CFTC Kept Fraud Focus, Increased Enforcement With DOJ in 2019 (1)

Spoofing, market manipulation, false reporting, and commodities fraud dominated CFTC enforcement over the past year, as the derivatives regulator filed a record number of parallel cases with the Justice Department.

Nearly two-thirds of the Commodity Futures Trading Commission’s 69 enforcement cases in fiscal 2019 focused on those four areas, according to the agency’s second annual enforcement report released Nov. 25.

Those topics remained a consistent focus despite a 35-day government shutdown in late 2018 and early 2019 and a leadership transition to new chairman Heath Tarbert in July, according to the report. Nearly 70% of enforcement actions were filed from when Tarbert took office through the end of the fiscal year.

Consistency in priorities benefits market participants who know how the CFTC enforces the law, ultimately encouraging deterrence, the agency said. “Enforcement programs should not pivot sharply between priorities from year to year,” it said.

Overall new case numbers decreased from fiscal 2018. The agency brought 83 cases that year, 56 of which related to manipulative conduct, false reporting, spoofing, or commodities fraud. However, the number of cases filed in fiscal 2019 exceeded the average over the past five fiscal years, the agency said.

Spoofing Focus

CFTC enforcement of spoofing and other market manipulations has trended upward over the past decade since the expansion of its enforcement authorities under the 2010 Dodd-Frank Act to include fraud and manipulation in cash markets. Spoofing is a type of ruse intended to shift prices in a trader’s favor by placing buy or sell orders, then retracting them before they can be filled.

The fiscal 2019 numbers bucked that trend with just 16 cases, compared to 26 in fiscal 2018.

Nevertheless, those subject areas remain an area of enhanced focus, striking at the core of the agency’s priorities of transparent derivatives and commodities markets, the CFTC said.

The agency’s investment in market data analytics will likely grow the number of manipulative conduct cases in the future, the agency said.

Those data capabilities are helping the agency draw connections across markets, McDonald said during a Nov. 25 press call. CFTC watchdogs are able to draw price correlations between different domestic and foreign markets, between different derivatives markets, and between derivatives and cash markets, McDonald said.

“You’ve seen some of our cases that have focused on that; I expect to see more of that going forward,” he said.

More Parallel Actions

The Enforcement Division marked a new record last year for civil enforcement cases that were brought in parallel with criminal cases by the DOJ. There were 16 parallel cases during fiscal 2019, two more than in fiscal year 2018. The agency filed just 10 parallel cases in total between fiscal 2013 and 2017.

The statistic speaks to an ongoing policy of holding higher-ranking corporate officials accountable for commodities fraud or other violations, the CFTC said.

“When criminal penalties are added to the broader range of other remedies the CFTC can impose, the result is a robust combination of sanctions, which can be tailored to the violation at issue to achieve optimal deterrence,” it said.

The parallel cases brought in fiscal 2019 included market manipulation allegations in September against Michael Nowak, the managing director of J.P. Morgan’s global precious metals trading desk, along with two other executives the CFTC and Justice alleged operated a criminal conspiracy to manipulate futures markets.

More than half of all fiscal 2019 new enforcement cases were against individuals. Eleven people were specifically charged with spoofing activities.

Whistleblower Tips

The number of cases generated through whistleblower tips is on the rise, accounting for between 30% to 40% of ongoing investigations, according to the report.

That trend will likely be reflected in future cases, CFTC Enforcement Director James McDonald previously told Bloomberg Law.

“It’s an entirely new avenue of information for us to learn about what’s happening in the markets and about potential misconduct,” McDonald said. “I think it is just common sense to grow that as much as you possibly can. And I think we have.”

The whistleblower program was established in fiscal 2011 but payouts only began in fiscal 2014. They reached a record high in fiscal 2018, with total whistleblower awards of more than $75.6 million that year.

The CFTC made five awards in fiscal 2019 totaling $15.4 million. The agency has paid out approximately $103 million over the past 6 years.