CFTC Targets Goldman, Other Repeat Offenders With Risky Approach

The Commodity Futures Trading Commission wants to dispel any notion that it’s a friendly regulator.

But a pledge from CFTC enforcers to get tougher with rule-breakers, including Wall Street powerhouses, will be constrained by the agency’s perennially limited resources. The CFTC’s dilemma underscores the challenges cash-strapped regulators face to ensure their penalties don’t become merely a cost of doing business for the largest companies they oversee.

The CFTC’s enforcement unit recently said it may recommend higher penalties for banks and other companies that violate US derivatives rules, especially if they’re repeat offenders. It may also require businesses to admit wrongdoing in settlements, the unit said in an advisory to staff.

JPMorgan Chase & Co. is among the banks cited most often in CFTC enforcement actions, according to a Bloomberg Law review of agency actions over the past decade, while Goldman Sachs Group Inc. was recently called out by a CFTC commissioner as a repeat offender.

Citigroup Inc. and Deutsche Bank AG have also faced numerous enforcement cases, including actions over alleged swap reporting violations.

Goldman Sachs, Citigroup, and Deutsche declined to comment. JPMorgan didn’t immediately respond to a request.

The CFTC’s tone is a change from the past, when it focused on giving financial institutions an incentive to report their own violations. If that was a carrot approach, “this advisory is all sticks,” said Elizabeth Lan Davis, a Davis Wright Tremaine LLP partner and former chief trial attorney in the CFTC’s enforcement unit.

But the CFTC, which is responsible for overseeing multitrillion-dollar derivatives markets, will have to walk a line.

If enforcers get too tough in negotiations, demanding bigger checks and admissions of misconduct, more companies could decide to take their chances in court, adding to strain on the resources of an agency that has around 700 full-time staff members budgeted for fiscal 2023 and about $365 million in annual funding.

More aggressive punishments may also make companies think twice about whether to cooperate with enforcers.

Deterring Misconduct

The CFTC’s tougher stance may reflect frustration from inside the agency with banks that have been caught violating the same rules multiple times.

Kristin N. Johnson, a Democratic commissioner, said in August that compounding “compliance violations should be met with compounding penalties.”

Johnson’s comments came after Goldman Sachs agreed to pay $5.5 million to settle CFTC allegations that the bank violated recordkeeping requirements, leading to the loss of audio recordings for calls related to its business as a swap dealer. The bank three years earlier was ordered to pay $1 million for similar alleged failures, the CFTC said.

The “civil monetary penalty imposed today is quite literally less than the profit Goldman can earn by the end of the day today,” Johnson said, citing a Goldman earnings report announcing $1.22 billion in net income for the second quarter of 2023.

“Penalties must be rightly calibrated to deter repeat offenders,” Johnson added.

Swaps are agreements between two parties to exchange cash flows in the future based on an underlying price or instrument, and are often used to hedge risks. The CFTC expanded its scrutiny of swaps trading under the 2010 Dodd-Frank Act.

Goldman Sachs was hit with another penalty the very next month—$30 million for alleged swaps reporting failures and other violations. JPMorgan also agreed to pay $15 million for violating swap data reporting rules, its second time facing CFTC charges for such misconduct, Democratic Commissioner Christy Goldsmith Romero said at the time.

“Recidivism has gotten worse in regulated financial services,” Goldsmith Romero said in an October statement without mentioning any specific companies. Weeks earlier, Goldsmith Romero said Goldman Sachs was a “repeat defendant” in cases brought by the CFTC and other federal agencies.

“Goldman has a long history of violating federal laws, getting caught, and then settling with federal agencies,” Goldsmith Romero said.

Weight of Recidivism

While the CFTC previously factored in a company’s past violations in weighing penalties, the enforcement division’s advisory said it will now “heavily factor recidivism” into those decisions.

“Where conduct is occurring repeatedly over time, wrongdoers should expect a reassessment of the penalty size needed to deter the misconduct,” Enforcement Director Ian McGinley said recently in remarks at New York University.

McGinley, a former Justice Department attorney and Akin Gump Strauss Hauer & Feld LLP partner, took over the enforcement division in February. One of his stated priorities has been to “dispel this myth” that the CFTC takes a light approach to enforcement.

“He wants the focus to be on recidivists,” said Carl E. Kennedy, who co-chairs the Financial Markets and Regulation group at Katten Muchin Rosenman LLP.

Many large financial institutions are trying to get it right, but the rules can be complex, Kennedy said. He highlighted swap data reporting rules that were required by the Dodd-Frank Act and recently amended.

“Some of these rules are just incredibly difficult and challenging to implement,” said Kennedy, who helped draft regulations in a previous position with the CFTC.

Cost-Benefit Analysis

The agency has signaled its new, tougher approach in some recent orders.

The CFTC’s September action targeting big banks’ swap trading topped $50 million in total penalties, including an $8 million fine for Bank of America Corp. McGinley said the penalties were “significantly higher than those imposed in prior similar matters.”

Notably, JPMorgan also admitted wrongdoing as part of the settlement. The CFTC, like other federal agencies, has often allowed companies to settle without any admissions. Going forward, McGinley said, financial institutions settling cases shouldn’t assume there will be “no-admit, no-deny resolutions.”

The CFTC’s enforcement unit said when dealing with repeat rule-breakers it will also be inclined to recommend a consultant or monitor, which can be costly and intrusive.

At some point, if settlement becomes too expensive, companies may be inclined to walk away from negotiations and force the CFTC to sue them. They might also balk at having to admit to wrongdoing in certain cases, fearing it could expose them to a flood of new lawsuits.

“If you do the cost-benefit analysis, it may very well be more economical to litigate than to agree to a settlement,” Davis said.

That could limit how aggressive the CFTC gets with its enforcement, particularly when demanding admissions, given its staffing and budget.

“The most obvious reason why this policy doesn’t have teeth is because the CFTC staff just doesn’t have the resources to implement it,” Barnes & Thornburg LLP partner and former CFTC attorney David Slovick said of the admissions policy.

SEC Warning

The CFTC’s pledge to crack down on offenders comes as a fellow financial regulator, the Securities and Exchange Commission, faces criticism over high penalties.

Supporting a recent petition asking the US Supreme Court to step in, legal scholars and former SEC officials highlighted the regulators’ probe into Wall Street companies’ use of outside messaging services like WhatsApp to conduct official business. The sweep has netted the SEC and CFTC over $2.5 billion.

The brief to the Supreme Court noted SEC settlements from that investigation in which several banks, including Goldman Sachs, each agreed to pay $125 million, saying the “the legal basis for the size of the penalty is a mystery.” The Supreme Court on Oct. 30 declined to hear the case, but the criticism could be a warning to the CFTC, which also has wide discretion in deciding penalty amounts.

The CFTC’s aggressive tack could also clash with efforts to encourage firms to report their own wrongdoing, which can include incentives like a potential reduction in penalties. It’s hard to quantify the benefits of self-reporting or cooperation with an investigation, and the CFTC enforcement advisory doesn’t make that process any more transparent, attorneys said.

“There’s no way to counsel a client to say, here’s the discount, the benefit you’re going to get if you self-report and cooperate,” Slovick said.