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CFTC Enters Its First Non-Prosecution Agreements

The U.S. Commodity Futures Trading Commission (CFTC) recently announced its first use of non-prosecution agreements – in connection with three Citigroup employees accused of utilizing spoofing strategies. This action signals a significant change in the CFTC’s enforcement strategy, which could encourage enhanced cooperation from individuals and organizations in future CFTC investigations.

The Scheme

The non-prosecution agreements, announced by the CFTC on June 29, 2017, alleged that five traders at Citigroup Global Markets Inc., the broker-dealer subsidiary of Citigroup Inc., engaged in “spoofing” in the U.S. Treasury futures market in 2011 and 2012. The CFTC alleged that five Citigroup traders placed large orders in the U.S. Treasury futures market on the Chicago Mercantile Exchange, with the intent to cancel orders on one side of the market before execution, in order to create or increase market imbalance to induce other traders to fill smaller orders Citigroup had placed on the opposite side of the market at a favorable price. The large orders were then cancelled.  Related to this matter, Citigroup agreed with the CFTC in January of this year to pay $25 million to settle charges that it had failed to properly supervise the traders and prevent the spoofing.

The Non-Prosecution Agreements

Three of the traders involved in the spoofing cooperated extensively during the CFTC’s investigation. As a result, they were able to enter into non-prosecution agreements with the CFTC. The CFTC agreed not to pursue any claims or sanctions against these three traders if they each comply with the requirements of their non-prosecution agreement. In contrast, the other two accused traders – who were not granted non-prosecution agreements – received six-month trading bans and were assessed civil monetary penalties totaling $550,000.

The agreements highlight the traders’ (i) timely and substantial cooperation, (ii)  material assistance in the investigation by identifying the misconduct of others, (iii) acceptance of responsibility for their own misconduct (each admitted engaging in spoofing dozens of times), and (iv)  absence of a history of prior misconduct. The CFTC noted that their cooperation expedited the investigation and strengthened the cases against Citigroup and the other traders.

Impact on CFTC Enforcement Strategy

James McDonald, the CFTC’s new Director of Enforcement as of March 2017, stated that he expects non-prosecution agreements “will be an important part of the Division’s cooperation program going forward.” He also referred to the use of non-prosecution agreements as “a powerful tool” that provides individuals and organizations “strong incentives to promptly accept responsibility for their wrongdoing and cooperate with the Division’s investigation.”

The use of non-prosecution agreements aligns the CFTC’s enforcement strategy more closely with that of the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), both of which make frequent use of these types of agreements to encourage cooperation.

Krista Hess contributed to this article.

© 2017 Schiff Hardin LLP

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About this Author

Kenneth W. McCracken, Litigation Attorney, Schiff Hardin Law Firm
Partner

Kenneth W. McCracken concentrates his practice in litigation, compliance and enforcement matters related to futures, derivatives and commodity products in the financial markets. As a former Chief Trial Attorney in the Division of Enforcement for the U.S. Commodity Futures Trading Commission (CFTC), Mr. McCracken supervised a team of attorneys in investigations and litigations in federal court. He has investigated, litigated and supervised all aspects of financial regulatory matters including market manipulations, trade practice violations, and commodities and securities...

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Michael Rivera, Schiff Hardin Law Firm, Financial Regulation Attorney
Partner

A former securities and financial regulator, Michael J. Rivera knows the potentially devastating effects of enforcement proceedings. Coupling regulator experience with over two decades in private practice, Mike adeptly defends businesses and individuals in criminal and civil government investigations and enforcement proceedings. Mike counsels clients in the areas of securities regulation and compliance, as well as anti-corruption (the Foreign Corrupt Practices Act) and anti-money laundering. He also conducts internal investigations for companies.

Mike focuses his practice on defending parties embroiled in enforcement investigations and proceedings by the Securities and Exchange Commission (SEC) and securities exchanges, Financial Industry Regulatory Authority (FINRA), Public Company Accounting Oversight Board (PCAOB), and the Consumer Financial Protection Bureau (CFPB). He has represented the following types of clients in enforcement proceedings spanning a broad spectrum of securities, compliance, corporate and accounting issues: broker-dealers; securities traders; investment advisers; investment funds; accounting firms; legal, compliance and accounting professionals; public companies and their directors, officers and employees; investors; and other participants in the securities markets.

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