September 29, 2016

CFTC Charges Options Trader Thomas C. Lindstrom with Fraud

CFTC alleges Lindstrom’s scheme caused his employer more than $13.9 million in losses and led to the collapse of Rock Capital Markets, LLC in early 2015, after more than 23 years in business.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement Complaint, charging Thomas C. Lindstrom, of Winnetka, Illinois, with fraud in connection with his trading of options on 10-year U.S. Treasury note futures (T-Note Options). Lindstrom is registered with the CFTC as a floor broker, has been a member of the Chicago Board of Trade (CBOT) since 1993, and is a long-time trader of T-Note Options offered on the CBOT.

The Complaint, filed in the U.S. District Court for the Northern District of Illinois on September 29, 2016, alleges that, from at least January 1, 2014 to January 27, 2015, Lindstrom perpetrated a scheme to falsely inflate the value and profitability of his options position, and lied about the quantity of options and the risk associated with his position, in order to defraud his employer, proprietary trading firm Rock Capital Markets, LLC (Rock Capital), into paying him $285,000 in draws to which he was not entitled. Lindstrom’s scheme caused Rock Capital to incur more than $13.9 million in losses, the Complaint alleges, and caused the collapse of the firm in early 2015, after 23 years in business as a small professional trading group.

The Complaint alleges that Lindstrom’s scheme exploited a pricing convention set by exchange rule then in effect, whereby deep out-of-the-money options settled each day at the standard minimum tick value of $15.625 prior to expiration. Thereby, Lindstrom allegedly generated millions in phony profits in his trading account by acquiring hundreds of thousands of deep out-of-the-money options which were virtually assured to expire worthless.

Lindstrom’s Scheme was Uncovered on January 27, 2015

As alleged, even though the options Lindstrom acquired were so far out of the money as to be essentially worthless, they settled each day up until expiration at the minimum tick value of $15.625. The Complaint states that from one contract expiration to the next, as the options expired worthless and his account’s phony profits were wiped out, Lindstrom allegedly acquired more and more out-of-the-money options to cover the realized losses his account had incurred and create more phony profits. By January 27, 2015, when his trading activity was discovered, Lindstrom accumulated a position of more than 950,000 deep out-of-the-money T-Note Options, and held 99.9% or 100% of the open interest in at least ten T-Note option contracts, the Complaint alleges.

According to the Complaint, Lindstrom hid his scheme from and defrauded Rock Capital by sending Rock Capital’s principal screenshots from trading software that Lindstrom doctored to omit his huge position in deep out-of-the-money options. Lindstrom allegedly took draws of $285,000 from Rock Capital based on his phony profits. In doing so, Lindstrom allegedly failed to disclose his huge position in deep out-of-the-money options that was not accurately valued on his trading statements, the risk that the position posed to the firm, and that he had exceeded his $500,000 margin limit by millions of dollars.

When Lindstrom’s scheme was uncovered, his account had a net liquidation value that was inflated by more than $15 million, the Complaint alleges. Lindstrom’s fraud was uncovered just days before he was to receive an additional payment of more than $500,000.

In its continuing litigation, the CFTC seeks full restitution, disgorgement of any ill-gotten gains, a civil monetary penalty, permanent registration and trading bans, and a permanent injunction against violations of federal commodities laws, as charged.

The CFTC’s Enforcement Division thanks the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Northern District of Illinois for their cooperation.  Today, the U.S. Attorney’s Office in Chicago issued an indictment against Lindstrom, charging him with criminal violations of the commodities and wire fraud statutes.

CFTC Division of Enforcement staff members responsible for this action are Michael D. Frisch, Jeffrey Gomberg, Joy McCormack, Robert Howell, Scott R. Williamson, and Rosemary Hollinger.

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Last Updated: September 29, 2016