The US Commodity Futures Trading Commission’s (CFTC) Division of Enforcement (DOE) articulated a goal in 2018 of increasing coordination with other regulators and criminal authorities. As made clear in its second annual report, the DOE has made good on its goal.
In testimony to Congress in 2019, former Chairman Christopher Giancarlo trumpeted the CFTC’s enforcement efforts:
During my watch, the CFTC has been resolute in holding market participants to the highest standards of behavior. In fact, by any measure, enforcement has been among the most vigorous in the history of the CFTC, including more enforcement actions, more penalties, more large-scale matters, more accountability, more partnering with criminal law enforcement at home and abroad, and more whistleblower awards than in prior years.1
During the 2019 fiscal year, which ended September 30, the CFTC filed 16 parallel actions with criminal authorities—more than any prior year. Many of those involved the US Department of Justice, which in October announced a Main Justice fraud division restructuring that creates a commodities fraud subsection known as the Market Integrity and Major Frauds Unit.2
“Our ultimate goal is to deter wrongdoers from committing misconduct in the first place,” the DOE report stated.3 “In pursuing that goal, we know there is no greater deterrent than the prospect of criminal prosecution—and the reality of time in jail.”
Of the 69 civil enforcement actions filed by the CFTC, about 65 percent involved commodities fraud, manipulative conduct, false reporting or spoofing. Sanctions totaled $1.32 billion in civil monetary penalties, restitution and disgorgement, a 39 percent increase over the prior fiscal year and the fourth highest total in the CFTC’s history.4
The CFTC also issued five awards amounting to $15.38 million through its whistleblower program, which now contributes to an estimated 30–40 percent of the DOE’s ongoing investigations.5
Other Enforcement Themes
1. Individual Accountability
Of the CFTC actions filed in FY2019, about 58 percent involved charges against one or more individuals, including low-level employees, supervisors, desk heads, chief compliance officers and chief executives.6
2. Risk Management
The CFTC took several actions to ensure that registrants adopt and implement proper risk management processes. Those included the agency’s first actions against:
- A registered derivatives clearing organization for violations of Core Principles involving financial risk management, operational requirements, and information-systems security
- A swap dealer for violating rules that require establishment of a governing body and internal policies to oversee swap data reporting
3. Compliance Program Adequacy
Compliance stands as a first line of defense to prevent misconduct, and the CFTC took several actions involving failure of the compliance function.7 For example, the CFTC took action against a swap dealer that failed to implement effective processes and controls around swaps reporting and that made misleading statements and material omissions to staff.8
4. Digital Assets
The CFTC prosecuted misconduct involving digital assets that fall within the definition of “commodity” under the Commodity Exchange Act, including charges against the principal of a cryptocurrency escrow fund for a multi-million dollar Bitcoin fraud.9
5. Misappropriation of Confidential Information
Confidential information can be used illegally when firms disclose a client’s trading information, front-run a client or use confidential information to unlawfully prearrange trades. The CFTC charged an energy broker and its owner with misappropriating confidential customer information by taking the other side of the customer’s trades in his proprietary trading account.10
6. Cooperation and Self-Reporting
The CFTC filed three cases that arose out of self-reports. According to the CFTC, the self-reports resulted in reduced sanctions. The CFTC also recognized meaningful remediation efforts in a number of cases, purportedly resulting in reduced sanctions. Questions remain, however, regarding the ultimate value of cooperation.
Additionally, in certain cases, the CFTC bifurcated a cooperating witness’ case, deciding liability in an initial order but leaving the penalty amount to be determined when the cooperation has been substantially completed. Such cooperation is designed to more closely mirror the criminal process, where a guilty plea comes first and a defendant is sentenced later, allowing a prosecutor to consider the full range of cooperation when determining a penalty.11
7. Data Analytics
The CFTC has begun a multi-year project to enhance its ability to detect misconduct through the use of data analytics, an important tool in identifying cases of manipulative conduct.12
According to the DOE, its priorities will essentially remain the same in FY2020, focusing on:
1. Preserving market integrity (for example, combatting spoofing and manipulation)
2. Protecting customers
3. Promoting individual accountability
4. Increasing coordination with other regulators and criminal authorities
1 Testimony of Chairman J. Christopher Giancarlo Before the Senate Committee on Appropriations Subcommittee on Financial Services and General Government (May 8, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo71.
2 See Remarks of Assistant Attorney General Brian A. Benczkowski (Oct. 8, 2019) available at https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-global-investigations.
3 FY2019 Division of Enforcement Annual Report, Commodity Futures Trading Commission, at 7 (Nov. 25, 2019) available at https://www.cftc.gov/PressRoom/PressReleases/8085-19.