Casa Trading, a little-known US energy trader, is locked in a US$36 million (Dh132.22m) legal row with the Dubai Mercantile Exchange (DME) as it emerged that a partner of the American company was involved in a fake driver's licence ring in Chicago. The DME cancelled several Casa memberships last year after it discovered a criminal conviction handed down to Frank Carbonara Jr, one of two senior partners in the American firm, was allegedly more serious than they were led to believe.
The DME in January filed a legal action in the Dubai International Financial Centre (DIFC) Courts to have the cancellations ratified. But last Tuesday, Casa Trading filed a counter claim in an effort to have the memberships reinstated or to be paid $36m for lost income, expenses and other costs. Mr Carbonara was arrested outside Chicago in 1991, when he was 18 years old, on charges of manufacturing fraudulent driver's licences, according to court documents and an article in the Chicago Tribune. He was later convicted of four counts of felony fraud after pleading guilty, records show.
Casa Trading alleges in its defence that Mr Carbonara fully disclosed his record to the executives of DME. "As was subsequently disclosed to the DME in two meetings, Mr Carbonara had been involved in the manufacture and sale of fake IDs to other teenagers for the use of getting into bars and clubs," Casa said in its defence. "The process involved standing in front of a large imitation driver's licence and having one's photo taken with a Polaroid camera. The photo would then be cut to size and laminated to produce a fake ID."
Casa said that in a meeting with DME executives they assured Mr Carbonara the record was a "non-issue" and referred to him as a "kid making an innocent buck". The DME claims that Mr Carbonara misled the exchange's membership committee about his criminal record and trading history in the US. In his application with the exchange Mr Carbonara said he had been charged with "having a fake identification card", DME alleged.
In its counter claim - which was filed by Lord Goldsmith, a former attorney general of the UK who is now the European chair of litigation at the law firm Debevoise and Plimpton - Casa said the DME was using the record to justify its termination of the memberships to the exchange. "The DME's deliberate arbitrary, capricious and contract-breaching conduct has robbed Casa of its investment and caused it significant loss," the company said in court documents.
The alleged change in tenor from the DME towards Casa Trading happened after Chicago Mercantile Exchange acquired the New York Mercantile Exchange and became an indirect owner of about 25 per cent of the DME, Casa said. "Soon after this change in control of the DME, the DME changed its attitude and approach to Casa," the claim said. The DME said yesterday: "Casa had previously held off-floor memberships on the exchange and had, in addition, applied for floor membership. In the course of reviewing Casa's candidacy for floor membership, information was uncovered which led the DME to conclude that Casa did not meet the DME's criteria for floor membership and that Casa's existing off-floor memberships should be terminated.
"With respect to the rejection of the application for floor membership, Casa was afforded access to an independent appellate procedure under DME rules, pursuant to which, Casa's appeal was rejected ? Casa continues to dispute both the grounds of termination and the termination process itself. "DME looks forward to bringing this claim to a swift and fair resolution, and is confident that the DIFC Courts will reach a decision which confirms that the DME acted in full compliance with the Rules of the Exchange in order to safeguard the integrity of the Exchange."
Lord Goldsmith did not respond to requests for comment yesterday. Mr Carbonara's conviction has caused issues for him in the past. The National Futures Association (NFA), a US self-regulatory organisation for the futures industry, shows on its website that Mr Carbonara was initially denied registration because of the felony conviction. However, in a subsequent meeting to hear his appeal he was granted registration provided that he not act as a partner, officer, director or branch office manager "of any person registered or required to be registered with the commission" or have supervisory authority of any other person registered with the NFA, the NFA says on its website.
Casa Trading was among the first traders on the DME. The company was incorporated on October 25 2007 with the purpose of investing in the exchange, according to Casa. The other equal partner was George Salerno. Casa obtained three off-floor memberships and invested in a special purpose vehicle called DME Strategico designed to increase liquidity on the exchange, Casa said in its counter claim. The investors in DME Strategico "was and is known as 'Project Spyder'," the company said.