tax-spinning transactions constituted prohibited "wash sales"
entered into for the purpose of artificially depressing the
price of oil. Wash trading, not defined in the Act itself, is
the practice of entering into or purporting to enter into
transactions for the purpose of giving the appearance that
trades are being or have been made but without having actually
taken a market position. See 80 Cong.Rec. 7858 (May 25, 1936);
accord Admin.D. 200 (May 25, 1966). The existence of a wash
result — the purchase and sale of the same futures contract at
a similar price — is an insufficient showing to establish a
wash sale in violation of § 4c(a) of the CEA. See In re
Collins, ("Collins III") [1986-87 Transfer Binder]
Comm.Fut.L.Rep. (CCH) ¶ 23,401 at 33,077 (CFTC Nov. 26, 1986).
Prohibited wash sales are proved only if it is demonstrated
that the trader "knowingly participated in transactions
initiated with intent to avoid a bona fide market position."
Id.; Stoller v. Commodity Futures Trading Comm., 834 F.2d 262,
265 (2d Cir. 1987); In re Goldwurm, 7 Agric.Dec. 265, 274
(1948) ("The essential and identifying characteristic of a
`wash sale' seems to be the intent not to make a genuine, bona
fide trading transaction . . ."). In Stoller, the Second
Circuit Court acknowledged that prior rulings on wash sales had
concerned transactions that were "virtually riskfree, often
prearranged, and intentionally designed to mislead, or to serve
other illicit purposes." Stoller, 834 F.2d at 266 (citations
omitted). Whether a transaction constitutes a wash sale
"inevitably turn[s] on the particular facts and circumstances
of individual cases and not on any absolute formula." Collins
III, at 33,077.
Defendants argue that because the 15-day Brent Market
involves binding commitments to take or make delivery of
physical oil, the fact that a tax spin leaves a company in a
net unchanged position as to price spreads does not mean that
it has avoided a bona fide market position. Defendants claim
that, to the contrary, a company completing a spin has assumed
the risks of non-performance by its seller and buyer as well as
the credit risks of both counterparties, unlike an offsetting
transaction on a exchange-traded futures market where
participants look directly to the central clearing house for
performance of contractual obligations. Defendants claim that
these non-market risks distinguish this case from In re
Goldwurm, 7 Agric.Dec. 265 (1948), and In re Siegel Trading
Co., [1977-80 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 20,452
at 21,827 (CFTC July 26, 1977), which ruled that trades
intended as tax avoidance mechanisms are "artificial as far as
futures trading is concerned. . . . [and] fictitious from the
standpoint of reality and substance." In re Siegel, at 21,844.
Transnor maintains that it is market risk, not credit or
performance risk, that makes commodities transactions "bona
fide market positions," citing In re Gimbel, 
Comm.Fut.L.Rep. (CCH) ¶ 24,213; 1988 CFTC LEXIS 204 (CFTC April
14, 1988), aff'd, 872 F.2d 196 (7th Cir. 1989), and Campbell
v. Shearson American Express, Inc., [1985-86 Transfer Binder]
Fed.Sec.L.Rep. (CCH) ¶ 92,303 at 92,047, 92,050 n. 5 (E.D.Mich.
Aug. 9, 1985), aff'd, 829 F.2d 38 (6th Cir. 1987).*fn38
While In re Gimbel, 1988 CFTC LEXIS 204, at 4, n. 7, states
that "[t]o be ficticious within the meaning of Section
4c(a)(A), . . . it is sufficient if the transaction is
structured to negate price competition or market risk," the
Commission did not consider credit or performance risk because
the clearing house guaranteed the contractual obligations.
Neither the Commission nor any court has considered risks other
than price competition or market risk in determining whether a
party "negated risk" because hybrid transactions such as those
at bar have not until now been deemed futures contracts.
Nonetheless, the purpose of the prohibition, to prevent
cheating and fraudulent practices "employed to give a false
appearance of trading and to cause prices to be registered
which are not true prices," 80 Cong.Rec. 7858 (May 25, 1936
(comments of bill's sponsor, Senator Pope), is served by
prohibiting transactions that negate market risk.*fn39 As
stated by the Commission in In re Collins, ("Collins II")
[1986-87 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 22,982 at
31,896 (CFTC April 4, 1986), "the common denominator of the
specific abuses in Section 4c(a) — [including] wash sales . .
. — and the central characteristic of the general category of
fictitious sales, is the use of trading techniques that give
the appearance of submitting trades to the open market while
negating the risk or price competition incident to such a
Transnor asserts that defendants' 16 circular transactions in
which the identical amount, grade and delivery date of the oil
was traded among the defendants and Mobil on the same day at
the same price, as well as defendants' 328 buy/sell
transactions with one other party, at identical prices during
an erratic Brent Market period, negated market risk. Because
defendants do not dispute that these transactions left the
companies "in a net unchanged position as to price spreads,"
this Court concludes that defendants' tax spins feigned a
non-existent market position and potentially misled other Brent
Market traders, despite any nonmarket risks incurred. To hold
otherwise would defeat the purpose of the CEA's clear
Defendants next claim that Transnor cannot establish the
required intention to induce an artificial price because the
transactions were entered into for legitimate commercial or
investment purposes, citing In re Indiana Farm Bureau Coop.
Ass'n, [1982-84 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,796
at 27,279 (CFTC Dec. 17, 1982). See Russo, supra at § 12. 19.
Defendants maintain that tax-spinning transactions were routine
commercial transactions entered into for permissible purposes,
including tax certainty. Transnor first refutes the relevance
of any legitimate purpose to a determination of manipulation
and alternatively asserts that defendants' activities,
constituting tax fraud, further evidence wash sales.*fn41
Where a trader acts with a legitimate investment or
commercial purpose, no manipulative intent can be found.
Stoller, 834 F.2d at 266 (citing with approval the distinction
between legitimate market purpose and manipulative intent drawn
in In re Collins, ("Collins I") [1977-80 Transfer Binder]
Comm.Fut.L.Rep. (CCH) ¶ 20,908 at 23,687 (CFTC Aug. 16, 1979);
Russo, supra § 12.19 at 12-34. The "legitimate market purpose"
test for conduct alleged to constitute wash sales is intended
to avoid charging a knowing violation and causing undue
prejudice to a litigant who may have relied on an agency's
prior interpretation or policy. See Stoller, at 265-266. A
second purpose of the test recognizes that a trader is entitled
to act in his best interest so long as he does not act with
manipulative intent. See In re Indiana Bureau Coop. Ass'n.,
Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,767 at 27,279 (CFTC
Dec. 17, 1982).*fn42
In Stoller, the court reversed the Commission's ruling of
liability because, in its view, the public was not apprised
that the Commission considered the practice of "roll forward"
trading to be encompassed within the wash-sale prohibition of
the Act. The Second Circuit Court accepted defendant's claim
that the transactions at issue were "designed to fulfill a
purpose generally considered legitimate in the industry" and
declined to hold the public accountable under the Commission's
construction of the statute without appropriate notice.
Stoller, 834 F.2d at 266-67 (emphasis added).*fn43
In the case at bar, the alleged legitimate market purpose is
tax certainty. However, it is obvious that the incentive behind
tax spinning was the achievement not merely of a more certain
tax but of a lower tax. Defendants claim that OTO's subsequent
sanction of the transactions as legitimate distinguish their
activities from the proscribed tax structurings in
Goldwurm and In re Siegel. Transnor maintains that the Goldwurm
and In re Siegel rulings fairly apprised defendants that
achieving tax advantages by engaging in offsetting transactions
at artificial prices is within the prohibition of "wash sales"
and, moreover, that at the time of the tax spins, defendants
did not act to "fulfill a purpose generally considered
legitimate in the industry," making irrelevant that the U.K.
subsequently condoned their conduct.*fn44
Clearly, Goldwurm and In re Siegel gave public notice that
illicit tax maneuverings are prohibited under the Act. The more
difficult question is whether the U.K.'s subsequent approval of
the transactions retroactively renders the purpose of the
transactions legitimate. This Court believes that it does not.
More appropriate to a determination of legitimate market
purpose than subsequently adjudicated legality is whether the
transaction was "designed to fulfill a purpose generally
considered legitimate in the industry." Stoller, 834 F.2d at
266. Although defendants offer testimony that U.K. tax law as
it existed prior to March 1987 permitted integrated oil
companies to sell and buy back future cargoes to establish the
lowest price for tax purposes, Transnor has refuted that
"portfolio pricing" in particular was generally considered
legitimate in the industry, citing the deposition testimony of
Exxon chief-of-trading Morey Lorenz, Exxon trader Diane Sharp,
Conoco trader Player Edwards, Morgan Stanley trader Nancy
Kropp, and defendants' expert witness Donald Miller. Transnor
also offers the testimony of its U.K. tax expert James Bentley
that defendants trading constituted attempted tax fraud.
Because there remains a question of material fact as to whether
defendants' transacted with a legitimate market purpose in
mind, summary judgment is denied.
Defendants assert that the tax spinning transactions were not
responsible for the decline in oil prices thereby defeating
Transnor's manipulation claim for lack of causation. Defendants
submit testimony that the drop in oil prices resulted from the
actions of OPEC, particularly its decision to compete for
market share. However, where "multiple causes of an artificial
price . . . can be sorted out, and [defendants] are a
`proximate' cause of the artificial price, a charge of
manipulation can be sustained." In re Cox, at 34,066. As
discussed earlier, Transnor presents a question of fact as to
Finally, defendants contend that their conduct did not result
in the creation of an artificial price, a requisite to
Transnor's CEA manipulation claim. Transnor contends otherwise.
This issue of material fact precludes summary judgment.
For the reasons outlined above, defendants' motion for
summary judgment is denied.