Robert Mish is not an oil trader. He’s a numismatist — an expert in rare coins, precious metals, and currencies. Growing up in Brooklyn, he began by collecting stamps and playing cards at the age of four. From there, he moved on to coins and, eventually, valuable antiquities, heading out to California to start his own business in Menlo Park, Mish International Monetary. He traveled the world attending coin shows and became an authority on commodities such as gold, silver, platinum, and palladium, writing and contributing to a number of books.
This year, two months after his 73rd birthday, Mish found himself trading U.S. crude oil futures at perhaps their most inopportune moment: On April 20, the price of oil fell to zero — and kept falling. Mish, an expert in commodities, was holding ten oil contracts as the market went over the edge.
After 50 years of inspecting currencies and stores of value from the Americas to Europe to Asia, Mish can also claim another expertise: He is an expert in counterfeit detection. That day, as he watched his oil trades go south, he picked up the phone and called one of the best market-manipulation lawyers in the country.
While much of Wall Street was on vacation in August, the battle lines were drawn in what is increasingly shaping up to be a fight over whether oil prices in April were manipulated and, if so, who was responsible.
The dominant question hanging over the debate is who will have to pay.
“I have done manipulation cases since 1976,” says Christopher Lovell, partner at New York-based law firm Lovell Stewart Halebian Jacobson, which is now representing Mish. “We have looked at the pricing patterns and done the analyses. And we have ruled out that this was the result of normal market activity. This is a classic example of manipulation.”
According to a class-action suit filed jointly last month by Lovell’s firm and Chicago law firm Miller Law on behalf of Mish, crude oil futures on the New York Mercantile Exchange traded at levels too extraordinary to be true.
The prices, which Lovell says in no way reflected any kind of “competitive market activity,” vacillated more than $55 a barrel on April 20, plunging at one point to minus $40.32 a barrel to mark the lowest intraday handle ever witnessed in the most liquid crude oil contract in the world. If that was not enough to raise doubts, the speed at which prices fell that day, the suit alleges, defied reason, with oil prices dropping more than $25 a barrel in the final two minutes of trading alone to settle at minus $37.63 — an anomaly that has yet to be satisfactorily explained.
The suit also notes that, the next day, the very same contract suddenly turned positive, rising more than $47 a barrel in the final hours of trading to expire at $10.01 a barrel, moving into positive territory and casting further suspicion on the prior 24 hours of mysterious trading.
All told, the price swings were tantamount to a 40-standard-deviation event, according to the suit. In other words, explains Lovell, without manipulation, such an event “would not happen in the life of the universe.” He adds, “Supply and demand fundamentals do not change to that degree in just minutes, and they certainly don’t slingshot between $50 and $60 in one day. This was unprecedented in the history of the oil market.”
Mish, like many market participants, was caught in the undertow of collapsing prices, losing $92,490 when he was forced to sell his long position in May oil futures at negative prices. Unlike many market participants, however, the veteran commodities trader is refusing to swallow his losses. Instead, he’s leading a class action to identify and hold accountable the players who sought to drive the market below zero. The suit alleges that Vega Capital London, a trading firm registered in Essex, England, and a cohort of its traders acted intentionally to manipulate oil prices lower, minting as much as $500 million in a single day.
“At least a dozen traders associated with defendant Vega Capital worked together to aggressively sell [the] futures contracts and other related instruments for the purpose of depressing the price,” the suit alleges. Pushing oil prices into negative territory increased the value of crude contracts Vega had arranged to purchase in large quantities in advance at that day’s settlement price, according to the suit. “Vega had a large financial incentive for the May 2020 contract to trade and to ultimately settle at the lowest possible price on April 20,” it says, alleging the trading firm engaged in a “highly unusual violation” to reap “supra-competitive profits.”
In the first week of August, word of Vega’s coup leaked out, with reports surfacing of roughly a dozen traders working to crush the market’s settlement price by selling oil contracts en masse in a much-loved strategy traders affectionately call “banging the close.” While this approach has indisputably enriched many a trader for the better part of the last century, it is not legal. Mish’s suit, seeking damages, legal fees, and other monetary relief, was filed within hours of the news of Vega’s trading gains.
“If you are trading in a manipulated market and you are charged an artificial price, then you are entitled to damages,” says Lovell. “If you are trading with other people to move the price, it’s a violation of the law.” Both Mish and Vega declined to comment. Vega’s lawyer, Amy Doehring, a partner at Chicago law firm Akerman, did not return calls for comment. Mish’s suit — which names Vega Capital, its director Adrian Spires, and Vega traders “John Does 1–100” — invites anyone who bought or sold oil contracts on or around April 20 and April 21 to join the class action. Based on available market data, the suit estimates hundreds of people may qualify to apply.
While it is notoriously difficult to win trading damages and Mish’s case may take years, this suit is likely to have teeth. Specializing in commodities-price manipulation, Lovell has taken three cases to the Supreme Court — including one at the start of his career, when he was just 28, against entrepreneur J.R. Simplot. Simplot was caught manipulating prices on the New York Mercantile Exchange more than four decades ago, when the marketplace’s centerpiece contract was not light, sweet crude oil futures but — of all things — Maine potatoes.
Because of Simplot’s hijinks, the Commodity Futures Trading Commission banned Nymex potato futures trading after the exchange suffered the biggest market default in history in 1976.
Of his three Supreme Court cases, Lovell has won two, including the one against Simplot.
Mish’s case is by no means the only one to have surfaced this summer. But it is one of the few that have a face. Many traders have been afraid to identify themselves or undertake lawsuits in the aftermath of April’s oil price crash — especially hedge funds that fear disclosing their names, lest their investors learn of their losses.
Lawsuits cropping up are not just of the class-action variety, but are also being spearheaded by hedge funds and brokerages and, in some cases, appear to hint at imminent actions against some of the exchanges.
The fact that so many in the market feel the only redress available to them is to take legal action is less than ideal, says Dan M. Berkovitz, commissioner at the Commodity Futures Trading Commission, the futures market watchdog that has opened a months-long investigation into what went wrong. “We need to get to the bottom of this,” he tells Institutional Investor. “The oil market contracts are supposed to work, not just when things are smooth, but when things are volatile — especially when things are volatile. That’s when people need this market the most.” If market participants believe they have been treated fraudulently, he says, there is also the option of reporting it to the CFTC, which can take enforcement action. “But of course,” he adds, “that can take years.”
The legal allegations afoot are not just specific to oil price manipulation, says Sam Lieberman, a partner in the securities litigation group at law firm Sadis & Goldberg, but encapsulate the totality of the dysfunction witnessed in the market the day oil prices turned negative.
“There were a lot of people who were on trading platforms that wouldn’t allow them to exit the market when prices went below zero,” he says. “Traders were not just deprived of selling, but also buying, which, when you consider how much the market needed that natural upward pressure, is truly astonishing.” He says the downward pressure on the market, combined with some traders’ inability to buy or sell below zero, may have made the market more susceptible to manipulation.
One of Lieberman’s clients, a London-based, Cayman Islands-registered hedge fund (which declined to be named), found itself unable to access its positions and was locked out of the market as the bottom fell out. The fund, using the online trading platform of Interactive Brokers, purchased around 100 oil contracts just as oil prices fell below $2 a barrel on April 20, investing about $155,000, Lieberman says. When oil prices started to crater, the fund desperately tried to liquidate its bets, but in vain.
“They were forced to watch in horror as the prices dropped to zero and then kept going,” Lieberman says. “They ended up losing around $4 million as their positions were auto-liquidated by Interactive Brokers at the negative settlement price of $37.63.” Lieberman is now leading Sadis’s investigation into misconduct by Interactive Brokers, one of the biggest online brokerages in the U.S., which refused to compensate his client for its losses. According to the Financial Industry Regulatory Authority, which oversees U.S. brokers and broker-dealers, a number of cases are now pending against Interactive Brokers.
In May, the billionaire chairman of Interactive Brokers, Thomas Peterffy, appeared to blame the exchanges for much of the turbulence, stating, “We have called the CFTC and complained bitterly. It appears the exchanges are going scot-free.” At the same time, Interactive Brokers acknowledged that a defect in its trading system did not allow clients to buy or sell oil contracts at negative prices, reimbursing what it estimated to be nearly 95 percent of customer losses below zero, which came to $102.7 million. The company declined to provide the number of traders it compensated or more information about why some traders were refused and others were not.
One of the market participants who was compensated was Syed Shah, a 31-year-old trader based in Mississauga, Canada, just outside Toronto. He says he started the day on April 20 with hundreds of thousands of dollars in his Interactive Brokers account before his oil trades led to an unexpected margin call. “I was in a panic,” he says. “I couldn’t believe it. When I placed my trades, I did not know my account was already below zero. I wasn’t getting the updated prices.” After many phone calls to the brokerage throughout the day and evening, Shah finally received a message at midnight. Interactive Brokers sent him an email stating he owed the company C$13 million ($9.9 million), plus interest. “I was in shock,” he says. “I thought, ‘I’ve lost everything. I am going to owe them for the rest of my life.’”
After several months of negotiating with the brokerage, Shah was able to arrive at a legal settlement in July to wipe out his debt. But it didn’t make him whole, he says. And there was a twist: It appeared Interactive Brokers was reserving the right to pursue legal claims against Nymex, owned by CME Group, and Atlanta-based Intercontinental Exchange, or “any market for crude oil derivatives,” according to terms of the company’s settlement agreements.
After taking a closer look at the Interactive Brokers settlement documents, Institutional Investor can reveal that traders receiving compensation from the company must not only agree to release it from any legal claims arising from the negative-oil-price events, but also transfer any of their own related claims against third parties to Interactive Brokers, assisting the company with its own litigation and providing testimony; attending hearings or trials; and procuring paperwork, if needed.
In response to questions from Institutional Investor about whether Interactive Brokers plans to pursue claims against Nymex, CME Group, and Intercontinental Exchange — all of which were named as potential litigation targets in the documents — Interactive Brokers declined to comment. When CME and Intercontinental Exchange were asked if they were aware of possible litigation, they also declined to comment. “I don’t think Interactive Brokers is just going to take this loss,” Shah says. “I think it’s going to take what we signed over and go after these exchanges and get their money back and more.”
Shah agrees with Peterffy on one point: He doesn’t believe oil prices were justified at below zero. “I think this was the result of market manipulation, 100 percent,” he says. Peterffy, for his part, thinks there’s a problem with the design of commodities futures contracts, because trading ahead of expiration tends to get thinner as traders exit their positions, leaving prices more vulnerable to influence. “That’s how it’s possible for these contracts to go absolutely crazy and close at a price that has no economic justification,” Peterffy told Bloomberg. “The issue is, whose responsibility is this?”
If Vega’s trading bonanza was impressive, then Goldman Sachs’s returns resulting from oil prices’ nosedive are extraordinary. According to sources familiar with the bank’s trading gains for the year through May, Goldman’s commodities division raked in as much as $1.4 billion, led by oil futures, along with investments in natural gas, power, precious metals, and other commodities.
The gain was Goldman’s largest in a five-month period in at least a decade, harking back to its pre-global financial crisis heyday. Standout returns from oil came primarily from the bank’s overseas trading desks in Singapore, led by partner Qin Xiao — known to his colleagues as “QX” — and in London, led by partner Anthony Dewell. Both report to New York-based Ed Emerson, who runs the bank’s global commodities business.
When asked if the massive gains stemmed from speculative trading activity, the bank initially declined to comment on the record. When pressed, Goldman emailed a statement saying its commodities trading entities, which consist of J. Aron & Co., J. Aron & Co. Singapore, and Goldman Sachs International, are “all subject to regulation both by the Fed and the CFTC.” It declined to elaborate or provide any further explanation.
Following the global financial crisis and subsequent bank bailouts, speculative trading by U.S. taxpayer-backed banks was reined in heavily by the Dodd-Frank Act and the Volcker Rule. Under the Trump administration, however, the CFTC has controversially loosened those restrictions, allowing for exemptions among overseas trading desks, in addition to officially narrowing the scope of the Volcker Rule, which sought to reduce the high-risk speculative-trading activities of top banks.
In fact, many of the winners of April 20 were based overseas — with London-based funds and trading houses casting the longest profile. Among the winners were Westbeck Capital Management; Andurand Capital Management; Arctic Blue Capital, a division of H2O Asset Management; BB Energy; and Merchant Commodity Fund — all in London — as well as Switzerland’s GZC Investment Management. Most of the funds, when reached by Institutional Investor, said they took great pains to exit the oil market before it tumbled into negative territory, because, as one high-ranking trader crisply stated, “We don’t participate when we don’t understand. That was a moment we did not understand.”
Arctic Blue chief investment officer Jean-Jacques Duhot, whose commodities fund benefited from short bets in oil last spring and was up 12 percent this year through August, says, “I think a significant number of fund managers did not feel comfortable trading at minus $10, minus $30. I am sure there were discretionary traders in the market on that day. But for me, it was impossible to put in a sound money management plan. If you’re going to go long at negative prices, where is your stop loss? The downside is infinite. At some point, it’s like gambling. There are just too many unknown unknowns.”
Will Smith, founding partner of Westbeck Capital Management, says while his fund notched double-digit returns in the spring from oil’s price drop, he believes the market will draw greater scrutiny going forward to ensure negative price events don’t recur. “I think the market is wiser, not broken, but that there will be areas going forward that will be receiving much closer attention,” he says. “Crude oil futures are by far the biggest commodity that’s traded, and 99 percent of the time, it's transacted very efficiently. I do think the events of this spring are unlikely to be replicated.”
So far, oil prices have not turned negative again, but to better understand exactly what happened — and if there was any market manipulation — the CFTC announced last spring it would undertake its own investigation into the matter. On July 21, CFTC chairman Heath Tarbert said the commission had completed “a detailed forensic study” of what he called the “crude-oil price aberration on April 20th” and planned to release the results this fall. Sources close to the CFTC have told Institutional Investor the report could be out as soon as October.
Tarbert said the CFTC’s analysis “point[ed] to a confluence of fundamental and technical reasons” for the market mayhem, adding that the CFTC would work to “ensure that the price formation, price discovery, reliability, and soundness” of the market was “further strengthened.” As has been widely noted, U.S. oil prices turned negative as global energy demand plummeted, panic reigned due to the global pandemic, and fear took hold over oil-storage levels topping out at a key Nymex delivery point in Cushing, Texas, forcing many to flee the market. All of these factors helped to weigh on oil prices in the spring.
A source familiar with the status of the CFTC’s much-awaited report tells Institutional Investor that there is a draft report already on the CFTC chairman’s desk, compiled by the agency’s staff, career civil servants, awaiting his approval. The CFTC and the exchanges are often among the only organizations in the world that are able to see market trades with full transparency. The CFTC draft report, according to the source, is a full analysis with recommendations and details indicating that market fundamentals were not the only cause of negative oil prices last spring, as the CFTC has claimed in the past.
Tarbert declined to be interviewed and the CFTC would not comment on the status of the report or its findings, but spokeswoman Rachel Millard emailed a statement saying, “We are currently developing our report with the input from all of the commission’s divisions and expect to publish it once the process is completed.”
Institutional Investor can also reveal that a careful study of tick-by-tick data of trading activity on April 20 shows that traders amassed and liquidated larger positions around the Nymex oil futures price as it approached and crossed the zero mark and, again, in the final minutes before it settled at minus $37.63. Nymex’s parent company, CME Group, and Intercontinental Exchange both declined to comment on whether they are conducting their own probes of oil prices that day.
Joseph Cisewski, senior derivatives consultant and special counsel for Washington-based watchdog group Better Markets, says he questions the hold-up surrounding the CFTC report. “If the chairman received a detailed forensic study in July — which he said he did — then why are we still waiting for it in September?” he says. “It raises concerns that the report is being sanitized.”
Cisewski, who from 2010 to 2014 held senior roles at the CFTC — including co-chief operating officer and co-chief of staff for then-acting chairman Mark Wetjen, as well as counsel in the CFTC’s division of market oversight — says that in his experience, it’s unusual to have a report of such high importance waiting months to be rubber-stamped. At the same time, the CFTC, which oversees global markets amounting to more than $600 trillion annually, had a budget this year of $284 million — just over half the size of Vega’s reported payday on April 20. Notably, the CFTC faces the likelihood of even less funding in 2021.
“Are we capable of regulating these markets?” Cisewski says. “We could, if we had the political will to do it. But if you look at the scope of what the CFTC is supposed to police and then the funding it gets to do it, you can see the issue. The chronic underfunding is deliberate. And if you are someone who tends to poke industry interests in the eye, then you’re going to face strong headwinds getting appointed to leadership roles at the CFTC.”
Yet, to answer Interactive Brokers’ Peterffy’s question of who, in the end, is responsible for U.S. commodities markets, it is of course the CFTC. If more than 40 years ago the agency had the power to forever ban Nymex from potato trading and to threaten to shut the exchange down, it certainly has the power to rein in global oil markets today. “It only takes the stroke of a pen to enact reasonable policy and enforce the law,” Cisewski says.
Shah, the trader from Canada, says he’s not expecting much. “Are we capable of reining in the market?” he asks. “I don’t think so. Not yet. I personally don’t think anything is going to change anytime soon, if at all. None of this is normal.”
In the meantime, Shah says, he’s thinking about joining the Mish class-action lawsuit. And he’s already formulated a plan for the next market kerfuffle. “Next time I see negative prices, I am going to open two accounts — and long one and short the other.”