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Hedge fund fined for compliance failures

Date: Thursday, November 19, 2009
Author: HedgeFunds Review

The Commodity Futures Trading Commission (CFTC) has fined a New York-based hedge fund for making false statements about its market positions and financing arrangements to the Chicago Board of Trade (CBOT).

EMF Financial Products, a CFTC registered commodity trading adviser (CTA), agreed to pay a $4 million fine to settle the case.

The charges stem from 2005 when EMF made misrepresentations to CBOT about its positions on the September 2005 US Treasury note futures contract.

CFTC said EMF failed to disclose its control of up to $11.9 billion of the underlying cheapest-to-deliver (CTD) security on the September 2005 futures contract.

EMF also misrepresented the size of its cash position in the CTD, telling CBOT officials it had $200 million when, in fact, it held a cash position of $2.2 billion.

EMF also misled the CBOT about how it was financing these and other positions.
According to SEC filings, EMF currently has around $328 million in assets under management.

EMF is led by Eric Flanaghan, who is president and trading manager of the company. He previously headed Delta Flyer, a hedge fund which was dissolved in 2005 following the collapse of Refco. Delta Flyer had been a client of the now defunct brokerage.

In its order CFTC also said EMF had an "inadequate system of supervision and internal controls to detect and deter possible wrongdoing and to reasonably oversee the handling of its business".

According to the CFTC, EMF did not have appropriate oversight procedures in place to manage and control the large concentrated positions taken by its traders.

The CFTC also said EMF did not have policies and procedures in place to oversee communications with regulators to ensure complete and truthful information was reported in a timely fashion.

In addition to the S4 million fine, EMF had its CFTC registration restricted and was ordered to improve its internal compliance and controls and to establish a risk management committee.