Commodity Futures Trading Comm'n v. EOX Holdings L.L.C.
| Decision Date | 30 September 2021 |
| Docket Number | Civil Action H-19-2901 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. EOX HOLDINGS L.L.C., and ANDREW GIZIENSKI, Defendants. |
| Court | U.S. District Court — Southern District of Texas |
COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
EOX HOLDINGS L.L.C., and ANDREW GIZIENSKI, Defendants.
Civil Action No. H-19-2901
United States District Court, S.D. Texas, Houston Division
September 30, 2021
MEMORANDUM OPINION AND ORDER
SIM LAKE, SENIOR UNITED STATES DISTRICT JUDGE.
This action is brought by plaintiff, the Commodity Futures Trading Commission (“CFTC” or “Plaintiff”), against defendants, EOX Holdings L.L.C. (“EOX”) and Andrew Gizienski (“Gizienski”) (collectively, “Defendants”), for violations of the Commodity Exchange Act (“CEA”), 7 U.S.C. §§ 1-27f, and the Regulations promulgated thereunder, 17 C.F.R. parts 1-190, from August of 2013 through May of 2014 (“Relevant Period”). Pending before the court are Defendants' Motion to Amend Revised Docket Control Order to Grant Them Leave to File Amended Answer Adding Affirmative Defenses (“Defendants' Motion to Amend”) (Docket Entry No. 121); Plaintiff's Motion for Summary Judgment (“Plaintiff's MSJ”) (Docket Entry No. 150); Defendants' Motion for Summary Judgment on Counts I & II, and for Partial Summary Judgment on Counts III & IV (“Defendants' MSJ”) (Docket Entry No. 160); and Defendants' Motion to Strike
Improper Declarations Submitted by Plaintiff in Support of Its Motion for Summary Judgment (“Defendants' Motion to Strike”) (Docket Entry No. 171). For the reasons stated below Defendants' Motion to Amend will be granted; Plaintiff's Motion for Summary Judgment will be denied; Defendants' Motion for Summary Judgment will be granted in part and denied in part; and Defendants' Motion to Strike will be granted in part and denied in part.
I. Undisputed Facts and Procedural Background
A. Undisputed Facts
Plaintiff is a federal agency “charged by Congress with the administration and enforcement of the [CEA] and the Regulations promulgated thereunder.”[1]
Defendant EOX is a wholly owned subsidiary of OTC Global Holdings LP (“OTC Global”), an inter-dealer broker in over-the-counter energy commodities, that has been registered with the CFTC as an Introducing Broker (“IB”) since August 7, 2009. EOX executes block futures and options trades on behalf of OTC Global's affiliate companies, and has done so since October of 2012.[2]
Futures contracts are agreements to purchase or sell a commodity for delivery or cash settlement in the future at a specified price.[3] A block trade is a transaction that meets or exceeds an exchange-determined minimum threshold quantity of futures or options contracts, is privately negotiated, and is executed away from the open outcry or electronic markets.[4]
At all times during the Relevant Period EOX brokers reported their block trades to the Intercontinental Exchange, i.e., ICE Futures U.S. (“IFUS”), which is “a board of trade designated as a contract market, and self-regulatory organization.”[5] With respect to the futures and options contracts at issue in Plaintiff's Complaint, IFUS required block trades to be reported to the exchange within fifteen (15) minutes from the time of execution. Block trades made outside of normal trading hours were required to be reported to the exchange no later than five (5) minutes before the open of the next trading session for that particular contract.[6]
On October 15, 2012, EOX entered into an Intercompany Services Agreement (“ISA”) with fifteen affiliates, including Choice Power LP (“Choice Power”). Pursuant to the ISA all of OTC Global's individual brokers engaging in futures transactions within the United States are registered with the CFTC as Affiliated Persons (“AP”) of EOX.[7] The ISA states that
when AP's perform brokerage services involving futures contracts, they are acting exclusively on behalf of EOX in their capacities as [APs] of EOX. The Affiliates and EOX agree that when AP's perform brokerage services involving transactions in contracts other than futures, they are acting on behalf of the relevant Affiliates.[8]
Gizienski was employed by EOX affiliate Choice Power as a broker, and was registered with the CFTC as an AP of EOX from February 1, 2013, to January 1, 2019.[9]
EOX charged commissions to customers for block trades that it brokered.[10] EOX paid Gizienski 50-55% of the commission it received for block trades that he brokered.[11]
Jason Vaccaro (“Vaccaro”) was an energy trader who owned and operated his own trading firm, AC Power Financial (“AC Power”).[12]
From 2012 through May of 2014, Vaccaro retained EOX to broker block trades for AC Power, and Gizienski served as his primary broker.[13]Vaccaro and Gizienski also had a personal relationship that included travel and entertainment.[14]
On April 25, 2013, Vaccaro executed an Additional Account Request pursuant to which he asked FCStone, LLC (“FCS”), the Futures Commission Merchant (“FCM”) with which he worked, to establish an additional sub-account for AC Power, for the purpose of adding an additional trader, Gizienski.[15] On the same day, i.e., April 25, 2013, Vaccaro also executed a Managed Account Authorization providing Gizienski power of attorney to act as his agent to buy and sell commodity futures contracts, commodity
options contracts, and cash commodities through FCS.[16] FCS approved Vaccaro's request for an additional account on May 1, 2013.[17] EOX paid the expenses associated with establishing and maintaining the Managed Account.[18]
Gizienski started using the Managed Account to make trades for AC Power in August of 2013, and continued to use it for that purpose until May of 2014 when Vaccaro directed him to stop.[19]
Gizienski exercised discretionary authority over the Managed Account, which allowed him (1) to execute trades for AC Power without speaking to Vaccaro about the specific trade, and (2) to determine the quantity, price, and timing of trades.[20]
In order to establish the Managed Account that Gizienski used to trade for AC Power, EOX's CEO, Javier Loya (“Loya”), waived a company policy that prohibited brokers from exercising discretion over customer accounts.[21] EOX's Vice-President, Michael Nemer (“Nemer”), was responsible for working with FCS to set up the Managed Account, [22] and for daily monitoring of the Managed Account.[23]
EOX did not provide Gizienski any training expressly directed to exercising discretionary authority over the Managed Account.[24]
Neither EOX nor Gizienski disclosed to their other customers that Gizienski was exercising discretionary authority to execute
trades for AC Power in the same markets that he was brokering for EOX's other customers.[25]
Neither EOX nor Gizienski obtained consent from customers to represent them as their broker in trades for which Gizienski, in exercising discretionary authority over the Managed Account, took the opposite side of their orders.[26]
Gizienski's customers did not know that while acting as their broker he exercised discretionary authority over the Managed Account to execute trades for AC Power in the same markets that he brokered for his other customers.[27]
Gizienski understood that when EOX's customers asked him for a quote or a market for a block trade order, the customers trusted him to “find the best price.”[28]
Gizienski's customers expected him to provide them the best prices known to him for the products he was brokering, but there was no easy way for his customers to know whether he actually provided them with the best price.[29]
Other EOX brokers working in block trade energy markets understood that they had a duty to execute trades for customers at the best price available and known to the broker.[30]
EOX created trade confirmation documents for the Managed Account, some of which identify Gizienski as both broker and
trader.[31] Each trade confirmation document that identifies Gizienski as both broker and trader states:
Disclaimer: EOX Holdings, LLC acted solely as the broker for (Choice Natural Gas LP) for the transaction. The Counterparties themselves determined the terms and conditions of the transaction. EOX Holdings LLC is advising you of the above, as broker only.[32]
Gizienski disclosed to Vaccaro non-public information relating to the identities, positions, orders, and trading interests of EOX customers, not for the purpose of executing trades for other EOX customers but to “giv[e Vaccaro] market color.”[33]
EOX's customers did not all have brokerage services agreements (“BSAs”); EOX's practice was to execute a BSA if requested by a customer. EOX did not communicate to its brokers which customers had brokerage services agreements and which did not.[34]
In May of 2014, Vaccaro instructed Gizienski to stop using the Managed Account to execute trades for AC Power.[35]
B. Procedural Background
Plaintiff initiated this action on September 28, 2018, by filing Plaintiff's Complaint in the Southern District of New York alleging that Defendants violated the CEA and Regulations promulgated thereunder when between August of 2013 and May of 2014, Gizienski, an AP at EOX, disclosed EOX customers' confidential block trading orders and information to Vaccaro, and, exercising discretionary authority over the Managed Account, used that information to trade against his other customers without their prior consent (Counts I and II). Plaintiff also alleged that EOX failed to properly maintain certain records (Count III), and failed to properly supervise Gizienski (Count IV).
On July 31, 2019, the Southern District of New York entered an Order pursuant to 28 U.S.C. § 1404(a) granting defendants' motion to transfer the action to this court (Docket Entry No. 52).
On September 9, 2019, the court entered a Memorandum Opinion and Order (Docket Entry No. 74) denying Defendants' Motion to Dismiss and for Summary Judgment on Counts I and II of the Plaintiff's Complaint.
On March 21, 2021, the court entered a Memorandum Opinion and Order (Docket Entry...
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