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Recent Developments in CFTC Enforcement

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Recent Developments in CFTC Enforcement Securities Regulation & Law Report™ Reproduced with permission from Securities Regulation & Law Report, 48 SRLR 2189, 11/21/16. Copyright ஽ 2016 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com ENFORCEMENT Recent Developments in CFTC Enforcement BY ZACH BREZ,JON DANIELS,JOHN IVEY EAGLES, oversight role, the CFTC has traditionally lacked both the resources and the authority to aggressively pursue AND KATHRYN ROULETT fraudulent activities in these markets, and its reputation lthough it is less well-known than some of its regu- was as the ‘‘regulatory agency with a small bark and latory counterparts, the Commodity Futures Trad- even less bite.’’2 This changed with passage of the A ing Commission (the ‘‘CFTC’’ or the ‘‘Commis- Dodd-Frank Wall Street Reform and Consumer Protec- sion’’) plays a vital role in the financial markets by over- tion Act (‘‘Dodd-Frank’’) in 2010. Dodd-Frank greatly seeing the $31 trillion futures and options market and enhanced the Commission’s oversight and enforcement the $400 trillion U.S. swaps market.1 Despite this broad powers, and Congress has responded to this increased authority by enlarging the Commission’s budget from $146 million in 2009 to $250 million in 2015 and 2016.3 1 Commodity Futures Trading Commission (CFTC) Budget and Performance Estimate for Fiscal Year 2015, at 1 (2014), The impact of these new resources and expanded http://www.cftc.gov/ucm/groups/public/@newsroom/ powers is just starting to be seen. For fiscal years 2014 documents/file/cftcbudget2015.pdf. and 2015, the CFTC obtained monetary sanctions in ex- cess of $3 billion.4 These figures are more than 11 times Zachary Brez is co-head of Ropes & Gray’s 2 securities & futures enforcement and business Peter Henning, CFTC Is Set to Get Tougher on Fraud,NEW & securities litigation practices. YORK TIMES DEALBOOK (Nov. 1, 2010), http:// dealbook.nytimes.com/2010/11/01/c-f-t-c-is-set-to-get- Jon Daniels is a government enforcement tougheron-fraud/; associate at Ropes & Gray. His practice is Zach Brez and Jon A. Daniels, The New Financial Sheriff: focused on regulatory investigations involving CFTC Anti-Fraud Authority After Dodd-Frank, Bloomberg the Foreign Corrupt Practices Act, insider BNA Securities Regulation & Law Report, 44 SRLR 1209, June trading, financial fraud and related litigation 18, 2012. 3 matters. Press Release, CFTC, Statement of Chairman Timothy Massad on the Fiscal Year 2016 Budget Agreement (Dec. 21, John Ivey Eagles is an associate in the litiga- 2015) (noting that the Commission’s request to increase their tion department of Ropes & Gray. budget to $322 million for 2016 was rebuffed by Congress.), http://www.cftc.gov/PressRoom/SpeechesTestimony/ Kathryn Roulett is an associate in the litiga- massadstatement122115. tion department at Ropes & Gray. 4 Press Release, CFTC, CFTC Releases Annual Enforce- ment Results for Fiscal Year 2014 (Nov. 6, 2014), http:// COPYRIGHT ஽ 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0037-0665 2 the $280 million collected in 2009, the last year before rized the difficulties imposed by this standard when he Dodd-Frank.5 These figures include several high-profile noted that ‘‘in the CFTC’s 35-year history we have only settlements and recent judgments for very large sums. successfully prosecuted and won a single case of ma- In April 2015, for example, Deutsche Bank agreed to nipulation in the futures markets . Proving manipu- pay an $800 million penalty for false reporting and ma- lation under current law is so onerous as to be almost nipulation of certain benchmark interest rates – the impossible.’’10 The CFTC’s rule implementing the Act’s largest fine in CFTC history.6 Later, in December 2015, anti-manipulation provisions, Rule 180.1, went into ef- JP Morgan agreed to pay $100 million to the CFTC for fect on July 14, 2011.11 As a result, the CFTC’s Division failing to disclose conflicts of interests to clients.7 This of Enforcement can now bring a civil action against any trend of large enforcement penalties has continued in person who ‘‘intentionally or recklessly’’ engages in, or 2016. Charges of fraudulent misrepresentations and attempts to engage in, certain described manipulative omissions against Nikolai Battoo, an alternative asset practices – a significantly less onerous standard.12 The manager, and his three companies,8 resulted in sanc- rule expands the Commission’s authority in three im- tions reaching approximately $500 million in January portant ways. In contrast to the previous regulation re- 2016.9 lating to manipulative actions, the new rule: (1) is not These large penalties and fines reflect the CFTC’s limited to transactions but applies to all activities that pursuit of high-profile targets, and involvement in have a relationship to swap or futures contracts, (2) in- larger, more complex investigations. This article dis- cludes attempted manipulation, and (3) lowers the sci- cusses these recent cases and other attempts by the enter requirement from intent to recklessness.13 In ad- CFTC to utilize its new powers, and details specific dition to the new rule, the CFTC continues to maintain types of conduct that have been targeted by the Com- its traditional manipulation authority arising under Sec- mission as part of its invigorated enforcement efforts. tion 6(c)(3) and Rule180.2 – with the scienter require- ment – and will be guided by existing case law that has emerged.14 While the full impact of this more accom- Manipulation modating anti-manipulation authority remains to be seen, recent cases have shown that the Commission in- The Dodd-Frank Act significantly expanded the tends to make extensive use of its new powers. CFTC’s authority to regulate manipulative behavior. Be- fore Dodd-Frank, a manipulation charge required the In June 2015, for example, Judge William H. Pauley Commission to demonstrate both that the trader had of the U.S. District Court for the Southern District of acted with scienter – meaning that the trader intended New York issued a consent order against Joseph F. to manipulate the market – and that the trader had ac- Welsh III to resolve CFTC charges that Welsh at- tually affected the market price of the relevant contract. tempted to manipulate settlement prices on the New In 2009, former Commissioner Bart Chilton summa- York Mercantile Exchange, assessing a civil monetary penalty of $500,000 and ordering a trading ban and compliance training. Similarly, in December 2015, the www.cftc.gov/PressRoom/PressReleases/pr7051-14; Press Re- Commission settled charges against Total Gas & Power lease, CFTC, CFTC Releases Annual Enforcement Results for North America, Inc. and one of its gas traders, Therese Fiscal Year 2015 (Nov. 6, 2015) (noting that the CFTC obtained Tran, (together, ‘‘TGPNA’’), for attempted manipula- $3.27 billion in 2014 and $3.14 billion in 2015.), http:// tion of natural gas monthly index settlement prices.15 www.cftc.gov/PressRoom/PressReleases/pr7274-15. 5 Commodity Futures Trading Commission Performance In addition to these settlements, two separate ma- and Accountability Report Fiscal Year 2009, at 4, (2009), http:// nipulation cases are currently being litigated in federal www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/ courts – the first time a CFTC manipulation case has 2009par.pdf. gone to trial since 2008.16 In the first case, the Commis- 6 Press Release, CFTC, Deutsche Bank to Pay $800 Million sion filed a complaint in the Southern District of New Penalty to Settle CFTC Charges of Manipulation, Attempted York in late 2013 against DRW Investments, LLC, and Manipulation, and False Reporting of LIBOR and EURIBOR (Apr. 23, 2015), http://www.cftc.gov/PressRoom/PressReleases/ pr7159-15. 10 Press Release, CFTC, Speech of Commissioner Bart 7 JP Morgan’s total settlement with both the SEC and CFTC Chilton before the Argus Media Summit (Oct. 21, 2009), http:// totaled $307 million. See Sarah Lynch, JP Morgan to pay $307 www.cftc.gov/PressRoom/SpeechesTestimony/opachilton-28. 11 million to settle SEC, CFTC disclosure charges, REUTERS 17 CRF 180.1 (Dec.18, 2015), http://www.reuters.com/article/us-jpmorgan- 12 17 CFR 180.1(a); Kenneth W. McCracken and Christine sec-settlement-idUSKBN0U124R20151218; Press Release, Schleepegrell, The CFTC’s Manipulative and Disruptive Trad- CFTC, CFTC Orders JPMorgan Chase Bank, N.A. to Pay $100 ing Authority in an Algorithmic World, Schiff Hardin (April Million for Failure to Disclose Conflicts of Interest (Dec. 18, 2015), http://www.schiffhardin.com/Templates/media/files/ 2015) (The CFTC order required JP Morgan to pay the CFTC a publications/PDF/Mccracken-Schleppegrell_FutDerLaw_ $40 million civil monetary penalty, and an additional $60 mil- 201504.pdf. lion in disgorgement.), http://www.cftc.gov/PressRoom/ 13 Zach Brez and Jon A. Daniels, The New Financial Sher- PressReleases/pr7297-15. iff: CFTC Anti-Fraud Authority After Dodd-Frank, Bloomberg 8 The companies involved were BC Capital Group S.A., BC BNA Securities Regulation & Law Report, 44 SRLR 1209, June Capital Group International Limited, and BC Capital Group 18, 2012. Holdings S.A. The three companies were operated as a com- 14 McCracken and Schleepegrell, supra note 12. mon enterprise. Each entity was said to perform different func- 15 Press Release, CFTC, CFTC Files and Settles Charges tions in operating the commodity pools, though some of the against Total Gas & Power North America, Inc. and Therese corporations were mere shells with no actual offices. Than for Attempted Manipulation of Natural Gas Monthly In- 9 Press Release, CFTC, Federal Court in Illinois Orders Ap- dex Settlement Prices (Dec. 7, 2015), http://www.cftc.gov/ proximately $500 Million in Sanctions against Defendant PressRoom/PressReleases/pr7289-15. Nikolai S. Battoo and His Three Companies for Committing a 16 Bradley Hope, Big Trader Strikes Back Against CFTC, Global Commodity Futures and Options Fraud (Jan.
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