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U.S. Commodity Futures Trading Commission v. Li

United States District Court, N.D. Illinois, Eastern Division

December 25, 2016

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
YUMIN LI, and KERING CAPITAL LTD. Defendants, KERING CAPITAL LTD. Relief Defendant.

          OPINION AND ORDER

          Sara L. Ellis, Judge

         Plaintiff U.S. Commodity Futures Trading Commission (“CFTC”) filed a complaint against Defendants Yumin Li and Kering Capital, Ltd. (“Kering”), alleging that Li and Kering violated the Commodity Exchange Act (“ the Act”), 7 U.S.C. §§ 6b(a)(1)(A) and (C), 7 U.S.C. § 6c(a), and 17 C.F.R. § 1.38(a), when Li cheated or defrauded Li's employer, Tanius Technology (“Tanius”), by entering into pre-arranged, fictitious trades of futures contracts designed to transfer money from Tanius to Kering. CFTC now moves for summary judgment, seeking to permanently enjoin Defendants from further violations of the Act, permanently enjoin Li from trading in the futures markets, and permanently enjoin Kering from granting Li access to its futures trading accounts and from relying upon Li for trading advice and direction. CFTC also asks the Court to impose a civil monetary penalty of $901, 387.50, jointly and severally against the Defendants. Finally, CFTC requests that the Court order restitution to Tanius in the amount of $300, 462.50, plus post-judgment interest.

         Because the undisputed facts establish that Li engaged in illegal fictitious trades in order to fraudulently transfer funds from Tanius to Kering and did so in the scope of her employment with Kering, the Court grants the CFTC's motion for summary judgment. The Court orders Li and Kering to return $300, 462.50, plus post-judgment interest, to the Tanius Account and to pay a civil penalty of $901, 387.50. The Court enjoins Li from working in the futures markets for five years and permanently enjoins Li from future violations of the Act. The Court enjoins Kering from employing Li to do any work related to the futures markets for five years and permanently enjoins Kering from future violations of the Act.

         CFTC also moves to strike [65] the declaration of Nicolas Morgan in opposition to the motion for summary judgment [56], the declaration of Dr. Tiago Duarte-Silva [57], and Li's Response to the Joint Statement of Undisputed Material Facts[1] [58]. Li subsequently withdrew the declaration of Dr. Duarte-Silva, but she continues to object to the exclusion of her Response and the Morgan declaration. Because the Response does not comply with the Court's standing order on summary judgment procedures and the Morgan declaration puts forth irrelevant and inadmissible evidence, the Court grants CFTC's motion to strike.

         BACKGROUND[2]

         A. Relevant Parties

         1. Yumin Li

         Tanius, a California based trading firm, employed Li from February 2013 until May 2015. Tanius hired Li because she had expertise in Eurodollar and other types of trading. While employed at Tanius, Li received a total of $931, 140.21. According to her employment agreement, Li was not authorized to trade any securities or financial instruments for herself or any other entity without authorization from Tanius.

         Li contends that while at Tanius, she was treated unfairly relating to the margin and risk limits on her trading activities. Li also felt that Tanius did not appropriately compensate her and thus, she faciliated the trades described below in order to obtain compensation which she believed Tanius owed to her.

         Li accepted a position as a trader at Kering in November 2014 while still employed at Tanius. At Kering, Li was the only person trading futures for Kering and held sole responsibility for developing Kering's futures trading strategies.

         Prior to her employment at Tanius, Li had worked periodically as a Eurodollar trader for five years. Li has a master's degree in statistics and a bachelor's degree in business administration.

         2. Kering Capital Limited

         Kering is a company incorporated in the British Virgin Islands. Yanping Lu, Li's mother, formed Kering in November 2014. Lu is the Chief Executive Officer of Kering. Kering's sole business activity is trading; its only business asset is the trading account ending in 2536 (“Kering Account”). During the relevant timeframe, Li was a probationary trader for Kering, but she expected to receive compensation from Kering for profitable trading and she expected to be hired by Kering if she generated enough profit.

         3. Tanius Technology LLC

         Tanius is a California-based trading firm. One of Tanius' founders, Gary Middlemiss, was Li's supervisor at Tanius. While working at Tanius, Li had access to Middlemiss' trading account ending in 8202 (“Tanius Account”).

         B. Trading at Issue

         Beginning on March 17, 2015 and continuing until May 6, 2015, Li used the Tanius Account to engineer a series of trades designed to benefit Kering. Li structured 41 trades over six separate occasions such that the Tanius Account would always buy futures from the Kering Account at higher prices and sell those same futures back to Kering at lower prices (or in the reverse order in some circumstances) completing what is known as a “round-turn trade.” Regardless of the order of the transaction, each transaction resulted in unidirectional profits to Kering at the expense of Tanius. Over the course of these 41 transactions, Li successfully transferred $300, 462.50 from the Tanius Account to the Kering Account. Li was not authorized by Middlemiss or anyone else at Tanius to enter into any of these 41 transactions and she was not authorized to enter into any transactions that obviously would result in a loss for Tanius.

         Li always placed these orders outside of normal trading hours in illiquid futures markets-typically Eurodollar futures with expiration dates more than five years in the future. She would enter an order with one account and then, within seconds, enter an identical order with the other account on the opposite side of the trade. For example, on May 6, 2015, between 12:42:54 AM and 12:43:05 AM (a nine-second window), Li entered orders on the Kering Account selling a total of 2400 futures with three different expiration dates. Then, between 12:44:17 AM and 12:44:21 AM, Li entered orders on the Tanius Account to buy the exact same quantities of those futures at the exact price she offered them on the Kering Account. These orders matched and the exchange executed the trade. Li then immediately closed out the position by doing essentially the same transaction in reverse, this time entering an order to buy the same 2400 futures with the Kering Account and selling them from the Tanius account, but this time at a lower price. Again the orders matched and the exchange executed the trade. The total time elapsed from the moment Li entered the first order until she closed out the position was one minute and forty seconds, during which time she transferred $67, 487.50 from the Tanius Account to the Kering Account. Each of the other round-turn trades Li executed between the Tanius Account and the Kering Account resulted in a loss to Tanius and a gain to Kering.

         By engaging in these trades outside of regular business hours, placing nearly simultaneous orders in illiquid products, Li was able to virtually assure that she would not trade with a third party, and eliminated any market risk to her transaction. During each of her trades, the Kering Account and Tanius Account were the only two accounts trading in the selected markets.

         C. Discovery of the Trading and Subsequent Action

         On May 6, 2015, Middlemiss noticed that trading had occurred in the Tanius Account that had caused a significant loss on the account. Middlemiss asked Li about the trades and she admitted to executing the trades. That same day, Li fled to China where she remains to this day. Li has expressed her intention to return to the United States and continue trading for Kering after the conclusion of this case.

         Kering did not authorize Li to engage in illegal transactions, and Lu was not aware that Li conducted trades on behalf of Kering by controlling the Tanius Account and directing trades favoring Kering with that account.

         D. Freezing of the Kering Account

         On July 2, 2015, the Court entered an order freezing the assets in the Kering Account. The parties consented to a preliminary injunction extending the freeze for the duration of the case on July 23, 2015.

         LEGAL STANDARD

         Summary judgment obviates the need for a trial where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. To determine whether a genuine issue of fact exists, the Court must pierce the pleadings and assess the proof as presented in depositions, answers to interrogatories, admissions, and affidavits that are part of the record. Fed.R.Civ.P. 56 & advisory committee's notes. The party seeking summary judgment bears the initial burden of proving that no genuine issue of material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In response, the non-moving party cannot rest on mere pleadings alone but must use the evidentiary tools listed above to identify specific material facts that demonstrate a genuine issue for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir. 2000). Although a bare contention that an issue of fact exists is insufficient to create a factual dispute, Bellaver v. Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the Court must construe all facts in the light most favorable to the non-moving party and draw all reasonable inferences in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L .Ed. 2d 202 (1986).

         ANALYSIS

         A. Motion to Strike

         CFTC moves to strike the declaration of Nicolas Morgan in opposition to the motion for summary judgment, the declaration of Dr. Tiago ...


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