CFTC and futures exchange enforcement actions: A year-in review (2015)

Publication | February 2016

Introduction

In fiscal year 2015, the Commodity Futures Trading Commission (the "CFTC" or "Commission") filed 69 enforcement actions resulting in a record $3.144 billion in civil monetary penalties, in addition to $59 million in customer restitution and disgorgement of ill-gotten gains.1  Continuing last year's trend, several of these cases relied on the expanded anti-manipulation authority granted to the CFTC by the Dodd-Frank Act ("Dodd-Frank").2 

Significantly, the CFTC also began to pivot from implementing to enforcing Dodd-Frank.  Its recent enforcement actions include the first cases enforcing the Commission's new rules promulgated under Dodd-Frank (primarily in the area of reporting).  And, in light of its flat appropriation and scarce resources, the CFTC also has put pressure on futures exchanges such as CME and ICE Futures U.S. to aggressively police their markets.3  This has led to new Exchange rules against disruptive trade practices and increased Exchange disciplinary activity.

Market participants must be mindful of this robust enforcement mindset at both the CFTC and the Exchanges.  To aid in that effort, this Legal Update will discuss significant recent developments4 in the following categories of cases:

  1. Cases enforcing Dodd-Frank regulations
  2. Manipulation
  3. Non-manipulation cases against energy and agricultural companies
  4. Disruptive trade practices
  5. Failure to supervise
  6. Position limits violations
  7. Bitcoin and swap execution facilities
  8. False statements
  9. Customer protection
  10. Domestic and international enforcement cooperation, and the whistleblower program

1. Cases enforcing Dodd-Frank regulations

As the CFTC has transitioned from writing Dodd-Frank rules governing the swaps market to enforcing those rules, many of its initial enforcement actions have focused on violations of the CFTC's swap reporting requirements.  Dodd-Frank eliminated the "darkness" of the swaps market – even to global regulators – through extensive swap data reporting requirements.  These reporting requirements represent one of the most critical aspects of the  new swap regulatory regime, as many of the protections that Dodd-Frank built into the financial system hinge upon available and accurate data. 

It is not surprising, therefore, that in 2015, the CFTC brought its first action enforcing the new Dodd-Frank requirements for both real-time reporting (i.e., publicly available data) and "regulatory" reporting (i.e., data available to the regulators).

Specifically, the CFTC settled an enforcement action against Deutsche Bank AG ("Deutsche Bank") by ordering the bank to pay a $2.5 million civil monetary penalty and comply with substantial undertakings to improve its internal controls in order to ensure the accuracy and integrity of its swap reporting.5  The CFTC concluded that Deutsche Bank failed to properly report cancellation data associated with both real-time and regulatory reporting.  Under the CFTC's real-time reporting rules, a swap cancellation or partial termination must be reported if it changes the price of a previously-reported swap,6 and under the CFTC's regulatory reporting rules, a swap cancellation must be reported in all instances as continuation data.7  The CFTC settlement Order states that Deutsche Bank violated these regulations by failing to:  (1) send cancellation messages at all for tens of thousands of swaps, and (2) properly investigate problems associated with hundreds of thousands of cancellation messages that it did transmit.  The CFTC also concluded that these violations resulted in part from deficiencies in Deutsche Bank's swap supervisory system.8 

The CFTC also brought and settled in 2015 its first case enforcing the separate Dodd-Frank large trader reporting requirements for physical commodity swaps.  The CFTC's large trader reporting system ("LTRS") has been a valuable tool for the CFTC in performing its routine market surveillance of futures and options markets for physical commodities.  Pursuant to authority granted by Dodd-Frank, the CFTC adopted rules to extend its LTRS to physical commodity swaps as well.  In September 2015, the CFTC imposed a $150,000 civil monetary penalty against Australia and New Zealand Banking Group, Ltd. ("ANZ Bank") for submitting large trader reports that routinely contained errors, for example by failing to identify the underlying commodity, reporting positions in units of the underlying commodity rather than in futures equivalent contracts and reporting certain non-zero positions with a value of zero.9     
It should be noted that the CFTC has yet to bring any enforcement proceedings involving other pillars of the Dodd-Frank regulatory reforms besides reporting, such as the clearing mandate, the trade execution mandate, or the swap dealer registration requirement.  It has, however, exercised its expanded authority under Dodd-Frank by bringing causes of action for violating CFTC rules that applied pre-existing futures trading requirements to swaps activity.

For example, with respect to segregation of customer funds, the CFTC imposed a $300,000 civil monetary penalty on Morgan Stanley & Co. LLC for failing to maintain sufficient U.S. dollars in segregated accounts in the U.S. to meet its obligations to cleared swap customers. 

The CFTC's settlement Order regarding Morgan Stanley also included a failure-to-diligently-supervise charge, as the CFTC found that Morgan Stanley failed to have adequate procedures in place to ensure compliance with the relevant segregation obligations.10  Similarly, breach of a registrant's duty of diligent supervision – which has long been an established CFTC requirement with respect to futures and options – was applied to the swap space when the CFTC imposed a $200,000 civil monetary penalty against INTL FCStone Markets, LLC, a registered swap dealer, for failing to meet its supervisory obligations under certain swap dealer regulations.11

As the CFTC continues to turn its enforcement focus to the swaps market, actions to enforce the CFTC's rules implementing Dodd-Frank – and investigations to detect potential violations, perhaps including market sweeps in these areas – would not come as a surprise. 

2. Manipulation

In 2015, the CFTC continued to bring a number of cases under its new anti-manipulation authority granted by Dodd-Frank.  Although the largest enforcement actions this year related to manipulation of financial benchmarks, it appears the CFTC may be nearing the end of that road – and returning its attention to manipulation cases involving physical commodities.

Financial benchmark manipulation

The CFTC imposed civil monetary penalties exceeding $2.6 billion on seven banks in 2015 in settlement of charges that they manipulated foreign exchange ("FX"), LIBOR, Euribor and ISDA FIX benchmark rates.  This included the largest fine in the CFTC's history when the CFTC ordered Deutsche Bank to pay $800 million for (among other things) manipulating LIBOR and Euribor indices. 

In a signal relevant to any company that comes under CFTC enforcement scrutiny, the CFTC specifically noted in one of these settlement Orders that the magnitude of the fine imposed reflected, in part, that the bank respondent did not settle at an earlier stage of the investigation. The bank received a sizeable penalty as a result, even though it: (1) self-reported preliminary findings of questionable conduct to the CFTC, (2) initiated its own internal investigation into the conduct prior to the CFTC's investigation and (3) commenced significant remedial action in response to its findings.12 

Manipulation of energy and agricultural commodities

In December 2015, the CFTC issued an Order bringing and settling charges against Total Gas & Power North America, Inc. ("Total") and Therese Tran, a natural gas trader at Total.  The CFTC found that Total and Tran had attempted to manipulate natural gas monthly index settlement prices by trading large volumes of physical fixed-price natural gas during bidweek at four major trading hubs in Texas and elsewhere in the Southwest.  In addition to ordering Total and Tran jointly to pay a $3.6 million civil monetary penalty, the CFTC also imposed a 2-year ban on trading physical basis or physical fixed-price natural gas at hub locations when Total also holds, prior to or during bidweek, any financial natural gas position whose value is derived in any material part from natural gas bidweek index pricing.13 

In another noteworthy case involving manipulation of physical commodities, the CFTC charged Kraft Foods Group, Inc. and Mondelēz Global LLC with manipulation and attempted manipulation of the physical wheat and wheat futures markets.14  According to the CFTC's Complaint, Kraft (among other things) acquired a large long position in wheat futures in order to induce wheat sellers into believing that Kraft would acquire the wheat it required through the futures market (rather than the cash market).  The CFTC alleged that Kraft's manipulative scheme thereby lowered the price of cash wheat to Kraft's benefit.  The CFTC's case against Kraft in federal district court is still being litigated.15

Fraud-based manipulation standard

In a motion to dismiss the CFTC's Complaint, Kraft argued that the CFTC must allege fraudulent conduct when exercising its new anti-manipulation authority under Dodd-Frank.  This new authority – included in Section 6(c)(1) of the Commodity Exchange Act ("CEA") and implemented by CFTC Regulation 180.1 – is patterned after Section 10(b) of the Securities Exchange Act of 1934, which prohibits fraud-based manipulation with respect to securities.  Significantly, Dodd-Frank reduced the CFTC's burden of proof in manipulation cases by:  (1) lowering the intent standard from a specific intent to create an artificial price to recklessness instead;19 and (2) eliminating the existence of an artificial price as a required element of the charge. 

The CFTC countered Kraft's motion to dismiss by arguing that a claim brought under CEA Section 6(c)(1) need not sound in fraud – which, pursuant to the Federal Rules of Civil Procedure, would subject all such CFTC claims to a heightened pleading requirement (i.e., to be pled with particularity and to specifically identify the fraud).17  The court disagreed, however, stating that these provisions "are intended to reach only fraudulent conduct."18  This opinion was based, in part, on the similarities between the CFTC's and SEC's statutory and regulatory language, and the CFTC's statement in its adopting release that "Rule 180.1 prohibits fraud and fraud-based manipulations."19

While the court wound up denying Kraft's motion to dismiss,20 the CFTC may have won this battle but lost the war.  If the court's opinion requiring fraud as an element of the CFTC's new anti-manipulation authority is upheld and adopted by other courts, the CFTC's pleadings would need to specifically identify fraudulent activity in its future manipulation cases.  More significantly, it would have to charge any manipulation cases that do not involve fraud under its traditional price manipulation authority codified in CFTC Regulation 180.2.21  Such cases would not receive the benefit of the lower intent standard (i.e., recklessness) afforded by Dodd-Frank, and would require the CFTC to prove the existence of an artificial price (and that the defendant's conduct caused that artificial price) – which are very difficult elements of proof that the CFTC thought Dodd-Frank had removed for most of its manipulation cases.

3. Non-manipulation enforcement cases against energy and agricultural companies

Apart from manipulation cases, the CFTC also fined energy and agricultural companies for a variety of other unlawful activities in 2015.  These cases – which included registration violations, insider trading, position limits violations, and reporting violations – are discussed below.22

Energy

Registration:  In a widely reported case, the CFTC imposed a $140,000 civil monetary penalty on Summit Energy Services, Inc. ("Summit") for acting as an unregistered commodity trading advisor ("CTA").  CFTC rules provide exemptions from CTA registration in certain circumstances, which energy marketing companies often have relied upon, taking comfort from two CFTC staff no-action letters dating back to 2002.23  But such companies must now exercise greater caution in doing so, given the CFTC's attention to this area from an enforcement perspective.  The facts that the CFTC's settlement Order cited as evidencing Summit's status as a CTA that was required to register included that Summit:  (1) advised over 15 clients on the "value of or advisability of" trading in natural gas swaps and futures, (2) acted as a broker in natural gas swaps on behalf of some of its clients and (3) held itself out to the public as a CTA by offering "risk management" services, including advice on trading in natural gas swaps and futures.24

Insider trading:  The CFTC in 2015 brought its first "insider trading" case under authority granted by Dodd-Frank – against Arya Motazedi, a former energy trader at a large, publicly-traded corporation.25 The CFTC's insider trading authority stems from its new anti-manipulation authority which, as discussed above, is patterned on the SEC's fraud-based anti-manipulation authority.  Relying largely on SEC precedent, then, the CFTC explained when it adopted its anti-manipulation rules that violations may occur "by trading on the basis of material nonpublic information in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source). . . ."26

The rulemaking was not clear, however, as to how the agency would apply this insider trading authority in practice, given the potentially broad reading of the types of proscribed activity.  Motazedi begins to provide an answer to that question.

The CFTC's Order explained that Motazedi was regularly provided with "confidential and proprietary trading information concerning the times, amounts, and prices at which the company intended to trade energy commodity futures for its own account."  It noted that the company's policies prohibited employees from entering into transactions that created a conflict of interest or improperly used the company's confidential information.  The Order found that Motazedi did exactly that by engaging in a series of trades between his personal accounts and the company's accounts at prices favorable to his personal accounts.

Agriculture

Position limits:  The CFTC imposed a $3 million penalty on two affiliated agribusiness companies – Olam International, Ltd. ("Olam International") and its wholly-owned subsidiary, Olam Americas, Inc. ("Olam Americas") – for position limits violations due to a failure to aggregate their positions (and related violations). The violations stemmed from the inter-related nature of the two affiliates' operations.  Specifically, the CFTC's settlement Order stated that: (1) traders from both companies had access to each other's position information, (2) traders from both companies regularly discussed the cocoa markets, (3) Olam Americas' traders placed orders for futures contracts on behalf of Olam International's operations in Ecuador, and (4) a trader from Olam Americas supervised certain of Olam International's futures trading activities for five months.

Based on the inter-related nature of their trading operations, the CFTC determined that the two companies' positions had to be aggregated for position limits purposes because the companies engaged in futures trades between commonly-controlled accounts.  As a result of this aggregation, the settlement Order found, the companies exceeded applicable position limits.27

Reporting:  In its action against Olam International and Olam Americas, the CFTC also found that the affiliates had submitted false statements to the CFTC in their Form 40s because they did not identify the other company as being under common control.  CFTC Form 40 is a type of "special call" utilized by the CFTC to obtain information from traders that cross the threshold of becoming large traders. 

CFTC rules also require traders holding or controlling reportable futures and options positions in certain agricultural commodities, any part of which constitute bona fide hedging positions, to file on a monthly basis CFTC Form 204 reports.  These reports show the composition of such traders' fixed price cash position in each such commodity hedged.  During 2015, the CFTC imposed an $800,000 civil monetary penalty based on a finding that Marubeni America Corporation submitted inaccurate Form 204 reports by including in such reports Marubeni's basis and fixed price cash positions, instead of only its fixed price cash positions as required.28 

4. Disruptive trade practices

The CFTC brought a number of cases in 2015 regarding various trade practice violations.  Most of these cases involved "spoofing" (i.e., bidding or offering with the intent to cancel the bid or offer before execution).29  And, in part due to pressure from the CFTC, the futures exchanges also have been devoting a significant amount of enforcement attention to spoofing cases.

CFTC cases

Spoofing:  In one 2015 spoofing case, the CFTC found that Eric Moncada (among other violations) placed a large number of orders without the intent that they be filled in order to benefit his other futures positions.  According to the Order, Moncada placed large buy-orders for a futures contract when there were already several orders at that bid price (meaning there was little chance they would be filled immediately), and then quickly cancelled them.  The CFTC found that Moncada did this with the intent of creating a misleading impression of market depth in order to move the price upward.  This, in turn, served to benefit several sell orders that Moncada subsequently placed at the new, higher price.  Put another way, Moncada influenced the market to ensure he would 'buy low, sell high.'  Moncada settled these charges with the CFTC for a $1.56 million civil monetary penalty, as well as trading and registration bans.30

Moncada's conduct pre-dated the CFTC's new anti-spoofing authority under Dodd-Frank, so the CFTC charged him under a theory of attempted manipulation (which was its standard practice prior to Dodd-Frank).  The CFTC's case against Igor Oystacher, however, has similar facts but has been charged as a spoofing case.  Significantly, in that case, the CFTC's Complaint alleges that Oystacher and his company, 3 Red Trading LLC, engaged in spoofing even though all of the orders were entered manually.31  Thus, spoofing is not limited to the world of high-frequency, or algorithmic, trading.

In another notable spoofing case, the CFTC charged Navinder Singh Sarao and his company Nav Sarao Futures Limited PLC with (among other things) spoofing with regard to the E-mini S&P 500 futures contracts. The CFTC's Complaint alleges that Sarao's trading pattern was intended to create artificial volatility in order to affect the prevailing E-mini S&P price to the defendants' benefit.  Although somewhat tangential to its allegations against Sarao, the CFTC's action asserts that Sarao's spoofing conduct contributed to an extreme E-mini S&P order book imbalance that, in turn, contributed to the market conditions that led to the "Flash Crash" on May 6, 2010.32

In another case with similar facts, the CFTC charged two residents of the United Arab Emirates with spoofing for regularly placing large orders on COMEX for gold and silver futures contracts opposite smaller orders for the same contracts, and canceling the larger orders after the smaller orders were executed.  The Market Regulation Department of CME Group, Inc., which owns COMEX, identified this trading pattern and contacted the defendants and their futures commission merchant ("FCM"), which suspended their access to COMEX.  The defendants then began using another FCM to perform the same trading strategy on COMEX.  The Market Regulation Department identified this trading pattern also, and contacted the defendants requesting (among other things) that they cease all trading activity on CME Group exchanges.33  As noted, an enforcement action followed thereafter.

Non-competitive trading:  The CFTC also brought a number of cases involving other disruptive trade practices such as wash sales, and/or fictitious or non-competitive trades, during 2015.  Unlike spoofing, this type of conduct has long been explicitly prohibited by the CEA and CFTC rules. 

In one case, the CFTC imposed a substantial $35 million civil monetary penalty on the Royal Bank of Canada ("RBC") for engaging in wash sales, fictitious sales and noncompetitive transactions.  The settlement Order found that RBC entered into more than 1,000 narrow-based stock index futures and single stock futures contracts on the OneChicago Exchange that were deliberately executed so as to negate market risk as part of a strategy motivated by potential tax benefits in Canada.34

In another case, the CFTC charged Matthew Marcus, his company Tech Power, Inc., and Marcus' law firm, MetroWest Law Corp., with executing fictitious and non-competitive trades as part of a "money pass" scheme.  According to the CFTC's Complaint, the defendants entered into a number of simultaneous, matching orders in illiquid single stock futures products, virtually eliminating the possibility of trading with any other counterparty.  Each time a position was closed out, the CFTC averred, it resulted in a loss to MetroWest and a gain to Tech Power, ultimately transferring at least $390,000 to Tech Power.35 

Exchange cases

As part of their increasing attention on disruptive trade practices such as spoofing, the CME Group exchanges and ICE Futures U.S. in late 2014 implemented rules regarding the prohibition on disruptive trade practices on their markets.36  And in 2015, these futures exchanges brought a large number of disciplinary proceedings enforcing these rules.  As an example, NYMEX and COMEX imposed a $150,000 fine and a permanent trading ban on Nitin Gupta for repeatedly entering large orders for crude oil, gold, silver and copper futures contracts to encourage others to trade opposite smaller orders that he had resting in these markets, and then canceling the large orders before they could be filled.37

Criminal proceedings

Violations of the CEA can be criminally prosecuted, with a potential sentence of 10 years in prison for a felony conviction.38  And in a little noticed legislative act in 2009, Congress extended the criminal securities fraud prohibition to include commodities fraud, too – with an even longer potential prison term of 25 years.39

Michael Coscia, formerly of Panther Energy, had been subjected to civil penalties totaling  approximately $3.1 million, and was required to disgorge approximately $2.7 million in profits, in enforcement actions brought by the CFTC, the CME and the UK Financial Conduct Authority ("FCA") for spoofing in connection with over 400,000 orders he placed on CME's Globex that were canceled over 98% of the time.  Subsequently, in 2015, the Department of Justice obtained a guilty verdict in a jury trial on criminal charges for that same activity; namely, six counts of commodities fraud and six counts of spoofing in violation of the CEA.  Coscia's sentencing is scheduled for March 17, 2016.

5. Failure to supervise

CFTC Regulation 166.3 imposes a duty of diligent supervision on Commission registrants, which duty has been carried over to swap dealers and major swap participants by Dodd-Frank40 and the CFTC's implementing regulations.41  Several of the cases discussed above demonstrate that the CFTC intends to ensure that registrants take seriously their duty of diligent supervision.

For example, the cases noted above against INTL FCStone Markets, LLC, Deutsche Bank and Morgan Stanley (among others) all included separate charges against the company for failure to supervise its employees.  CFTC Commissioner Sharon Bowen repeatedly has stressed that it is one of her priorities to instill a culture of compliance in registered firms.42  As a result, the Commission can be expected to continue civilly prosecuting companies for supervision failures in addition to bringing actions against the individuals who actually were engaged in the unlawful activity.

6. Position limits violations

The CFTC's proposed rules to impose position limits on an expanded set of futures and options involving physical commodities as well as economically equivalent swaps, and its proposed rules regarding aggregation of positions for position limits purposes, have generated extensive public comment and garnered much attention and scrutiny in the press.  But position limits and aggregation requirements are not just an issue in the Dodd-Frank rulemaking process – they also are a focus of CFTC enforcement activity under the existing position limits regime.  This is reflected in the Olam case, discussed above, where the CFTC found that Olam International and Olam Americas committed position limits violations because the companies' positions should have been aggregated with one another due to common control.

The CEA provides that a violation of an Exchange's position limits is a violation of the CEA and therefore subject to an enforcement action by the CFTC.43  And a violation of position limits is a strict liability offense.  Under these circumstances, there are few position limits cases too small to escape the reach of CFTC enforcement. 

This was well illustrated by the CFTC's enforcement action against an individual, Daniel Bowman, for a relatively small number of position limits violations, each of which exceeded the applicable position limits by a relatively small amount. According to the CFTC's settlement Order, Bowman exceeded the speculative position limit for the CME Live Cattle futures contract on six days in 2010 and 2013 by a maximum of 96 contracts.  The CFTC ordered Bowman to pay a civil monetary penalty of $ 34,940.01 (calculated based on the profits he made from the positions held in excess of the position limit), and permanently banned him from trading on any futures exchange or swap execution facility ("SEF").44

7. Bitcoin and SEFs

In a pair of actions in September 2015, the CFTC used its enforcement authority as a means to assert jurisdiction over two recent developments:  (1) Bitcoin derivatives, and (2) the new SEF trading platforms.  First, the CFTC charged Coinflip, Inc., which operated a platform called Derivabit, with failing to register as a SEF.  Derivabit listed put and call options on Bitcoin, and allowed users to post bids and offers for such contracts on the platform.45 

Second, the CFTC charged TeraExchange, a provisionally registered SEF, with failing to enforce its rules prohibiting wash trading and pre-arranged trading with respect to a Bitcoin derivatives product. More specifically, the CFTC's settlement Order found that TeraExchange affirmatively arranged for two market participants to enter into the SEF's newly-listed Bitcoin swaps without intending to take on any price risk.  In the Order, the CFTC explained that TeraExchange's activity differed from pre-operational test trades in certain ways and that TeraExchange did not intend to test the systems – but, rather, intended to create the impression that actual trading had taken place in its Bitcoin swap product.46

These cases reflect a willingness by the CFTC, in certain circumstances, to use its enforcement program as a means to make public policy.47  In a very rare occurrence, the CFTC did not impose a civil monetary penalty on either Coinflip or TeraExchange – presumably due to the novel nature of these cases.  But Commissioner Sharon Bowen dissented from the settlement with TeraExchange, arguing that a penalty should have been imposed.

8. False statements

Although the CFTC in 2015 did not continue its series of enforcement actions based on the new prohibition against false statements to the CFTC that was contained in Dodd-Frank, it did bring two actions based on false statements to the National Futures Association ("NFA"). 

In the first action, the CFTC charged Gary Creagh and Wall Street Pirate Management, LLC ("Wall Street Pirate"), a registered commodity pool operator ("CPO"), with making false, fictitious, or fraudulent statements or omissions in reports to the NFA and during an NFA audit.  Specifically, the CFTC's Complaint alleges that Creagh falsely represented to the NFA, through quarterly reports required to be filed by registered CPOs, that the commodity pool he operated on behalf of Wall Street Pirate was not active, although he had accepted funds from prospective pool participants and traded futures on behalf of the pool.  Subsequently, during an on-site audit by NFA, Creagh again represented to the NFA that the commodity pool was not active, which the CFTC alleged was not accurate.48

In another action, the CFTC imposed a $280,000 civil monetary penalty and permanent trading and registration bans on Yakov Shlyapochnik and his company, Nord Capital Advisors, LLC ("NCA"), a registered commodity trading advisor ("CTA"), in connection with false statements to the NFA and to prospective investors.  Specifically, the CFTC found that NCA failed to disclose in its filings with the NFA the identity of one of its principals, and that NCA failed to disclose to prospective investors material changes in the algorithmic trading system it was using.49

These cases reinforce the point that when answering questions, responding to requests, or providing reports to any authority – whether it is the CFTC or a self-regulatory organization such as an Exchange or the NFA – extreme care should be taken to ensure that the information provided is true and correct. 

9. Customer protection

As it does every year, during 2015 the CFTC brought a large number of enforcement actions charging under-segregation, under-capitalization, fraudulent activity and the sale of illegal off-exchange instruments.  These cases rarely raise new or untested legal issues, but they are critical to the CFTC's mission of customer protection. 

For example, as discussed above, the CFTC imposed a $300,000 civil monetary penalty on Morgan Stanley & Co. LLC for failing to maintain sufficient U.S. dollars in segregated accounts in the U.S. to meet obligations to cleared swap customers.50  And FCM Friedberg Mercantile Group, Inc., was fined $70,000 for commingling customer funds with its proprietary funds, and for failing to timely notify the CFTC of a secured amount deficiency.51

The CFTC's fraud cases in 2015 often involved Ponzi schemes and/or fraud in connection with commodity pool activity.52  Most of its illegal instruments cases involved fraudulent schemes relating to precious metals or foreign currency.53 

10. Domestic and international enforcement cooperation, and the whistleblower program

Participants in markets regulated by the CFTC should be aware that the agency's Division of Enforcement works cooperatively on a regular basis with other regulators, both domestic and foreign.  It routinely responds to requests for assistance, shares information, and works in tandem with other regulators where it deems it appropriate to do so. 

According to the CFTC, the Division of Enforcement handled nearly 300 matters involving joint cooperation with federal and state criminal and civil authorities in 2015, and issued approximately 200 requests for assistance to foreign regulators.  Additionally, the CFTC has stated that there were parallel criminal proceedings in approximately 90% of its major fraud and manipulation cases in 2015.54

The past year also brought the CFTC's second award under its new whistleblower program.  This award, in the amount of $290,000, followed on the award made during the previous year that also was for approximately a quarter million dollars ($240,000).55  The CFTC's whistleblower program was authorized by Dodd-Frank, and permits the agency to make monetary awards to persons who report violations of the CEA or CFTC regulations in certain circumstances, if the information leads to an enforcement action that results in more than $1 million in monetary sanctions.

Accordingly, when responding to an inquiry or a request for information from the CFTC, an Exchange, or another regulatory body, it should be assumed that what is provided will be received and reviewed by many other authorities, too.  And when addressing an internal report of potentially violative conduct at a company, it should be recognized that the same information may be provided to the CFTC as well in hopes of receiving a whistleblower award. 

Conclusion

As is evident from the foregoing recitation of enforcement activity during 2015, the CFTC's enforcement reach is long and broad.  It is (1) wielding new enforcement authorities that it obtained in Dodd-Frank, (2) prosecuting cases that it could not have brought before, and (3) taking advantage of lower standards of proof in cases that were much harder for it to win before Dodd-Frank.56 

Further, the CFTC's pressure on the Exchanges to enhance the robustness of their disciplinary programs, its increasing cooperation with other regulatory authorities, and its new whistleblower program mean that potential violations are coming to the CFTC's attention through an increasing number and variety of sources.  And it means that conduct is increasingly being investigated, and sometimes charged, by multiple regulatory bodies.

The take-away for market participants could not be clearer.  The need for vigilance and strong compliance policies, practices and procedures is greater than ever before.  If there is insufficient commitment or resources dedicated to supervisory oversight and preventative measures – or if compliance efforts lag – the price is increasingly likely to be paid in the form of monetary costs and reputational harm in enforcement investigations and actions.



1 See Press Release, CFTC Releases Annual Enforcement Results for Fiscal Year 2015 (Nov. 6, 2015).

2 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, H.R. 4173 (July 21, 2010).

3 See, e.g., Testimony of Chairman Timothy G. Massad before the U.S. Senate Committee on Agriculture, Nutrition & Forestry, Washington, DC (May 14, 2015) ("The CFTC recently recommended, for example, that CME develop strategies to identify instances of spoofing and, as appropriate, pursue actions against perpetrators.  The CFTC also recommended that CME maintain sufficient enforcement staff to promptly prosecute possible rule violations.").

4 Unless otherwise noted, references to "2015" include the timeframe from the beginning of fiscal year 2015 on October 1, 2014, through the end of calendar year 2015 on December 31, 2015.

5 Specifically, the CFTC's Order requires Deutsche Bank to: (1) develop several new processes and procedures in order to implement and improve its internal controls in a manner reasonably designed to ensure the accuracy and integrity of its swap reporting, (2) correct its previously reported swaps, (3) implement training programs reasonably designed to ensure that cancellation messages are not improperly used to report non-cancellation life cycle events, (4) implement improved supervisory practices related to reporting, (5) make reports to the CFTC every 6 months explaining its progress toward compliance with these undertakings and (6) provide the CFTC within 18 months an explanation of how it complied with these undertakings.

6 See 17 C.F.R. § 43.2.

7 See 17 C.F.R. §§ 45.1, 45.4.

8 See Deutsche Bank AG, CFTC Docket No. 15-40 (Sept. 30, 2015).

9 See Australia and New Zealand Banking Group Ltd., CFTC Docket No. 15-31 (Sept. 17, 2015).  In a separate case against ICE Futures U.S., Inc. ("IFUS"), the emphasis the CFTC is placing on data reporting issues was vividly demonstrated even though the case did not involve swap data reporting in particular.  In one of the few enforcement actions against an Exchange in recent memory, the CFTC imposed a $3 million civil monetary penalty based on its finding that IFUS had submitted incorrect clearing member reports, permanent record data, and transaction-level trade data to the CFTC, and then compounded its dereliction by not responding in a timely and satisfactory manner to inquiries from CFTC staff regarding these issues.  See ICE Futures U.S., Inc., CFTC Docket No. 15-17 (Mar. 16, 2015).

10 See Morgan Stanley & Co. LLC, CFTC Docket No. 15-26 (Aug. 6, 2015).

11 See INTL FCStone Markets, LLC, CFTC Docket No. 15-27 (Aug. 19, 2015).

12 See Barclays Bank PLC at 3, CFTC Docket No. 15-24 (May 20, 2015) ("The Commission notes, however, the civil monetary penalty imposed reflects, in part, that Barclays did not settle this matter at an earlier stage of the investigation.").

13  See Total Gas & Power North America, Inc., CFTC Docket No. 16-03 (Dec. 7, 2015). On September 21, 2015, the Office of Enforcement of the Federal Energy Regulatory Commission ("FERC") filed a Notice of Alleged Violation against Total and two of its traders.  At this time, that matter has not yet been resolved.

14 See Complaint, CFTC v. Kraft Foods Group, Inc., No. 15-cv-2881 (N.D. Ill. April 1, 2015).

15 In addition to its manipulation cases involving energy and agricultural commodities, the CFTC in 2015 also brought a case involving manipulation of metals commodities.  In its settled action against Joseph Welsh, a former broker at MF Global, Inc., the CFTC found that Welsh had attempted to manipulate the settlement prices of NYMEX palladium and platinum futures contracts.  Notably, in addition to imposing a $500,000 civil monetary penalty, the CFTC permanently banned Welsh from trading palladium or platinum futures contracts.  See Consent Order, CFTC v. Welsh, No. 12-cv-1873 (S.D.N.Y. June 17, 2015).

16 See, e.g., JPMorgan Chase Bank, N.A. at 14-15, CFTC Docket No. 14-01 (Oct. 16, 2013) (finding in "London Whale" case that JPMorgan's Synthetic Credit Portfolio traders recklessly employed manipulative devices in connection with swaps trading).

17 See Response and Incorporated Memorandum of Law in Opposition to Defendant's Motion to Dismiss at 12-14, CFTC v. Kraft Foods Group, Inc., No. 15-cv-2881 (N.D. Ill. July 13, 2015) (arguing that CEA Section 6(c)(1) and Regulation 180.1 prohibit two distinct categories of conduct: (1) manipulative devices and (2) deceptive devices).

18 CFTC v. Kraft Foods Group, Inc., No. 15-cv-2881 (N.D. Ill. Dec. 18, 2015) (order denying Defendant's motion to dismiss).

19 See id. at 19 (quoting Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41398, 41400 (July 14, 2011)).

20 Specifically, the court found that the CFTC's Complaint had, in fact, been pled with particularity because it sufficiently pled each of the following: (1) the manipulative acts that were performed, (2) which defendants performed them, (3) when the manipulative acts were performed, and (4) what effect the scheme had on the market for the commodities at issue. See id. at 24.

21 17 C.F.R. § 180.2.

22 Although not described below, the CFTC also imposed an $800,000 penalty on Marubeni America Corporation ("Marubeni"), an integrated trading and investment company, in connection with a finding that Marubeni submitted inaccurate Form 204 reports by including in such reports Marubeni's basis and fixed price cash positions, instead of merely its fixed price cash positions. See Marubeni America Corporation, CFTC Docket No. 15-18 (Mar. 23, 2015).

23  CFTC Letter No. 02-59, No-Action Letter from CFTC Division of Trading and Markets (May 17, 2002), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/02-59.pdf; CFTC Letter No. 04-12, No-Action Letter from CFTC Division of Clearing and Intermediary Oversight (April 2, 2004), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/04-12.pdf

24 See Summit Energy Services, Inc., CFTC Docket No. 15-12 (Jan. 16, 2015).

25 See Arya Motazedi, CFTC Docket No. 16-02 (Dec. 2, 2015). The Order does not identify the name of Motazedi's employer.

26 Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. at 41403.

27 See Olam Int'l, Ltd., CFTC Docket No. 15-13 (Jan. 20, 2015).

28 Marubeni America Corp., CFTC Docket No. 15-18 (Mar. 23, 2015).  See also Libero Commodities SA, CFTC Docket No. 15-22 (May 11, 2015) (imposing a $480,000 civil monetary penalty based on a finding that Libero Commodities SA held or controlled cotton futures positions that were required to be reported on CFTC Form 304, but failed to file such reports on approximately 200 occasions).

29 See CEA § 4c(a)(5)(C); 7 U.S.C. § 6c(a)(5)(C).

30 See Consent Order, CFTC v. Moncada, No. 12-cv-8791 (S.D.N.Y. Oct. 1, 2014).

31 See Complaint, CFTC v. Oystacher, No. 1:15-cv-09196 (N.D. Ill. Oct. 19, 2015).

32 See Complaint, CFTC v. Nav Sarao Futures Ltd. PLC, No. 15-cv-03398 (N.D. Ill. April 17, 2015).

33 See Complaint, CFTC v. Khara, No. 15-cv-03497 (S.D.N.Y. May 5, 2015).

34 See Order, CFTC v. Royal Bank of Canada, No. 12-cv-2497 (S.D.N.Y. Dec. 18, 2014).

35 See Complaint, CFTC v. Marcus, No. 1:15-cv-03307 (N.D. Ill. April 14, 2015).  The CFTC also imposed a $500,000 fine on Cargill de México SA De CV ("Cargill de Mexico") for executing wash sales on the Kansas City Board of Trade in connection with prearranged and intentionally matching futures trades that Cargill de Mexico claimed were executed in order to move hedging positions for its physical business among numerous accounts.  See Cargill de México S.A. De C.V., CFTC Docket No. 15-34 (Sept. 24, 2015).

36 See CME Submission No. 14-367 (Aug. 28, 2014) (adopting new CME Rule 575); ICE Futures U.S. Notice: Disruptive Trading Practices (Dec. 29, 2014) (consolidating rules into ICE Rule 4.02(l)).

37 See, e.g., COMEX Notice of Disciplinary Proceeding No. 13-9391-BC (Oct. 12, 2015).

38See CEA § 9; 7 U.S.C. § 13.

39 See 18 U.S.C. § 1348 ("Whoever knowingly executes, or attempts to execute, a scheme or artifice (1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery . . . or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery . . . shall be fined under this title, or imprisoned not more than 25 years, or both.").

40 See CEA § 4s(h)(1)(B); 7 U.S.C. § 6s(h)(1)(B).

41 See 17 C.F.R. § 23.602.

42 See, e.g., Speech of Commissioner Sharon Y. Bowen at George Washington Law, 2016 Manuel F. Cohen Lecture (Feb. 4, 2016) ("Real change starts at the top – a culture of compliance that is supported by the Board and senior management. . . . we need enforcement tools, as well as conduct standards, that will really ignite culture change on Wall Street and across finance.").

43 See CEA § 4a(e); 7 U.S.C. § 6a(e) ("It shall be a violation of this chapter for any person to violate any bylaw, rule, regulation, or resolution of any [DCM] . . . fixing limits on the amount of trading which may be done or positions which may be held by any person under contracts of sale of any commodity for future delivery or under options on such contracts or commodities, if such bylaw, rule, regulation, or resolution has been approved by the Commission.").

44 See Danial Bowman, CFTC Docket No. 15-37 (Sept. 29, 2015).

45 See Coinflip, Inc., CFTC Docket No. 15-29 (Sept. 17, 2015).

46 See TeraExchange LLC, CFTC Docket No. 15-33 (Sept. 24, 2015).

47 The CFTC did take some regulatory action as well in asserting jurisdiction over Bitcoin derivatives.  Also in September 2015, the Commission granted the application of LedgerX to become provisionally registered as a SEF for purposes of listing and trading Bitcoin swaps. 

48 See Complaint, CFTC v. Creagh, No. 1:15-cv-6140 (S.D.N.Y. Aug. 5, 2015).

49 See Nord Capital Advisors, LLC, CFTC Docket No. 15-35 (Sept. 24, 2015).

50 See Morgan Stanley & Co. LLC, CFTC Docket No. 15-26 (Aug. 6, 2015).

51 See Friedberg Mercantile Group, Inc., CFTC Docket No. 15-01 (Oct. 8, 2014).

52 See, e.g., Consent Order, CFTC v. Simmons, No. 3:11-cv-23-RJC (W.D.N.C. June 24,2015) (imposing $76 million civil monetary penalty against Keith Simmons, Deanna Salazar and their companies in connection with a foreign currency Ponzi scheme).

53 See, e.g., Paramount Metals Exchange, LLC, CFTC Docket No. 15-16 (Feb. 5,2015) (ordering Isaiah Goldman and Brock Catronio and their companies, Paramount Metals Exchange, LLC and Paramount Credit, LLC, to pay a civil penalty of over $2.5 million in connection with illegal, off-exchange precious metals transactions in which they solicited retail customers claiming that they would engage in outright cash purchases of precious metals).

54 See Press Release, CFTC Releases Annual Enforcement Results for Fiscal Year 2015 (Nov. 6, 2015).

55 Id.

56 It has been reported that the Administration's budget request for the CFTC for fiscal year 2017 would, if approved by Congress, increase the size of the agency's Division of Enforcement by approximately one-third.  See "SEC, CFTC To Beef Up Enforcement Staffs Under Obama Plan," Law360 (February 9, 2016), available at http://www.law360.com/assetmanagement/articles/757313?nl_pk=a8b1530d-5429-4a2c-bb95-f408f48ccc52&utm_source=newsletter&utm_medium=email&utm_campaign=assetmanagement.


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