Trader Don Wilson Faces Potential Lifetime Ban as Trial Begins


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A rare market-manipulation trial begins in a Manhattan federal court on Thursday, as one of the biggest U.S. futures traders enters a risky showdown with his regulator.

Donald Wilson Jr., the 48-year-old founder and chief executive of proprietary trading firm DRW Investments LLC, faces the possibility of a lifetime trading ban if he is found to have directed an illegal scheme to manipulate a little-known interest-rate contract in 2011. Mr. Wilson denies the civil allegations from the Commodity Futures Trading Commission.

Most traders faced with manipulation allegations by the CFTC settle without going to trial. But Mr. Wilson, who started in Chicago's rough-and-tumble trading pits before entering the high-tech world of quantitative trading, didn't.

The showdown has high stakes for the CFTC, too. Lawyers say a victory against DRW could help the agency by shoring up its spotty record in manipulation enforcement and setting a precedent for future cases.

"If the CFTC prevails, it will sharpen the weapon of manipulation for them, which historically has been very difficult for them to prove," said Michael Greenberger, a professor at the University of Maryland's law school.

Since its creation in 1975, the agency has won just one manipulation case against a trader who refused to settle, according to a CFTC spokesman. The last time such a case went to trial was in 2008. The trader in that case was found to have attempted to manipulate natural-gas prices, but the jury's verdict was set aside by a federal appeals court in 2010.

Mr. Wilson is expected to testify during the trial at New York'sSouthern District, according to a person close to the case. The proceedings will be overseen by U.S. District Judge Richard Sullivan, who has a reputation for being tough on defendants in Wall Street insider-trading cases. Spearheading the agency's legal efforts is CFTC enforcement chief Aitan Goelman, who as a rookie federal prosecutor in the 1990s was part of the team that convicted the Oklahoma City bombers.

Mr. Goelman's opponent in this trial is well-known in Chicago trading circles. Mr. Wilson founded DRW in 1992, naming the firm after his own initials, and built it into a global operation that employs more than 700 people. He is also an avid sailor and a supporter of a Chicago charter school that bears his company's name.

The CFTC's allegations stem from a big trade in interest-rate swap futures that DRW carried out in 2010 and 2011. The contracts allow firms to bet on or protect against future swings in rates.

DRW bought more than $350 million of the futures, anticipating that the position would grow in value, according to a lawsuit filed by the CFTC in 2013. When the underlying rates for the contracts failed to rise, the firm began placing bids in a 15-minute settlement window used by the exchange to determine the contract's closing value at the end of the day.

The CFTC alleged in its lawsuit that the bidding tactic amounted to "banging the close," an illegal practice in which a trader places buy or sell orders heavily at the end of the day to influence the daily closing price and benefit from an even larger position in a related derivatives market.

By using the tactic, DRW and its founder "distorted the market price for their personal benefit" more than 1,000 times and earned nearly $13 million in profits, the CFTC said in a Nov. 4 court filing.

DRW doesn't deny placing bids in the settlement window, but it has described them as a lawful strategy that actually benefited the markets. The firm says its bids helped fix a mispricing in a contract that few other companies were trading.

That is an issue because the CFTC must prove that DRW's actions created an "artificial price." DRW contends that its actions did the opposite, by bringing an incorrect price in line with market fundamentals.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com


  (END) Dow Jones Newswires
  11-30-160825ET
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