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CFTC regulator oversaw compliance at firm accused of illegal trades

| WASHINGTON

WASHINGTON Oct 18 A U.S. Commodity Futures Trading Commission senior regulator is being thrust into the spotlight after the agency fined her former employer for a supervisory breakdown over illegal wash trades that primarily occurred on her watch.

The commission's Sept. 28 civil case against Newedge USA LLC, now fully owned by Societe Generale, makes no mention of Eileen Flaherty, who heads up the agency's office that oversees rules governing chief compliance officers at brokerage firms, among other things.

Before Flaherty joined the CFTC in July 2015 as director of the Division of Swap Dealer and Intermediary Oversight, she was the global head of Compliance and Financial Crime Prevention for Newedge from mid-2011 through the end of 2014.

The "wash sales," or trades executed between the same buyer and seller, occurred from June 2010 through January 2014, according to the regulator. Such trades are illegal because they can disrupt the integrity of market pricing and fundamentals. The CFTC ordered the firm to pay $750,000 to settle the civil charges.

The CFTC's complaint said the firm "lacked an adequate supervisory system and compliance programs" to detect and deter the illegal trades and that it failed to train the firm's staff.

It did not, however, name any individuals who might have been responsible for the supervisory failures.

"When something is going on for 3-1/2 years, it is hard to understand why individuals should not be personally sanctioned," said Dennis Kelleher, the head of Better Markets, a non-profit that advocates for tougher rules for Wall Street.

Flaherty, who has been recused from handling or commenting on matters involving Newedge, declined to comment, CFTC spokesman Steve Adamske said in an emailed statement.

Adamske said the CFTC routinely hires people with industry expertise, and that Flaherty had complied with all government ethics rules, noting that she was recused from reviewing the case when it was sent to her division for input.

A spokesman for Societe Generale declined to comment on Flaherty's role in connection with the case, but said in an email that the firm was pleased to have resolved the matter.

The case has raised eyebrows among some commission staffers, who questioned whether Flaherty did her job properly at Newedge, and whether she was fit for her current role, several people told Reuters, asking not to be named because they were not authorized to speak with the media.

CFTC Chairman Timothy Massad extended Flaherty's employment contract for another year in August, about a month before the case became public, internal records show.

A major concern about federal government operations involve the "revolving door" through which executives in regulated industries get jobs to regulate their former employers.

However, experts have said that this case is particularly interesting because the settlement with the firm was announced while the former employee still works for the government.

The CFTC's Sept. 28 order marks at least the fourth time since 2011 that Newedge faced a fine for various regulatory violations.

In February 2011, the CFTC ordered Newedge to pay $220,000 for violating position limits and failing to report accurate and timely large trader reports that the CFTC relies on to help monitor the marketplace.

In January 2012, it was fined again - this time $700,000 - for continuing to submit inaccurate large trader reports, in violation of the prior CFTC order.

In the summer of 2013, the firm's securities arm was fined $9.5 million by the Financial Industry Regulatory Authority and other stock exchanges over charges that from 2008 through 2011, it failed to establish supervisory procedures to detect and prevent "manipulative and suspicious trading activity" including "wash sales."

The vast majority of the alleged violations in the prior CFTC and FINRA actions against Newedge occurred before Flaherty's tenure at the firm as the head of global compliance. (Reporting by Sarah N. Lynch, Editing by Soyoung Kim and Richard Chang)

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