## Facts

- The Commodity Futures Trading Commission (CFTC) brought two administrative enforcement actions under the Commodity Exchange Act (CEA) alleging wash sales, fictitious sales, bucketing, and other noncompetitive trades.
- In the first matter, floor brokers Stephen F. Reddy and John W. Sorkvist were charged with noncompetitive trades in coffee, sugar, and cocoa futures on the Coffee, Sugar & Cocoa Exchange.
- The CFTC relied substantially on expert analysis of thousands of trading cards identifying repeated, nearly simultaneous, identically offsetting trades between Reddy’s customer orders and Sorkvist’s opposing trades, consistent with indirect bucketing through an accommodating trader.
- Reddy and Sorkvist argued the patterns were consistent with lawful “scalping” rather than wash trades or bucketing.
- In the second matter, Solomon Mayer, Barry Mayer, SHB Commodities, Inc., Maye Commodities Corp., and Steven Gelbstein were charged with noncompetitive heating-oil futures trading on NYMEX, including wash trades between accounts alleged to be commonly controlled and involving Gelbstein as an accommodating trader.
- The administrative law judge (ALJ) found all respondents liable; the CFTC affirmed the liability findings in both matters and increased sanctions in the second matter, including long-term and permanent trading bans and higher civil monetary penalties.
- The respondents petitioned for judicial review; the Second Circuit consolidated the petitions.

## Issues

1. Whether substantial evidence supported the CFTC’s findings that petitioners engaged in wash sales, fictitious sales, bucketing, and other noncompetitive trades in violation of the CEA.
2. Whether petitioners’ alternative explanations (including scalping, lack of common control, and lack of knowledge) required setting aside the CFTC’s liability determinations.
3. Whether the CFTC’s sanctions, including permanent and lengthy trading bans and substantial civil penalties, were arbitrary, capricious, or an abuse of discretion.

## Decision

- The Second Circuit denied the petitions for review and affirmed the CFTC’s orders in full.
- The court held the CFTC’s liability findings were supported by substantial evidence, including circumstantial proof from trading patterns and account evidence.
- The court upheld the CFTC’s rejection of petitioners’ alternative explanations and declined to reweigh competing inferences from the record.
- The court sustained the sanctions as within the CFTC’s statutory remedial authority and not an abuse of discretion given the seriousness and recurrence of the misconduct.

## Legal Principles

- Under the CEA, agency factual findings must be upheld if supported by substantial evidence, and a reviewing court may not reweigh the evidence or substitute its judgment for the agency’s.
- Courts give significant deference to the CFTC’s expertise in interpreting complex futures-market data and drawing inferences about whether trades were competitive or fictitious.
- Repeated, nearly simultaneous, identically offsetting trades—especially involving an accommodating trader or accounts with common control—can support findings of wash sales, fictitious sales, and indirect bucketing, and can support inferences of knowledge and intent.
- The CFTC has broad discretion to impose severe sanctions, including permanent trading bans and substantial civil penalties, so long as the sanctions are within statutory limits and reasonably explained in relation to the misconduct.

## Conclusion

The Second Circuit affirmed the CFTC’s determinations that the petitioners engaged in noncompetitive, risk-neutralizing futures trades amounting to wash sales, fictitious sales, and bucketing, and upheld stringent trading prohibitions and civil penalties under a deferential standard of review.


Reddy v. Commodity Futures Trading Comm'n, 191 F.3d 109 (2d Cir. 1999)