# Appendix — DiPlacido v. Commodity Futures Trading Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2010
- **Citation:** 559 U.S. 1025

## Text

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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:

12a

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 l

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_1325%3A2. Public record. Not legal advice.