Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D.N.Y.: Intentionally mismarked trades resulted in over $100 million in realized losses, (Aug 21, 2026)

By R. Jason Howard, J.D.

In a parallel criminal case, the defendant pled guilty to one count of wire fraud and admitted that he was responsible for mismarking his trades.

The Southern District of New York had denied a defendant’s motion to dismiss a civil action brought by the CFTC which alleges that between December 2015 and September 2016 the defendant “made numerous fraudulent misrepresentations in an internal recordkeeping system that materially misled his employer” and resulted in the company suffering over $100 million in realized losses (CFTC v. Smothermon, No. 2:19-cv-04185-GBD (S.D.N.Y. Aug. 20, 2026)).

Scheme. From 2011 to 2016, the defendant served as the president and head trader of the gas division of a large commodities-trading company. The gas division purchased and sold natural gas products. As the head trader, the defendant had sole responsibility for trading natural gas futures, options on futures, and over-the-counter swaps on behalf of the company.

To manage financial risk, the gas division was required to enter all trading information into the company’s internal recordkeeping system. Between December 2015 and September 2016, the defendant deceptively mismarked the daily mark-to-market value of numerous futures positions in the company’s system. Around May 2016, the defendant was awarded a bonus of over $14 million based on the gas division’s performance.

By August 2016, the defendant’s marks on the gas division’s trading book deviated from the New York Mercantile Exchange’s daily settlements and the true mark-to-market values of the company’s Futures Commission Merchant by over $100 million and the company told the defendant that it was preparing to do an internal audit of the gas division. On or around September 1, 2016, the defendant admitted to the company that he mismarked his trading book and resigned that day. As a result, the company suffered over $100 million in realized losses.

Proceedings. The CFTC filed a civil action, and the Southern District filed a parallel criminal indictment. The defendant moved to stay the civil proceeding pending the resolution of the criminal case. In the criminal proceeding, the defendant pled guilty to one count of wire fraud and admitted that he was responsible for mismarking his trades to obtain a discretionary bonus.

Civil action. The defendant moved to dismiss the civil action for failure to state a claim. The court explained that because the CFTC’s allegations against the defendant sounded in fraud, its claims are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). Rule 9(b) requires that the CFTC specify what statements were fraudulent, identify the speaker, state where and when the statements were made, and explain why the statements were fraudulent.

Rule 9(b). Despite the defendant’s arguments that the CFTC failed to adequately allege that his conduct was “in connection with” a regulated transaction and that the CFTC failed to plead the alleged fraud with sufficient particularity, the court found that the CFTC satisfied Rule 9(b)’s particularity requirements because the complaint sufficiently identified the alleged fraudulent statements by (1) stating the types of trades the defendant was responsible for at the company; (2) identifying the time period in which the defendant mismarked trades; and (3) providing six detailed examples of trades defendant mismarked, how he carried it out, and to what effect.

Conclusion. The defendant’s motion to dismiss was denied.

The case is No. 2:19-cv-04185-GBD.

Judge: Daniels, G.

Attorneys: Danielle E. Karst for the CFTC. David Keith Isaak (Steptoe LLP) for David Smothermon.

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