this

order. See generally Tr. at 352 et seq.

Later, after having permitted DiPlacido’s counsel

to ask Bessembinder more questions regarding

Goldfarb’s potential liability and a number of

hypothetical questions, the ALJ directed DiPlacido’s

counsel to end hypothetical questions and to ask

questions about Bessembinder’s Declaration. Tr. at 366.

When DiPlacido’s counsel attempted to ask

Bessembinder about his expert, Kyle’s Declaration, the

ALJ directed DiPlacido’s counsel to cross-examine

Bessembinder over the contents of Bessembinder’s

written declaration, to seek to “clarify” anything

contained therein, and not to question Bessembinder

about Kyle’s Declaration. Tr. at 369-70.

6la

Appendix B

The ALJ’s direction was not improper, because he

may limit cross-examination to direct testimony, and

Bessembinder in preparing his report did not review

Kyle’s Declaration. In any event, this order also was not

enforced, as the ALJ permitted DiPlacido’s counsel to

question Bessembinder regarding Kyle’s Declaration.

Tr. at 371-75. Ultimately, DiPlacido’s cross-examination

was not cut off as he contends, but ended when he

indicated that he had “[nJo further questions.” Tr. at

377. DiPlacido’s cross-examination filled 40 pages of

transcript and appears comprehensive. In these

circumstances, we conclude that the ALJ did not abuse

his discretion and DiPlacido sustained no prejudice.

3. Kyle

In addition, DiPlacido contends that the ALJ

improperly prohibited him from examining his own

expert witness, Kyle, after DiPlacido had submitted

Kyle’s written statement. R.App. at 23-26. As noted

above, the ALJ prior to the hearing had directed the

parties to file their experts’ written statements,

pursuant to Commission Regulation 10.66(d). At the

hearing, Kyle took the stand, and the ALJ questioned

him in order to authenticate the report, which was

admitted into evidence. Tr. at 614. The Division declined

to cross-examine Kyle. Commission Regulation 10.66(d)

provides that an expert may be examined “orally upon

redirect following cross-examination.” Accordingly,

where there is no cross-examination, there should be

no redirect, and we find that the ALJ properly

precluded DiPlacido from examining the witness.

62a

Appendix B

Although DiPlacido contends that Kyle should have

been permitted to testify regarding evidence presented

at the hearing and to rebut Bessembinder, R.Reply at

7-8, this testimony is not permitted by Commission

Regulation 10.66(d). Further, while DiPlacido argues

that he did not intend to have his expert “necessarily”

supplement his report, which dealt with only the July

27 Close, R.Reply at 7-8, his Appeal brief states

otherwise, R.App. at 24, and by his own admission, Kyle

stated in response to the ALJ that “my report deals

exclusively with the July case, and there has been a lot

of evidence here about other months, and the other

months would strengthen my conclusion.” Tr. at 615.

However, he indicated that “I would not modify any of

my conclusions,” based on what he had heard. /d.

DiPlacido had clear notice regarding the scope of the

charges in the Complaint, which included all Closes.

That his expert only considered one of the Closes in his

written report was DiPlacido’s choice.

Accordingly, we conclude that the ALJ did not abuse

his discretion either in precluding DiPlacido from

conducting redirect examination or in prohibiting

DiPlacido’s expert from supplementing his written

testimony.

4. Recordings of Telephone Conversations

DiPlacido contends that the recordings of telephone

conversations involving Avista employees that included

their interactions with DiPlacido and others should not

have been admitted into evidence. In this regard, he

63a

Appendix B

claims that the tapes were not properly authenticated

and that certain portions of the recordings were redacted

or deleted, rendering them unreliable. R.App. at 29-34.”

The Division presented four witnesses at the

hearing to authenticate the recordings and establish the

chain of custody from when they were produced to the

Division and the hearing. Mengheang Synn, a

programmer analyst at Avista, testified about Avista’s

recording systems and the production of one group of

28. DiPlacido also claims that in response to a pre-hearing

motion.on the admissibility of the recordings, the ALJ failed to

follow his own procedure in requiring the Division to make an

offer of proof regarding the recordings. R.App. at 30. However,

the record indicates that on September 23, 2003, the ALJ issued

an Order directing the Division to submit a motion to enter the

taped telephone conversations into evidence, which would

include a description of how the Division intended to

authenticate the tapes, including the names of the witnesses to

be called. Pursuant to the September 23 Order, the Division

filed a Motion to Enter Certain Recorded Telephone

Conversations into Evidence on October 3, 2003, including a

list of witnesses to authenticate the recordings. DiPlacido filed

an Affidavit and Memorandum of Law in opposition to the

Division’s Motion, and the Division filed a reply. As a preliminary

matter at the hearing, the ALJ announced his ruling granting

the Division’s Motion to enter the telephone conversations, when

offered. Tr. at 13. Accordingly, we see no merit in DiPlacido’s

claim that the ALJ did not follow the established procedure,

and in any event, the Division’s Motion contained all the

information required by the ALJ, as well as an explanation of

the evidence’s relevance and admissibility, as generally

required in offers of proof.

64a

Appendix B

recordings to Avista’s outside counsel in response to the

Division’s request. Synn testified that all Avista trader

phone lines were recorded, with the exception of a few

lines for management. Tr. at 33. Synn further testified

that all recorded lines were connected to a recording

system that recorded telephone conversations onto a

hard drive, which was then backed up to a DAT tape

used for storage. Tr. at 34. According to Synn, the DAT

tapes of conversations were stored in a fireproof box in

a locked room in Avista’s Houston office, and could not

be altered in any way. Tr. at 35. In response to the

Division’s request for production, Synn testified that

when he retrieved data from the DAT tapes, the data

was saved in a different computer-readable format and

burned into a CD. Tr. at 38. He testified that during

this process, no alterations or deletions were made or

could have been made. Tr. at 38-41. The CDs Synn

created were then sent to Avista’s attorney, Samuel!

Abernethy. Tr. at 42.

Christine Porter, an Avista employee since 1997,

testified regarding additional recordings that were

stored in Avista’s Spokane Office. The recordings had

been shipped to Avista’s Spokane Office after closure

of the Houston Office. This group of recordings was

prepared in the same manner described by Synn—from

DAT tapes, the data was saved to a different computer-

readable format and burned into a CD. Tr. at 18. Porter

also testified that at no point in the process could

conversations be altered or deleted in any way. Tr. at

19, 21. She indicated that the CDs that she prepared

65a

Appendix B

were sent to Abernethy. Porter also testified that the

DAT tapes are still securely stored with Avista. Tr. at

21-22.

Samuel Abernethy testified that he received the

Division’s requests for recordings from Avista’s general

counsel, and that he was retained to conduct Avista’s

response to the requests. Tr. at 51. Abernethy reviewed

the requests and directed Avista’s retrieval of the

recordings the requests sought. /d. After receiving the

CDs of the recordings from Avista, Abernethy listened

to the recordings in order to determine if any of the

conversations were privileged or private, before copies

were made for and forwarded to the Division. Tr. at 51

52. A few privileged and personal conversations were

withheld from production, but no business related

material was withheld. Tr. at 52-53. Abernethy testified

that no portions of conversations were deleted. Tr. at

52. After the loss of the recordings in the destruction of

the Commission’s New York office on September 11,

2001, Abernethy supplied a duplicate production to the

Division. Tr. at 54-55. The 43 CDs supplied by Abernethy

to the Division were entered into evidence. Tr. at 55-57

(Division Exhibits 6-A, 6-B, and 6-C)

Division investigator Armand Nakkab testified that

under the direction of Division attorneys, he created 7

CDs (Division Exhibits 100-106) containing specified

conversations from the 43 CDs; he testified that he did

not delete or alter any conversations in this process

Tr. at 71-72

66a

Appendix B

Commission Regulation 10.67(a) requires that in

order to be admissible, evidence must be relevant,

material and reliable. Although we have not commented

on authentication requirements for tape recordings in

the past, we have considered them to be reliable

evidence. See Venesky v. Murlas Commodities, Inc.,

et al., [1986-1987 Transfer Binder] Comm. Fut. L. Rep.

(CCH) 4 23,218 at 32,600 (CFTC Aug. 14, 1986) (tape

recordings made by private parties admissible) (citing

Stoller v. Siegler Trading Co., Inc., [1984-1986 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 9 22,224 (CFTC June

6, 1984) (tapes made by private parities in violation of

statutes prohibiting interception of oral communications

admissible).

Even under the criminal case law cited by DiPlacido,

in order to establish admissibility, “(t]he government has

the duty of laying a foundation that the tape recordings

accurately reproduce the conversations that took place,

z.e., that they are accurate, authentic, and trustworthy.

Once this is done, the party challenging the recordings

bears the burden of showing that they are inaccurate.”

U.S. v. Thompson, 130 F.3d 676, 683 (5% Cir. 1997). The

testimony of the Division’s four authentication

witnesses establishes that Avista recorded the telephone

lines of its traders, that the recorded data was recorded

by an automated system, that the data was unalterable

by Avista employees, both in its stored format and as

produced to the Division, and that the transfer of the

recordings was handled with reasonable care.

Accordingly, the Division established that the

recordings were accurate, authentic and trustworthy.

67a

Appendix B

DiPlacido points to nothing that would show the

inaccuracy of the tapes, but cites Abernethy’s testimony

that a few privileged and private conversations were

withheld as evidence of redactions and deletions that

call the Avista recordings into question, and that at the

law firm, there may have been an opportunity to tamper

with the tapes, based on Abernethy’s testimony that

the Avista CDs were kept in an unlocked office and not

inventoried. R.App. at 33-34. However, Abernethy

testified that all business related conversations were

produced, that no portions of conversations were deleted

and that where a private conversation was included

within a business related conversation, the entire

conversation was produced. Tr. at 52. Moreover,

DiPlacido’s latter suggestion only demonstrates that

there is a possibility that someone could have altered

the tapes. He produced no evidence that someone did

alter or tamper with the tapes or that they were

otherwise inaccurate, even though he could have

subpoenaed Avista for the DAT tapes that it still retains

to confirm their accuracy. In these circumstances, we

hold that the recordings were properly admitted.

Il. Substantive Challenges

A. Liability for Manipulation

DiPlacido argues on appeal that the Division did not

prove the existence of a scheme to manipulate and that

the four factors required to establish manipulation were

not proven.

68a

Appendix B

The prohibitions against manipulation of prices are

contained in Sections 6(c), 6(d) and 9(a)(2) of the Act.

Section 6(c) and 6(d) authorizes the Commission to issue

a Complaint if it “has reason to believe that any person

... iS manipulating or attempting to manipulate or has

manipulated or attempted to manipulate the market

price of any commodity, in interstate commerce, or for

future delivery on or subject to the rules of any

registered entity.” 7 U.S.C. $§ 9, 13b. Section 9(a)(2)

makes it unlawful for any person “to manipulate or

attempt to manipulate the price of any commodity in

interstate commerce, or for future delivery on or subject

to the rules of any registered entity.” 7 U.S.C. § 13(a)(2).

Although the term manipulate is not defined in the Act,

the constitutionality of the statute has been upheld as

not void for vagueness,” and courts generally have taken

a pragmatic approach in defining manipulation. Thus

for example, the Eighth Circuit has stated:

We think the test of manipulation must largely

be a practical one if the purposes of the

Commodity Exchange Act are to be

accomplished. The methods and techniques of

manipulation are limited only by the ingenuity

of man. The aim must be therefore to discover

whether conduct has been intentionally

engaged in which has resulted in a price which

does not reflect basic forces of supply and

demand.

29. Bartlett Frazier Co. v. Wallace, 65 F.2d 350 (7th Cir.

1933).

69a

Appendix B

Cargill v. Hardin, 452 F.2d 1154, 1163 (8 Cir. 1971). In

Volkart Brothers, Inc. v. Freeman, 311 F.2d 52, 58 (5th

Cir. 1962), the court adopted the definition of

manipulation given by Arthur R. Marsh, a former

president of the New York Cotton Exchange, in a

hearing before a Senate subcommittee in 1928:

Manipulation, Mr. Chairman, is any and every

operation or transaction or practice, the

purpose of which is not primarily to facilitate

the movement of the commodity at prices

freely responsive to the forces of supply and

demand; but, on the contrary, is calculated to

produce a price distortion of any kind in any

market either in itself or in its relation to other

markets. If a firm is engaged in manipulation

it will be found using devices by which the

prices of contracts for some one month in some

one market may be higher than they

would be if only the forces of supply and

demand were operative. .. . Any and every

operation, transaction, device, employed to

produce those abnormalities of price

relationship in the futures markets, is

manipulation.

The Commission and the courts have developed the

following four-factor test to determine whether a

respondent has manipulated prices:

(1) The accused had the ability to influence

market prices;

70a

Appendix B

(2) The accused specifically intended to do

SO;

(3) The “artificial” prices existed; and

(4) The accused caused the artificial prices.

In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L.

Rep. (CCH) 49 23,786 at 34,061 (CFTC July 15, 1987);

In re Indiana Farm Bureau Cooperative Ass’n, [1982-

1984 Transfer Binder] Comm. Fut. L. Rep. (CCH)

{7 21,796 at 27,285 (CFTC Dec. 17, 1982); Frey v. CFTC,

931 F.2d 1171, 1175 (7 Cir. 1991).

Does the test apply in a trade-based manipulation

case? As an initial matter, we must decide whether the

four-factor manipulation test applies to this case, a

trade-based manipulation. The four-factor test

announced by the Commission in its caselaw was

developed from cases involving “corners” and

“squeezes,” which generally involve manipulation of

futures prices through control of the cash market rather

than the trade-based type manipulation at issue in this

case. However, in the Henner case, which involved a

trade-based manipulation, the Judicial Officer discussed

each of these elements in his decision, including price

artificiality and causation, even though he did not

specifically enumerate the four factors. We believe it is

appropriate to apply the four-factor manipulation test

in this case. Even without the Henner precedent, we

believe that we may apply the four-factor test, on the

grounds that it is logical and reasonable to do so.

Tla

Appendix B

l. The ability to influence prices

DiPlacido contends that he did not have the ability

to influence market prices because the evidence does

not show that he possessed market power. R.App. at

38. He argues that the ALJ’s decision “essentially reads

the market power requirement right out of manipulation

entirely.” R.App. at 40. However, market power is not a

required element under manipulation. As the

Commission has stated, “[a] dominant or controlling

position in the market is not a requisite element to either

manipulation or attempted manipulation and is not

essential to altering successfully the forces of supply and

demand.” Hohenberg, 4 20,271 at 21,477. Thus, the

Commission noted that “one of the most common

manipulative devices, [is] the floating of false rumors,

which [can] affect futures prices.” Jd. (quoting Cargill

v. Hardin, 452 F-2d at 1163). Accord, CFTC v. Enron

Corp., 2004 WL 594752 at *5 (S.D. Tex. Mar. 10, 2004)

(“proof of manipulation does not always require market

control”); In re Soybean Futures Litigation, 892 F.Supp.

1025, 1047 (N.D. Ill. 1995) (citing Hohenberg).

Henner found liability for manipulation based on a

floor trader’s activity on the exchange’s trading floor

without evidence of market power or control of the cash

market. The Judicial Officer determined that Henner

had manipulated the November 1968 Chicago Mercantile

Exchange shell egg futures contract, where Henner

entered trading with a large long futures position and

engaged in intensive buying at the close, entering a final

bid immediately before the closing bell 11 ticks higher

72a

Appendix B

than his previous purchase. The Judicial Officer

concluded that by paying more than he would have had

to pay for the shell egg futures contract, Henner had

purposely created an artificially high closing price.

Henner, 30 Agric. Dec. at 1174.

The Division’s evidence concerning DiPlacido’s

ability to influence prices was presented in the written

testimony of the Division’s expert, Bessembinder, who

analyzed each of the four elements of manipulation for

the five Closes at issue. With regard to the ability to

influence prices, Bessembinder’s testimony indicates

that the NYMEX electricity futures contracts were

“relatively illiquid” during the spring and summer of

1998. Ex. 2, 1 24. In comparison to NYMEX natural gas

and crude oil contracts, according to Bessembinder the

average daily volume of NYMEX electricity futures

contracts was less than 1% of NYMEX’s natural gas and

crude oil contracts for the period from April 1 to August

31, 1998.* Because of this illiquidity, Bessembinder

concluded that even relatively small orders for the PV

and COB futures contracts would have had an

appreciable effect on prices. Ex. 2, 4 25.

DiPlacido’s orders on behalf of Avista during the five

Closes were large relative to trading activity in NYMEX

electricity contracts by others, according to

30. From April 1 to August 31, 1998, Bessembinder’s

testimony indicates that a daily average volume of 661 PV and

530 COB futures contracts traded; a daily average of 64,944

natural gas contracts and 118,061 crude oil contracts traded on

NYMEX. Ex. 2, 1 24.

73a

Appendix B

Bessembinder. Not taking into consideration trading

done by other Avista traders, DiPlacido’s trading activity

accounted for 28% to 52% of the trading volume during

the Closes at issue. Ex. 2, 19 64, 66. Bessembinder’s

report indicates that DiPlacido’s average closing volume

during the Closes at issue was 14% of the average full

day volume (Avista’s average closing volume was 17%

when its other traders are included), and in

Bessembinder’s view, “the arrival and rapid execution

(within two minutes) of an unexpected order imbalance

(ie. an excess of buy over sell orders, or vice versa) equal

to 14% to 17% of a day’s trading volume [would]

influence prices substantially in any financial market.”

Ex. 2, 1 67 (emphasis in the original). We believe that

this evidence demonstrates that DiPlacido had the

ability to influence prices.

DiPlacido essentially contends that the Division

expert’s conclusion would render all large traders

potentially liable for manipulation of prices in illiquid

markets, and that such proof cannot constitute an

“illegal” ability to influence prices. R.Reply at 9.

However, this element of the manipulation test does not

require a showing of an “illegal” ability to influence

prices as DiPlacido contends, but only the ability to do

so. To be sure, large traders in illiquid markets will have

this ability, but that alone does not make them liable for

manipulation—the other three elements must also be

proven by a preponderance of the evidence, including

specific intent, an artificial price and causation.

14a

Appendix B

2. Specific intent to influence prices

In order to show the specific intent to influence

prices:

it must be proven that the accused acted (or

failed to act) with the purpose or conscious

object of causing or effecting a price or price

trend in the market that did not reflect the

legitimate forces of supply and demand

influencing futures prices in the particular

market at the time of the alleged manipulative

activity.

Indiana Farm Bureau, 4% 21,796 at 27,283. Intent may

“be inferred from the objective facts and may, of course,

be inferred by a person’s actions and the totality of the

circumstances.” Hohenberg, ¥ 20,271 at 21,477.

Moreover, “it is enough to present evidence from which

it may reasonably be inferred that the accused

‘consciously desire|[d]| that result, whatever the

likelihood of that result happening from his conduct.”

Indiana Farm Bureau, 1 21,796 at 27,283 (citation

omitted). As with all of the elements of manipulation,

intent must be proved by a preponderance of the

evidence. In Henner, the Judicial Officer inferred

manipulative intent from the fact that Henner

“purposely paid more than he would have had to pay”

in order to create an artificially high closing price.

30 Agric. Dec. at 1174.

I OE ALE RS Ma) ee en ATI Ba RF et SIT EP YS ae Oe

7Sa

Appendix B

DiPlacido contends that the evidence is “equivocal”

or “unreliable” that he violated bids and offers, and that

the ALJ made no finding with regard to the August 1998

Close that DiPlacido engaged in improper trading

tactics.

There is ample evidence in the record that DiPlacido

had specific intent to engage in manipulation. The

evidence from which intent may be inferred includes:

e the above-described taped telephone

conversations;

the testimony of NYMEX members who

witnessed DiPlacido violating bids and

offers by offering at lower than prevailing

bids or bidding at higher than prevailing

offers in the ring;

the testimony of one broker, Birbilis, who

testified that he was violated by DiPlacido

during the July COB Close when Birbilis

was offering at a lower price than

DiPlacido was bidding; and

testimony from witnesses that they heard

complaints about DiPlacido’s trading

activity.

The ALJ found that each of the witnesses who

testified that they observed DiPlacido violating bids and

offers was “credible, reliable, and honest.” Jd. at 5. On

76a

Appendix B

the other hand, the ALJ found DiPlacido—who denied

that he violated bids and offers and denied that he

intended to manipulate prices—to be “self-serving and

unreliable.” Jd. In general, the Commission defers to a

presiding officer’s credibility determinations in the

absence of clear error. In re Nikkhah, [1999-2000

Transfer Binder] Comm. Fut. L. Rep. (CCH) 9 28,129 at

49.886 (CFTC May 12, 2000). DiPlacido has failed to

demonstrate the type of error that would warrant a

detailed review of the ALJ’s credibility assessments.

Intent established in four out of five Closes. We

believe that evidence of DiPlacido’s specific intent to

manipulate prices is established with respect to four of

the five Closes: the April PV Close, May PV Close, July

PV Close and July COB Close. DiPlacido contends that

the evidence only shows he had an intent to move the

settlement price a certain way, without creating an

artificial price, R.App. at 46. The record, to the contrary,

includes evidence that during each of these four Closes

he engaged in uneconomic trading strategies—violating

bids and offers—in order to influence prices. Under

Henner, such evidence, which has no apparent economic

rationale, is sufficient to show manipulative intent.

With regard to the April PV Close, the evidence

includes Livingstone’s Declaration and Livingstone’s

testimony at the hearing that he observed DiPlacido

trading in the manner described in his affidavit, e.g.

offering to sell well below prevailing bid prices in the

ring.

Tla

Appendix B

Concerning the May PV Close, the most compelling

evidence includes Livingstone’s observation of DiPlacido

violating offers and the taped telephone conversation

between DiPlacido and Kristufek in which he described

how he offered at 20 through bids at 40.

With respect to the July PV Close, the evidence

includes Livingstone’s testimony that he observed

DiPlacido bidding higher than prevailing offers, the

testimony of NYMEX member McCann that he

observed DiPlacido bidding higher than another broker

was offering, the contemporaneous telephone

conversation of Caesar regarding DiPlacido’s trading

tactics, as well as evidence that DiPlacido brought in

NYMEX member Goldfarb who would be “believable”

to the ring in order to drive up the price.

Concerning the July COB Close, the evidence

includes Livingstone’s testimony that he observed

DiPlacido bidding higher than prevailing offers, Birbilis’

testimony that he observed DiPlacido bidding higher

than another broker’s offer as well as bidding higher

than his own offer, and the testimony of NYMEX

member McHugh that he observed DiPlacido bidding

higher than another broker’s offer. There is also the

taped conversation with regard to the after hours, non-

competitive trade, in which DiPlacido indicated that the

trade needed to be executed at a higher price in order

for the settlement price to be increased.

All of this evidence compellingly demonstrates that

DiPlacido had the specific intent to manipulate prices

during these four Closes.

78a

Appendix B

The foregoing analysis is consistent with a statement

made in an earlier case involving a traditional market

squeeze. Cf In re Abrams, [1994-1996 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9% 26,479 at 43,136 (CFTC

July 31, 1995). We held therein that even if a dominating

long played no role in the creation of a congested market,

and thus was not culpable in achieving his dominant

position, he nevertheless has a duty to avoid conduct

that exacerbates the situation. Consistent with that

holding, we find that where, as here, a trader executes

large orders all on the same side of an illiquid market

during the Close, a corollary duty exists to execute

orders so as to minimize price impact. Bidding at higher

than prevailing prices or offering at lower than

prevailing prices self-evidently maximizes price impact

in derogation of that duty. We hold that DiPlacido’s

intentional, repeated breaches of duty further support

the inference that he acted with manipulative intent.”

31. Obviously, such trading also violates exchange rules.

See, e.g., NYMEX Rule 6.06, which provides:

6.06 Transactions Made at Other Than Current

Market

(A) Transactions made on the Exchange trading

floor at a price above that at which the same futures

contract or options series is offered, or below that at

which such futures or options contract is bid, are

not made at the current market price for such

futures or options contracts and shall be disallowed

by any floor official designated by the President or

by any member of the Floor Committee. If so

disallowed, such transactions shall not be reported

or recorded by the Exchange.

(Cont’d)

79a

Appendix B

Intent not proved on the last Close. With regard to

the last, August PV Close, we agree with DiPlacido that

manipulative intent was not shown by a preponderance

of the evidence. During that Close, the evidence consists

only of an assertion in Livingstone’s Declaration that

he heard “complaints about DiPlacido’s trading,” Ex. 1,

1 23, but did not assert that he directly observed

DiPlacido. The ALJ made no finding that during this

Close, DiPlacido violated bids. The assertion in

Livingstone’s Declaration regarding complaints from

other brokers is double hearsay, and we have stated that

double hearsay alone generally is insufficient to meet

the Division’s burden of proof. Abrams, 1 26,479 at

43,137. There is no other evidence in the record for the

August PV Close that would establish manipulative

intent.

Motive not required to prove intent. DiPlacido also

argues that proof of speculative intent requires proof

of motive. He asserts that the Division did not present

evidence of Avista’s OTC positions, the alleged

motivation for the manipulation of prices, and that

absent preponderant evidence establishing motive, as

a matter of law, the Division cannot show intent. R.App.

at 48. Proof of motive, however, is not a required element

to establish manipulation under the Act. See Hohenberg,

1 20,271 at 21,478 (profit motive or demonstrated

capability of realizing a manipulation is not an essential

(Cont’d)

(B) The determination of a member of the Floor

Committee or any designated floor official shall be

final.

80a

Appendix B

element of manipulation); Cargill, 452 F.2d at 1162-63.

Accord, Henner, 30 Agric. Dec. at 1181 (noting that “(i]t

is not necessary to determine the respondent’s precise

motive. If he intentionally traded in a manner to distort

the closing price, that is manipulation.”). Nevertheless,

whether a respondent had a demonstrable motive may

support an inference of specific intent, and there is

evidence of Avista’s motive in the record. Livingstone

testified that Avista’s trading strategy was linked to its

OTC positions, and that DiPlacido told him that this was

the case. Ex. 1, 4 8; Tr. at 125.

3. Existence of an Artificial Price

In order to establish the existence of an artificial

price, the Division must show that the price “does not

reflect the market or economic forces of supply and

demand.” Coz, 1 23,786 at 34,064; Indiana Farm

Bureau, 1 21,796 at 27,283. One Commissioner has

commented: “[t]his is more an axiom than a test.”

Indiana Farm Bureau, 4% 21,796 at 27,300

(Commissioner Stone, concurring). In determining

whether an artificial price has occurred, we have stated:

one must look at the aggregate forces of

supply and demand and search for those

factors which are extraneous to the pricing

system, are not a legitimate part of the

economic pricing of the commodity, or are

extrinsic to that commodity market. When the

aggregate forces of supply and demand

bearing on a particular market are all

Sla

Appendix B

legitimate, it follows that the price will not be

artificial. On the other hand, when a price is

affected by a factor which is not legitimate,

the resulting price is necessarily artificial.

Thus, the focus should not be as much on the

ultimate price, as on the nature of the factors

causing it.

Indiana Farm Bureau, 4% 21,796 at 27,288. The

Commission’s limited case law in this area has looked at

such factors as the relationship between an allegedly

artificial price and historic price trends, the relationship

between cash market prices and the futures price, ete.

These factors are germane in the context of traditional

corners and squeezes and have little relevance here.

The Commission has identified one generally

applicable factor, namely, that a statistically unusual high

(or low) price will not on that basis alone be deemed

artificial. The Commission refused to find that an

artificial price existed in Cox when the evidence showed

only that the price at issue departed from an historical

trend. It held that “the prospective behavior of a

‘normal’ market is not necessarily bounded by the

market’s historical experiences. While historical and

spread data may be used .. . it is incumbent on the

parties to explain or justify the relevance of such

evidence.” Coz, 1 23,786 at 34,064.”

32. Commissioner West’s dissent in Coz captures the

difficulty of proving that a price is artificial in light of the

majority’s holding in that case:

(Cont’d)

82a

Appendix B

DiPlacido’s arguments. (1) Settlement prices

cannot be manipulated as a matter of law. As an initial

matter, DiPlacido. contends that settlement prices are

not legally cognizable as prices that can be the subject

of a manipulation charge under the Act. R.App. at 54.

In this regard, DiPlacido cites Vitanza v. Board of

Trade of the City of New York, 2002 WL 424699 (S.D.N_Y.

Mar. 18, 2002), in which the district court found that

manipulation of settlement prices could not be the

subject of a claim brought pursuant to Section 22 of the

Act, 7 U.S.C. § 25, the private right of action provision.

(Cont’d)

In other words, the fact that prices are shown to be

unusual, unprecedented, singular, or out of the

mainstream is no longer presumed relevant or

indicative to demonstrating whether they are

“artificial.” What, then, is relevant to this analysis?

* + +

The majority opinion leaves us with a very serious

question. In a future case, what evidence must the

Enforcement Division or private litigants present

in order to demonstrate “artificial” prices? Will any

set of data prove good enough? Under the majority’s

interpretation, historical prices are now presumed

irrelevant. Local prices are deemed irrelevant.

Contemporaneous futures and cash prices are

deemed insufficient. The concept of price

“artificiality” must have some context, a time and

place. A price can only be “artificial” compared to

some other contemporaneous price which we

consider “natural” or “legitimate.”

Coz, 1 23,786 at 34,074-76.

83a

Appendix B

The court specifically was interpreting Section

22(a)(1)(D), which provides that a person may be liable

in damages to any other person for violating the Act

“Gf the violation constitutes a manipulation of the price

of any such [futures] contract or the price of the

commodity underlying such contract.” The court

concluded that settlement prices, which generally are

weighted average prices of futures contracts, are not

actual prices of futures contracts or prices of the

underlying commodity, and thus the court ruled that the

plaintiffs could not bring a claim for manipulation of

settlement prices pursuant to Section 22(a)(1)(D).

Id. at *5.

Even if we were to accept this non-binding authority,

the court rendered no opinion regarding the

Commission’s authority to bring an administrative

enforcement action for manipulating settlement prices,

pursuant to Sections 6(c), 6(d) and 9(a)(2) of the Act. We

do not believe that the statutory language in those

sections could be construed to limit the Commission’s

authority in the same way as the court found with regard

to a litigant pursuing a private right of action under

Section 22.

Moreover, settlement prices are market prices that

can be manipulated. Settlement prices as noted above

generally are based on a weighted average of futures

contract prices over a certain period, known as the Close.

The price of an individual futures contract during the

Close can be unlawfully manipulated. Where this is the

case, the artificially obtained price is included in the

84a

Appendix B

calculation of the settlement price, and accordingly

causes the settlement price to be subject to artificial

influence as well. Accordingly, manipulation of

settlement prices can be the subject of an administrative

enforcement action. Henner, 30 Agric. Dec. at 1180

(discussing the influence of Henner’s trade on the

settlement price).

(2) The Division’s expert testimony did not

establish price artificiality. DiPlacido further argues

that the Division’s evidence regarding price artificiality

contained in Bessembinder’s Declaration does not

demonstrate the existence of an artificial price. He

contends that Bessembinder’s analysis shows only that

the price movements during the Closes at issue were

statistically unusual. We believe that Bessembinder’s.

Declaration was flawed in this respect and does not

demonstrate the existence of artificial prices.

Bessembinder defined prices as artificial if they did not

reflect the normal forces of supply and demand. This

definition is consistent with Commission precedent

noted above. However, the statistical analysis in the

Declaration demonstrates no more than that the prices

were statistically unusual, without explaining how that

demonstrates that the prices did not reflect the normal

forces of supply and demand. As stated above, the

Commission has held that this is insufficient to prove

artificiality. Accordingly, we accord little weight to

85a

Appendix B

Bessembinder’s conclusion regarding the existence of

artificial prices based on his statistical analysis.”

Nonetheless, we find that artificial prices existed

without relying on the Division’s expert, resting instead

on the artificial price analysis in Henner. There, the

Judicial Officer found that the inference was inescapable

that Henner “paid more than he had to for November

futures on June 25 for the purpose of causing the closing

price to be at that high level. No further proof is needed

to show that the closing price . . . was artificially high.”

30 Agric. Dec. at 1194. In this regard, the Judicial Officer

explained:

In short, the very essence of a normal price

on a futures market is a price arrived at by

the free forces of supply and demand on the

Exchange (viz., the sellers and the buyers)

acting rationally, 2.e., the buyers trying to buy

as cheaply as they can and the sellers trying

to sell as high as they can.

Whenever a buyer on the Exchange

intentionally pays more than he has to for the

purpose of causing the quoted price to be

higher than it would otherwise have been (or,

conversely, a seller on the Exchange

33. We do not believe that the statistical evidence

presented by Bessembinder deserves no weight, however.

Bessembinder’s analysis does demonstrate that the prices were

statistically unusual, which the Judicial Officer considered in

Henner as buttressing his conclusion that prices were artificial.

86a

Appendix B

intentionally sells cheaper than necessary for

the purpose of causing the quoted price to be

less than it would otherwise have been), the

resultant price is an artificial price not

determined by the free forces of supply and

demand on the Exchange.

30 Agric. Dec. at 1198. Thus, the placement of

uneconomic bids or offers results in artificial prices

because those prices are not determined by the free

forces of supply and demand on the exchange. For this

reason, it is not relevant whether Avista was a “net

seller” during the July Close, when Avista’s OTC

positions are factored in, or to consider the market “as

a whole” as DiPlacido contends. R.App. at 59-60; R.Reply

at 8.% Because the evidence shows that DiPlacido placed

uneconomic bids and offers during four of the five Closes

at issue, the prices were not determined by the free

34. In this regard, we accord little weight to the Report of

DiPlacido’s expert, Kyle. Kyle’s analysis, which examines only

the July Close, focuses on the role of Avista as a “net seller”

when Avista’s OTC positions are considered in light of Avista’s

futures position on NYMEX. But as noted above, this conclusion

runs counter to the Henner case’s focus on uneconomic trading

on the exchange. Although Kyle suggests that the trading in

‘this case was unlike the trading in Henner because here the

trading was profitable considering the OTC positions, and

therefore could be considered rational, Ex. K at 7, the trading

in Henner was in fact profitable. As the Judicial Officer

demonstrated, Henner’s trade influenced the settlement price

which increased the value of Henner’s already established large

long futures position. 30 Agric. Dec. at 1180. Accordingly, Kyle’s

suggestion is unpersuasive.

87a

Appendix B

forces of supply and demand on the NYMEX.

Accordingly, we find that the existence of artificial prices

was established.

This outcome is consistent with the holding in

Indiana Farm Bureau that “one must look . . . for those

factors which .. . are not a legitimate part of the

economic pricing of the commodity.” 9 21,796 at 27,288.

The illegitimate actions here are DiPlacido’s flagrant

violations of exchange rules established to maintain

orderly markets through incremental price moves.

“(When a price is affected by a factor which is not

legitimate, the resulting price is necessarily artificial.”

Id.

4. Causation

Proof of causation requires the Division to show that.

“the respondents’ conduct ‘resulted in’ artificia! prices.”

Coz, I 23,786 at 34,067 (quoting Great Western Food

Distributors, Inc. v. Brannan, 201 F:2d 476 (7th Cir.

1953). The Commission has concluded that there can be

multiple causes of an artificial price:

Where these causes can be sorted out, and

respondents are a “proximate” cause of the

artificial price, a charge of manipulation can

be sustained. If the multiple causes cannot be

sorted out, or if the respondents are not one

88a

Appendix B

of the proximate causes, then the charge of

manipulation cannot be sustained.

Cox, 1 23,786 at 34,066;* CFTC v. Enron, 2004 WL

594752 at *7.

DiPlacido contends that the evidence does not show

that he caused artificial prices. In this regard, he argues

that during the April and May PV Closes he did not

trade the low price on either day and that his average

trades were above the settlement price, which he claims

would have had the effect of raising, rather than

lowering, the settlement prices on those dates. Further,

he contends that during the July PV Close, his and

Goldfarb’s average trades on behalf of Avista equaled

the July PV Close settlement price, which he asserts

could not have made the price manipulatively high.*

35. The Commission further explained that “[i]t is our view

that an artificial price is proximately caused by an act, or a failure

to act, whenever it appears from the evidence in the case, that

the act or omission played a substantial part in bringing about

or actually causing the artificial price: and that the artificial

price was either a direct result or a reasonably probable

consequence of the act or omission.” Coz, 1 23,786 at 34,066 n.8.

36. DiPlacido does not present argument in his brief

regarding causation for the July COB Close. With regard to the

August PV Close, DiPlacido contends that there is no direct

evidence in the record regarding his August trades. Although

this question is moot since we believe the evidence does not

support a finding of intent to manipulate during the August

Close, DiPlacido’s trading cards for August were admitted into

evidence as direct evidence of DiPlacido’s trading. Ex. 15d.

89a

Appendix B

In addition, DiPlacido contends that Goldfarb drove the

settlement price up $1.50 during the July PV Close, but

he was not charged with manipulation. R.App. at 60-62;

R.Reply at 15.

DiPlacido’s arguments are not persuasive. The

Division’s exercise of prosecutorial discretion is

presumptively unreviewable, and any challenge

regarding selective prosecution must show both that a

respondent was singled out for prosecution among

others similarly situated and that the prosecutorial

decision was made based on an improper standard such

as race, religion or the prevention of the exercise of a

constitutional right, a showing that DiPlacido has not

made here. Jn re Antonacci, [1986-1987 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 9 23,038 at 32,066

(CFTC Apr. 21, 1986). To the extent DiPlacido suggests

that he was not the sole cause of price artificiality, as

noted above, Commission precedent has recognized that

there may be multiple causes of an artificial price and

that a manipulation charge may be sustained if the

respondent’s actions were a proximate cause of the

artificial price. The fact that DiPlacido did not trade the

lowest price during a Close has no probative value with

regard to settlement prices, which are determined based

on a weighted average of prices during the Close.

With regard to the average trade argument,

DiPlacido’s own expert describes a trading strategy by

which a trader could have achieved “both the objective

of a higher settlement price and the objective of having

the customer buy at an average price lower than the

90a

Appendix B

settlement price.” Ex. K at 41. The converse necessarily

follows, that a trader may achieve a lower settlement

price with trades that have an average price higher than

the settlement price.”

37. DiPlacido’s trading reflected in the NYMEX

streetbooks that DiPlacido had admitted into evidence (Ex. C)

supports this point. For example, in the May Close, when the

initial trade of the settlement period was $28.50, DiPlacido sold

49 contracts at $28.00. These sales, which comprised in the

aggregate the largest transaction at a given price executed

during the Close, caused a significant downward movement in

the weighted average price. The weighted average price never

meaningfully recovered during the two-minute settlement

period. Part way through the Close, DiPlacido executed another

series of trades totaling 40 contracts at $28.00—at a point when

the weighted average price was moving upward—thereby

stalling the upward trend. DiPlacido’s trades at $28.00 account

for more than half his total trading during the settlement

period, and nearly one-third of the 286 trades executed by all

traders during the Close. Although DiPlacido had smaller

trades at higher prices during the settlement period, which

caused the average price of his trades ($28.17) to be higher

than the settlement price of $28.09, these trades had a much

smaller impact on the weighted average price than his large

initial low trades at $28.00, which drove the weighted average

settlement price down significantly, while not lowering the price

of his personal average trade below the settlement price.

A simple numerical example illustrates this. Trader A

executes 2 trades to sell 10 contracts at $15 and 1 contract at $5.

Trader B executes 1 trade to sell 5 contracts at $10 (assume that

there are buyers to take the opposite side of these trades). The

settlement price based on a weighted average of these trades

would be $12.81 (205/16). Without A’s 1 contract trade at $5, the

(Cont'd)

9la

Appendix B

While DiPlacido has not demonstrated that he did

not cause artificial prices, the burden of proof lies with

the Division. The evidence presented by the Division

with respect to causation is contained in Bessembinder’s

Declaration. In this regard, Bessembinder found that

DiPlacido’s trades were large relative to typical trading

in the PV and COB futures contracts, and would have

been expected to move the market. Moreover,

Bessembinder noted that DiPlacido’s trades were all

directed to the same side of the market (all sell orders

in the April and May Closes when Avista sought to drive

settlement prices down and all buy orders during the

July and August Closes when Avista sought to drive

settlement prices up), and that his trades occurred

during the two minute Closes during which settlement

prices are calculated in order to influence them. Ex. 2,

162. Based on this evidence, and the evidence regarding

DiPlacido’s uneconomic trades, Bessembinder

(Cont'd)

settlement price would be $13.33 (200/15)—clearly the $5 trade

caused a downward movement in the settlement price. However,

despite this downward price influence, the average price of

Trader A’s trades is $14.09 (155/11), above the settlement price

of $12.81. In this example, Trader A could execute up to 10

contracts at $5, causing the settlement price to further decline,

while maintaining an average trade price at or above the

settlernent price.

The lowest price recorded during the May settlement

period was $27.95, below DiPlacido’s lowest priced trades.

However, only three transactions totaling 18 contracts were

executed at this price, and as such, these trades had a minimal

impact on the weighted average price during the May Close.

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Appendix B

concluded that it was “highly probable” that the orders

submitted by Avista and executed by DiPlacido and

others caused artificial prices. Ex. 2, 1 68.

Bessembinder’s analysis essentially asks us to draw

the inference that artificial settlement prices were a

“reasonably probable consequence” of or were

proximately caused by DiPlacido’s trading. In light of

the large size of DiPlacido’s trades in aggregate that

were made all on one side of an illiquid market—either

buying or selling depending on which direction Avista

intended to drive the settlement price—which were all

made during the Close when settlement prices were

calculated, and the evidence with regard to DiPlacido’s

uneconomic trading, we find that the record supports

an inference that DiPlacido’s trading proximately

caused artificial settlement prices during four of the five

Closes at issue.™

Alternatively, because the evidence shows that

DiPlacido engaged in uneconomic trading by bidding

higher than prevailing offers or offering below

prevailing bids during four of the five Closes at issue,

such evidence necessarily demonstrates artificial prices

38. Compare Henner, where the Judicial Officer concluded

that by Henner’s trading activity—intentionally paying more

than he had to pay—caused the price distortion at issue.

30 Agric. Dec. at 1174, 1180. The Judicial Officer in Henner noted

that a trade-based manipulation may include “buying or selling

in a manner calculated to produce the maximum effect upon

prices, frequently in a concentrated fashion and in relatively

large lots.” Henner, 30 Agric. Dec. at 1227 (citation omitted)

93a

Appendix B

for those transactions. Because those prices were

included in the settlement price calculation, we also

conclude that the settlement price itself is artificial on

that basis.”

Accordingly, we find that all four elements of the

manipulation offense have been established by the

weight of the evidence with respect to four of the five

Closes at issue, and therefore, we affirm the ALJ’s

findings that DiPlacido may be held liable for

manipulating settlement prices during those Closes.

B. Attempted Manipulation

DiPlacido does not specifically challenge the ALJ’s

attempted manipulation findings other than to say that

attempts merge into the completed offense and may not

be punished separately. R.Reply at 18.

Proof of manipulation necessarily includes proof of

an attempted manipulation. Brannan, 201 F.2d at 477;

Coz, 1 23,786 at 34,061 n.3. Accordingly, we affirm the

ALJ’s finding that DiPlacido attempted to manipulate

settlement prices during four of the five Closes at issue.

Because attempted manipulation requires intent,

Hohenberg, 120,271 at 21,477, which we have found was

not established with respect to the August PV Close,

39. Contrary to DiPlacido’s contention in his Reply Brief

that there is no evidence that the prices of particular trades

executed by DiPlacido were artificial, R.Reply at 17, the

testimony of the witnesses who observed DiPlacido violate bids

and offers is just such evidence.

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Appendix B

the evidence does not support a finding that DiPlacido

attempted to manipulate the settlement price of the

August 25, 1998 PV contract. As discussed below, we

agree with DiPlacido that he may not be punished for

both manipulation and attempted manipulation.

C. Lack of Notice

DiPlacido claims that he lacked fair notice that his

conduct could be the subject of a manipulation charge

under the Act. In this regard, DiPlacido characterizes

the Henner case as “questionable authority,” as a

“pre-CEA case decided under the old law,” and as not

“controlling authority under the present statutory

scheme.” R.App. at 40, 66. However, the Henner case

interpreted the long-standing manipulation provisions

of the CEA. Moreover, as noted above, the Commission

has cited Henz.er favorably in its adjudicated decisions,

see Indiana Farm Bureau, 1 21,796 at 27,282 and In re

Coz, 1 23,786 at 34,068, and at least one district court

has cited the decision favorably. See CF'TC v. Enron, 2004

WL 594752 at *5. DiPlacido cites the district court’s

decision in In re Soybean Litigation as questioning

Henner, R.App. at 67, but in that case, the district court

found that certain administrative decisions by U.S.

Department of Agriculture (“USDA”) (the parent agency

of the Commodity Exchange Authority) might not carry

strong precedential weight because they did not

consider whether prices could be manipulated by the

dissemination of false information, which was at issue in

the soybean case. 892 F. Supp. at 1047. Also, the court

did not specifically mention Henner as one of the

9Sa

Appendix B

administrative cases not deserving precedential weight,

but only certain USDA administrative decisions

involving consent decrees and default judgments. The

Henner case on the other hand was the final decision of

USDA.

Moreover, the Commission has pursued trade-based

manipulation cases after its establishment as an

independent agency. See In re Perlmutier, CFTC Docket

No. 79-33, 1979 WL 11474 (CFTC Dec. 3, 1979)

(settlement order involving a trade-based manipulation

on the New York Cotton Exchange); see also complaints

cited in D.Ans. at 45 n.43. More recently, the Commission

brought an enforcement case alleging attempted

manipulation of the Treasury bond futures market based

on trading activity on the exchange floor. Jn re Catalfo

and Zimmerman, {1994-1996 Transfer Binder] Comm.

Fut. L. Rep. (CCH) 9 26,636 (CFTC Feb. 29, 1996)

(affirming the ALJ’s entry of a default judgment against

Catalfo for failing to answer the complaint). Thus, even

if an abandonment by the Commission of prosecuting

trade-based manipulations could be construed as a lack

of notice of proscribed misconduct, there was no such

abandonment.

Legal commentators also have recognized that prices

may be manipulated and subject to liability under the

Act through “rigged trading.” See, e.g., Markham,

40. The default judgment against both respondents is

reported at In re Catalfo and Zimmerman, 1994 WL 524393

(C.E-T.C.) (ALJ Sept. 26, 1994). Zimmerman did not appeal.

96a

Appendix B

Manipulation of Commodity Futures Prices—the

Unprosecutable Crime, 8 Yale J. on Reg. 281, 283 (1991).

Testimony before Congress also has recognized that

manipulation of prices proscribed by the Act can involve

“heavy trading usually concentrated on the opening or

closing of the market. . . [t]he purpose [of which] is to

move futures prices either upward or downward for a

brief period” and that “[t]his type of price manipulation

is usually done for some purpose outside the futures

market itself.” Hearings on Russian Grain Transactions,

Hearings Before The Senate Permanent Subcommittee

on Investigations of the Committee on Government

Operations (Part 1), 93d Cong., lst Sess. at 166 (1973)

(testimony of Alex Caldwell, Administrator, Commodity

Exchange Authority).

DiPlacido cites the NYMEX Adjudicatory Panel’s

decision finding him not liable for manipulation under

NYMEX rules, and argues that the NYMEX Panel

considered federal case law and decisions of the CFTC

in arriving at its decision that DiPlacido did not attempt

to manipulate the market. He contends that the

NYMEX decision is evidence of what brokers like

DiPlacido generally had notice of what manipulation was

believed to be.

When a statute or regulation exposes private

persons to quasicriminal sanctions, the government

must provide fair notice of what is forbidden. See, e.g.,

United States v. Chrysler Corp., 158 F.3d 1350, 1354 (D.C.

Cir. 1998) (“The simple answer to the question .. . is

that a manufacturer cannot be found to be out of

97a

Appendix B

compliance with a standard if NHTSA has failed to give

fair notice of what is required by the standard.”);

General Elec. Co. v. EPA, 53 F.3d 1824, 1328-29 (D.C.

Cir. 1995) (“In the absence of notice—for example, where

the regulation is not sufficiently clear to warn a party

about what is expected of it—an agency may not deprive

a party of property by imposing civil or criminal

liability.”); Stoller vu CFTC, 834 F.2d 262, 267 (2d Cir. 1987)

(“The Commission may well have the power to construe

the statute in ...asubtle and refined way, but the public

may not be held accountable under this construction

without some appropriate notice.”). Fair notice occurs

when a hypothetical reasonable person who was acting

in good faith could have identified, with ascertainable

certainty and in light of the regulated community’s

common understanding, the standards with which the

agency expected the public to conform. Chrysler, 158

F'3d at 1355; General Elec., 53 F.3d at 1329. Fair notice

may be actual or constructive. See Martin v. OSHA, 941

F.2d 1051, 1058 (10 Cir. 1991).

In light of the inherent flexibility in the legal concept

of manipulation as recognized by the courts and the

existence of the Henner decision which found liability

for manipulation based on uneconomic trading, as well

as the commentary of legal scholars, Congressional

testimony, and the Commission’s pursuit of this type of

manipulation after its establishment, we believe that a

reasonable person in DiPlacido’s position could have

determined that his conduct could be punished as

manipulation under the Act. Moreover, the evidence

indicates that DiPlacido’s actions, such as using the code

98a

Appendix B

words “don’t be shy” in order to hide misconduct, shows

that he had actual knowledge that his conduct was

wrongful.”

D. Aiding and Abetting

DiPlacido does not directly appeal the ALJ’s finding

that he aided and abetted Kristufek and Taylor in

manipulating the settlement prices, other than to claim

that it would be “unfair” to pick and choose among the

ALT’s findings to cobble together some lesser offense

to punish. R.Reply at 19. As such, we deem the issue

admitted under Commission Regulation 10.102(d)(3). In

any event, the ALJ properly found that DiPlacido aided

and abetted Kristufek and Taylor.” Aiding and abetting

41. There is also additional evidence in the record of

DiPlacido’s attempts to obstruct NYMEX Compliance’s

investigation of his misconduct, which shows that he had actual

knowledge that his misconduct was wrongful. See infra.

42. Section 13(a) of the Act provides that:

Any person who commits, or who willfully aids, abets,

counsels, commands, induces, or procures the

commission of, a violation of any of the provisions of

this Act, or any of the rules, regulations, or orders

issued pursuant to this Act, or who acts in

combination or concert with any other person in any

such violation, or who willfully causes an act to be

done or omitted which if directly performed or

omitted by him or another would be a violation of

the provisions of this Act or any of such rules,

regulations, or orders may be held responsible for

such violation as a principal.

7 U.S.C. § 13e(a).

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Appendix B

liability requires proof that (1) the Act was violated,

(2) the named respondent had knowledge of the

wrongdoing underlying the violation and (3) the named

respondent intentionally assisted the primary

wrongdoer. Nikkhah, 7 28,129 at 49,888 n.28 (CFTC

May 12, 2000); R&W Technical Services, Ltd., 1 27,582

at 47,746. The evidence shows that DiPlacido

intentionally engaged in unlawful trading strategies

designed to manipulate prices in furtherance of

Kristufek’s and Taylor’s instructions. Such evidence is

sufficient to establish that DiPlacido aided and abetted

Kristufek and Taylor in manipulating and attempting

to manipulate settlement prices during four of the five

Closes at issue. See R&W Technical Services, 1 27,582

at 47,746, aff'd in relevant part, R&W Technical Servs.

v. CFTC, 205 F.3d 165 (5 Cir. 2000).

E. Failure to Respond to Commission Subpoena

The ALJ found that DiPlacido violated Section 4g

of the Act and Commission Regulation 1.31(a) by failing

to respond promptly to a Commission subpoena

requesting certain documents. Section 4g of the Act

requires that floor brokers like DiPlacido make such

reports as required by the Commission regarding,

among other things, transactions for customers, keep

books and records pertaining to such transactions in

the form and manner required by the Commission and

keep such books and records “open to inspection” by

Commission representatives. Commission Regulation

1.31(a) requires that all books and records required to

be kept by the Act be “open to inspection” by any

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Appendix B

representative of the Commission, provided to such a

representative “upon the representative’s request,” and

provided “promptly.”

DiPlacido contends that the only records required

to be produced “promptly” are those records required

to be kept pursuant to Commission Regulation 1.35(a),

and that the Commission’s subpoena went far beyond

the books and records required to be kept by that

regulation. R.App. at 72. DiPlacido further argues that

the evidence does not show that documents required to

be kept by Commission Regulation 1.35(a) were not

promptly produced. Jd. He claims that in response to

the Commission subpoena issued on August 4, 2000, he

made a good faith effort to produce documents on a

“rolling basis” until October 2001 when production was

completed. Jd. He also asserts that the Division failed

to prove that his trading cards, required to be kept by

Commission Regulation 1.35(a), were not produced until

October 2001. /d. at 73.

The evidence indicates that by January 17, 2001,

more than four months after the subpoena had been

issued, the Division had not received such documents

as DiPlacido’s order tickets and trading cards for COB

and PV futures contracts. Ex. B. By his own admission,

DiPlacido in his Memorandum of Law in Support of

Motion to Dismiss CFTC’s Complaint (Ex. 11, p. 31)

indicated that his production on October 26, 2001, more

than a year after the subpoena was issued, included

“4,240 pages of trading records.” At the hearing,

DiPlacido stipulated that his attorney had not produced

1Ola

Appendix B

documents he was required to maintain under the Act,

including all records relating to his trading of PV

and COB futures contracts, until October 2001. Tr. at

396-97.

Commission registrants are strictly liable for

recordkeeping violations, for which a showing of scienter

is not required. /n re Kelly, [1998-1999 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9 27,514 at 47,373 (CFTC

Nov. 19, 1998); In re Mayer, 1998 WL 80513 at *20. In

Kelly, where there was a five-month delay in the

production of documvats required to be kept under the

Act, the Commission found that the respondent in that

case violated Commission Regulation 1.31’s requirement

to produce records promptly. The evidence in this case

indicates that DiPlacido failed to produce trading

records more than a year after the subpoena was issued.

Accordingly, we affirm the ALJ’s finding that DiPlacido

violated Section 4g of the Act and Commission

Regulation 1.31(a).

FE Non-Competitive, After-hours trade

As noted above, DiPlacido does not address in his

briefs the ALJ’s liability findings regarding the non-

competitive, after hours trade. He also did not address

the issue in his post-hearing brief. Accordingly, pursuant

to Commission Regulation 10.102(d)(3), the Matter is

deemed admitted. In any event, the ALJ’s findings and

conclusions that DiPlacido violated Sections 4c(a)(A) and

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Appendix B

(B) of the Act,“ Commission Regulation 1.38, Section 4g

of the Act and Commission Regulation 1.35(d), as

43. The Commodity Futures Modernization Act of 2000,

Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000),

reorganized Section 4c of the Act and eliminated the prohibition

against cross trades. Prior to 2000, when DiPlacido’s conduct

occurred, the relevant portion of Section 4c of the Act, which

like the current version prohibited accommodation trades and

transactions used to cause any price to be reported that was not

bona fide, read as follows:

(a) It shall be unlawful for any person to offer

to enter into, enter into, or confirm the execution of,

any transaction involving any commodity, which is

or may be used for (1) hedging any transaction in

interstate commerce in such commodity or the

products or byproducts thereof, or (2) determining

the price basis of any such transaction in interstate

commerce in such commodity, or (3) delivering any

such commodity sold, shipped, or received in

interstate commerce for the fulfillment thereof—

(A) if such transaction is, is of the

character of, or is commonly known to the

trade as, a “wash sale,” “cross trade,” or

“accommodation trade,” or is a fictitious

sale; or

(B) if such transaction is used to cause

any price to be reported, registered or

recorded which is not a true and bona fide

price.

7 U.S.C. § 6e(a) (1994).

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Appendix B

charged in the Complaint, are supported by the weight

of the evidence.“

44. Section 4c(a)(A) of the Act prohibits accommodation

trades or fictitious sales, and Section 4c(a)(B) of the Act prohibits

any transaction that is used to cause any price to be recorded which

is not a true and bona fide price. Commission Regulation Section

1.38(a) requires that all trades on a contract market, unless

otherwise specified, shall be executed openly and competitively

during regular trading hours. Section 4g requires every registered

floor broker to make such reports as required by the Commission

and to keep such books and records open to inspection by any

representative of the Commission. Regulation 1.35(d) requires

that members of contract markets document their trades through

trading cards or similar records and that for each transaction the

card or record must include: (a) the members’ name or

identification; (b) the identity of the clearing member; and (c) the

date, hour and minute of the transaction.

Generally, fictitious sales include transactions that appear to

have been submitted to the open market while negating the

market risk or price competition inherent in competitive

trading. In re Three Eight Corp., [1992-1994 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 9 25,749 at 40,444-45 (CFTC June

16, 1993). Noncompetitive trading consists of the use of trading

techniques that negate risk or price competition that is incident

to an open, competitive market. Jn re Bear Stearns, [1990-1992

Transfer Binder] Comm. Fut. L. Rep. (CCH) 4 24,994 at 37,662

(CFTC Jan. 25, 1991).

By entering into a noncompetitive trade on July 27, 1998 to

raise the settlement price in the August 1998 PV electricity

futures contract with McHugh and reporting the

noncompetitive price as bona fide to the exchange, DiPlacido

violated Section 4c(A) and (B) of the Act and Commission

Regulation 1.38(a). In addition, DiPlacido violated Section 4g

and Commission Regulation 1.35(d) by falsely recording the

noncompetitive trade on his trading card.

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Appendix B

Ill. Sanctions

The ALT imposed sanctions on DiPlacido including

a cease and desist order, a 20-year trading ban, a

registration revocation and a civil money penalty of

$500,000.

Sanctions in enforcement proceedings are imposed

“to further the Act’s remedial policies and to deter

others in the industry from committing similar

violations.” Jn re Volume Investors Corp., [1990-1992

Transfer Binder] Comm. Fut. L. Rep. (CCH) 9 25,234 at

38,679 (CFTC Feb. 10, 1992). In selecting the

appropriate sanctions in a particular case, the

Commission takes into account the ALJ’s assessment

of the gravity of respondent’s violations® as well as the

sanctions imposed in the initial decision. Nevertheless,

the Commission’s review of the relevant factual issues

is de novo and reflects its independent judgment about

the appropriate mix of sanctions. /n re Grossfeld, [1996-

1998 Transfer Binder] Comm. Fut. L. Rep. (CCH)

1 26,921 at 44,467 (CFTC Dec. 10, 1996), aff’d sub

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