RELEASE Number 7826-18 October 11, 2018 Federal Court in Chicago Enters $14 Million Judgment against Options Trader for Fraudulent Options Scheme Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois entered a Consent Order for Permanent Injunction (Consent Order), which resolves charges against Defendant Thomas C. Lindstrom, of Winnetka, Illinois, for engaging in fraud in connection with his trading of options on 10-year U.S. Treasury note futures (T-Note Options). The October 4, 2018 Consent Order stems from a CFTC Enforcement Complaint filed on September 29, 2016, against Lindstrom, a long-time trader of T-Note Options offered on the Chicago Board of Trade (CBOT) (see CFTC Complaint and Press Release 7460-16).The Consent Order finds that in 2014, Lindstrom engaged in trading activity which had the effect of falsely inflating the value and profitability of his options position, and misrepresented to his employer the quantity of options and the risk associated with his position.As a result, the Consent Order finds, Lindstrom’s employer, Rock Capital Markets, LLC (Rock Capital) paid Lindstrom $285,000 in draws to which he was not entitled.Rock Capital lost $13,981,478 as a result of Lindstrom’s misconduct, and ceased operating after 23 years in business. The Consent Order requires Lindstrom to pay $13,981,478 in restitution, along with an $855,000 civil monetary penalty. The Consent Order imposes permanent trading and registration bans on Lindstrom, among other injunctive relief. Lindstrom’s Fraudulent Scheme The Consent Order finds that Lindstrom exploited a pricing convention set by exchange rule then in effect, whereby deep out-of-the-money options settled each day at the standard minimum tick value of $15.625 prior to expiration. According to the Consent Order, Lindstrom purchased thousands of these options, which created the appearance of millions of dollars of profits in Lindstrom’s account. Lindstrom used the appearance of profits to request and receive draws from Rock Capital.Lindstrom also sent his employer screenshots of his trading account that omitted the thousands of deep out-of-the-money options that he actually held. According to the Consent Order, from one contract expiration to the next, as the options expired worthless and his account’s phony profits were wiped out, Lindstrom purchased more and more out-of-the-money options to cover the realized losses his account had incurred and create the appearance of more phony profits in his account. Ultimately, Lindstrom accumulated a position of more than 950,000 deep out-of-the-money T-Note Options.When Lindstrom’s true position and losses were uncovered, his account had a net liquidation value that was inflated by more than $15 million. On September 29, 2016, Lindstrom was indicted on criminal charges arising from the same fraudulent conduct that was the subject of the CFTC’s enforcement Complaint. See United States v. Lindstrom, Case No. 16-cr-631 (N.D. Ill.).On January 23, 2018, Lindstrom pled guilty to one count of wire fraud and he is scheduled to be sentenced later this year. The CFTC’s Enforcement Division thanks the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Northern District of Illinois for their cooperation. CFTC Division of Enforcement staff members responsible for this action are Michael D. Frisch, Jeffrey Gomberg, Joy McCormack, Robert Howell, Scott R. Williamson, and Rosemary Hollinger.
"The Consent Order finds that Lindstrom exploited a pricing convention set by exchange rule then in effect, whereby deep out-of-the-money options settled each day at the standard minimum tick value of $15.625 prior to expiration" So he settled options prior to expiration and viewed to make a profit due to the options being out-of-money? How would the pricing convention set by the exchange relate to this? Wouldn't this be illegal regardless? Apologize if questions are dumb, fairly new to this
This was actually all a way for him to exploit his company's internal compensation model. He would buy options for next to nothing and because of the minimum price quote when they marked his position to market internally at his company it showed a huge, but in reality phantom, profit. Since his comp was tied to his profit, they paid him a lot more than they otherwise would have based on this phantom profit. In the real world he just bought far OTM options that expired worthless and lost his company a ton of money.
IMHO it was derelict that the proprietary trading firm's principals or risk officer didn't catch this right away. He was buying the options at a price point far cheaper than the settlement marks. Just very basic options knowledge and common sense would have caught it - a way, way-OTM option is not going to appreciate significantly in price during the course of a single typical trading day. And who TF would allow an employee to have on 950,000 of anything? Especially a small (and apparently ignorant) prop firm.
My first thought as well, that the compliance department of the firm should have been sanctioned as well.