The CFTC: An Increasingly Necessary Agency for Combatting International Fraud
The Commodities Exchange Act (“CEA”) essentially provides the Commodity Futures Trading Commission (“CFTC”) broad jurisdiction over trades and transactions involving swaps or contracts of sale of a commodity for future delivery. This means, in the commodity futures context, the CFTC is the analog of the Securities and Exchange Commission (“SEC”), and overall, the CEA and its promulgating rules mirror those of the SEC, including in its whistleblower program. Although few are aware of this program and even fewer understand the CEA rules when it comes to commodities, the reach of the CFTC enforcement has steadily expanded in direct correlation with changing market trends and increased commodity futures fraud.
Futures contracts for commodities have been traded in the United States for the past 150 years. Federal regulation of such contracts began in the 1920s and matured in 1974 when the CFTC was created. With the shift in futures traded commodities in the U.S., moving from predominantly agricultural commodities to varied mineral and energy producing commodities, jurisdiction over commodity trading was assigned exclusively to the CFTC in 1980 under the CEA. After the 2008 financial crisis unearthed the significant fraud and instability across the market, the CEA was amended by the Dodd-Frank Act in 2010. This amendment again expanded the enforcement abilities of the CFTC and also created the CFTC whistleblower program.
Since the Dodd-Frank Act, CFTC enforcement has increased exponentially. According to the CFTC Division of Enforcement’s Annual Report for 2020:
The Commission, through the Division, filed the most enforcement actions in the Commission’s history (113). This is an increase over the previous high (102) and significantly higher than the average number of filings per year over the prior 30 fiscal years (58).
The total monetary relief ordered in CFTC enforcement actions in FY 2020 (more than $1.3 billion) stands as the fourth highest total in the Commission’s history. This was the third straight year-over-year increase in the total amount of monetary relief ordered in the CFTC’s enforcement actions—and the second straight year in excess of $1 billion.
With this increased CFTC activity, both U.S. and international CFTC whistleblowers have also increased:
What is so striking about this increase is the apparent realization by whistleblowers and investigators that as a large hub for traders, a large energy consumer, and software developing nation, the U.S. is affected by fraud that may be outside of the reach of the SEC and that may on its face appear to be international extraterritorial in scope. Because the CFTC is not burdened by the requirement that its subject is a “publicly traded company,” it can reach this global conduct that harms U.S. investors and consumers. Indeed, several examples from recent years aptly demonstrate the extent of the CFTC’s regulatory reach:
On May 18, 2020, the CFTC announced charges against Casper Mikkelsen, a resident of Denmark, for a $1.5 million foreign currency (“forex”) fraud scheme and registration violations. In brief, Mikkelsen engaged in a fraudulent scheme to solicit at least $1.5 million from at least 101 individuals and entities to invest with a supposed company called GNTFX to trade retail leveraged or margined forex. These were instead allegedly misappropriated in a Ponzi-type scheme. Although much of the illegal conduct took place abroad, the funds were often deposited or withdrawn from U.S. bank accounts, thereby implicating U.S. interests. And as stated by CFTC Director of Enforcement James McDonald: “This complaint reaffirms our steadfast commitment to working in parallel with foreign authorities to protect participants in our markets and hold fraudsters accountable wherever in the world they are located.”
Heraeus Metals New York LLC, which is not a publicly traded company, was fined by the CFTC in September of 2019 for spoofing (a form of market manipulation involving bidding or offering with the intent to cancel the bid or offer before execution to gain market advantage) in the COMEX silver and gold futures markets.
On December 3, 2020, the Commodity Futures Trading Commission issued an Order filing and settling charges against Vitol Inc., an energy and commodities trading firm in Houston, Texas, for manipulative and deceptive conduct, which again took place around the world and did not involve a “publicly traded company:” “The conduct, which spanned from 2005 to early 2020, involved foreign corruption and physical and derivatives trading in the U.S. and global oil markets.”
The CFTC fined Deutsche Bank AG (Deutsche Bank) in June of 2020 for misreporting various swap data and other regulatory violations and spoofing. Relevantly, according to the CFTC order, DBSI, by and through the acts of two Tokyo-based traders, engaged in spoofing on multiple occasions, and one of the DBSI traders spoofed in the Treasury futures market while the other spoofed in both the Treasury and Eurodollar futures markets.
The CFTC issued an Order against The Royal Bank of Scotland plc and RBS Securities Japan Limited (a foreign private issuer at the time) in 2013 for manipulation and false reporting relating to LIBOR (LIBOR stands for London Inter-bank Offered Rate, an interest-rate average calculated from estimates submitted by the leading banks in London) for Yen and Swiss Franc, which are benchmark interest rates critical to financial markets and the public. The Order requires RBS to pay a $325 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps to ensure the integrity and reliability of LIBOR and other benchmark interest rate submissions, including improving related internal controls.
The misconduct involved more than a dozen RBS derivatives and money market traders, one manager, and multiple offices around the world, including London, Singapore, and Tokyo, however, the U.S. interest in this conduct was clear because, as stated by David Meister, the CFTC’s Director of Enforcement:
The integrity of LIBOR depends on truthful information provided by a select group of some of the world’s most important banks. The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years, falsely spinning their bank’s LIBOR submissions, trying to manufacture winning trades. That’s what happened at RBS.
In uncovering such frauds which are often uniquely complex (given their niche subject matter) and difficult to identify (given the variety of exchanges trades are taking place on around the world), whistleblowers are essential, which the CFTC itself has astutely and repeatedly recognized:
Whistleblower submissions have become a significant part of our enforcement program, allowing us to pursue violations we might otherwise have been unable to detect. That’s one reason why we’ve worked hard to expand our Whistleblower Program, including by increasing the protections afforded to whistleblowers that come forward. I expect the Whistleblower Program to contribute even more substantially to our enforcement efforts going forward.
–CFTC Director of Enforcement James McDonald (Press Release, July 12, 2018).
Today’s award demonstrates how integral whistleblowers have become to our enforcement efforts . . . Forty percent of our investigations now involve whistleblowers. We expect that number to increase as the CFTC continues to expand its whistleblower program.
–CFTC Director of Enforcement James McDonald (Press Release, September 27, 2019).
The contribution that whistleblowers have made cannot be overstated. To use just one data point, whistleblowers have led the CFTC to obtain nearly $900 million in monetary relief. We are very grateful for the value that whistleblowers have added to our investigations and litigations.
–CFTC Director of Enforcement James McDonald (Press Release, June 9, 2020)
It is equally clear to whistleblowers and practitioners that the CFTC’s whistleblower program is outstandingly successful given the sizeable rewards the CFTC has awarded to whistleblowers in the past few years, the informative and easy-to-use nature of the CFTC’s whistleblower website, the new action alerts for whistleblowers promulgated by the CFTC, and the accessibility and responsiveness of attorneys and other CFTC personnel with which whistleblowers attorneys such as this author have interacted.