Traders Told to Cough Up the Cash After Their HFT Firm Is Fined

(Bloomberg) -- A high-frequency trading firm that got slapped by regulators has found a relatively novel way to recover its fines: go after its former traders.

The dispute erupted this summer when regulators fined DV Trading, formerly known as Rosenthal Collins Capital Markets,for allegedly executing fake trades to artificially boost volume. Chicago-based DV, founded by Dino Verbrugge and Jared Vegosen, settled without admitting or denying wrongdoing and agreed to pay $5.7 million in penalties to the Commodity Futures Trading Commission and CME Group.

That usually ends such matters. But DV demanded that the traders -- Brandon Elsasser, Seth Rubin and Collins Brown -- pay some or all of the penalties, the traders alleged in a suit filed in Illinois federal court.

The traders contend that DV was trying to punish them for cooperating with authorities. They also allege that the firm’s owners were aware of and even directed some of the dubious trading. Verbrugge allegedly once instructed an unnamed employee to “ramp up volume as much as possible for the rest of the month,” according to the traders’ lawsuit.

DV fired back with an arbitration claim in September, formally seeking reimbursement for the fines. The three were responsible for the illegal trades and are contractually obligated to pay any fines stemming from misconduct, the firm contends.

Lost Income

DV said the former traders were contractors. But the CFTC described the only trader named, Elsasser, as an "employee." Elsasser was accused of engaging in fake trades and agreed to pay $240,000 in penalties to regulators after a settlement, without admitting or denying wrongdoing. The two other traders were not sued by regulators.

The three traders, who resigned, are seeking reimbursement for lost income and reputational harm as a result of DV’s arbitration claim and other actions.

“I’ve never heard of a firm suing their own traders before,” says James Cox, a professor at Duke University School of Law.

The fake trades, known as wash trades, earned DV and the traders extra cash from the exchanges because they increased liquidity, according to regulators. The alleged manipulation involved trading in Eurodollar contracts.

Parent Company

DV referred to a statement it issued in July. “Since becoming an independent entity in September 2016, DV Trading has focused on building a strong infrastructure and culture of compliance,” it said.

DV is also seeking cash from its former parent company, RCG Holdings, to pay a third of the penalties. It argues that the sanctions are business expenses, according to court documents. RCG, a futures broker, said in a suit that Verbrugge and Vegosen supervised the traders, so the parent company should not be responsible to pay the penalties.

No dates have been set for the litigation.

©2017 Bloomberg L.P.