On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (PDF: 1.95 MB) (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting. The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year. While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement.
The Division’s Report follows the annual results issued earlier in November by the enforcement division of the U.S. Securities and Exchange Commission (“SEC”), and together with that report provides a useful overview of the enforcement environment in the securities and commodities markets over the past year. Notably, while the SEC’s report appears to point to shifting priorities over the past year, including an increased focus on retail investors and a step away from the “broken windows” enforcement philosophy, the Division’s Report appears to reflect an approach characterized by greater continuity.
Overall, 2018 saw an uptick in enforcement action by the Division over 2017 in terms of the number of cases brought, the total fines imposed, and the number of significant (greater than $10 million) fines imposed. That said, the overall fines imposed and number of enforcement actions filed were not records for the Division, which in prior years saw massive resolutions with global financial institutions arising from the LIBOR and Foreign Exchange investigations. Moreover, many of the most significant resolutions in 2018 concluded years-long investigations into manipulation of the ISDAFIX benchmark and the markets for precious metals, which predate the current Division leadership.
In 2018, the Division filed 83 enforcement actions, imposing approximately $897 million in fines and $50 million in disgorgement and restitution awards. The Division highlighted in the Report that, although 2018 was not a record year in terms of either number of enforcement actions or overall collections, the Division brought a record 10 cases with fines in excess of $10 million.
Two parts of the Report were of particular note. First, the Division’s enforcement activities aligned closely with its stated priorities for 2018 and the four “task forces” it created. These task forces focused on spoofing and manipulative trading, virtual currency, insider trading and protection of confidential information, and the Bank Secrecy Act. The Division reports that 2018 was a record year for enforcement matters alleging manipulative conduct and spoofing, with 26 such enforcement actions commenced. And, while the Report does not itself break down the number of virtual currency-related enforcement matters, review of the Division’s docket for the last year reveals that the Division brought 11 virtual currency-related cases, which is about 13% of the total number of enforcement actions brought.
The focus on virtual currency cases is notable for at least two reasons. The first is that 2018 was a year in which the CFTC also litigated challenges to its jurisdiction to regulate virtual currencies under the anti-fraud provisions of the Commodities Exchange Act, with two district courts upholding that jurisdiction. Virtual currencies have thus become subject to split regulatory oversight, with the CFTC assuming jurisdiction over fraud in the purchase or sale of virtual currencies themselves, and the SEC assuming jurisdiction (PDF: 79.8 KB) over schemes in which virtual currencies operate as securities, for example, in certain Initial Coin Offerings (“ICOs”). The second notable point is that, although the CFTC has not publicly prioritized enforcement actions related to schemes involving retail investors (as the SEC has), the Division’s enforcement actions in the areas of virtual currencies over the past year—perhaps more than in any other single area of enforcement—have focused on fraudulent schemes involving the sale of virtual currencies to retail investors. This contrasts, for example, with some of the Division’s more significant enforcement matters, including enforcement action related to the precious metals markets and ISDAFIX, which relate principally to the wholesale markets.
Also notable is the Report’s highlighting of its whistleblower program, which paid out five whistleblower awards totaling over $75 million—more than the cumulative total of all whistleblower awards previously issued by the agency. This amount includes a $30 million award, the largest in the CFTC’s history, related to the ISDAFIX enforcement actions, which in itself represents about 35% of the total money awarded to whistleblowers over the last ten years. While the whistleblower program within the CFTC remains considerably less prominent than its SEC counterpart, the CFTC has put significant effort into promoting the program to the market.
In addition to the points highlighted by the Division in the Report, the Report and the Division’s docket are notable for another reason: the relative absence of cases brought by the CFTC related to trading in more traditional commodities, such as agricultural or energy futures. Rather, review of the Division’s docket for 2018 bespeaks a distinct focus on virtual currency, foreign exchange, precious metals and similar financial products.
In terms of enforcement initiatives, the Report focused extensively on self-reporting and cooperation. This largely parallels a focus on individual accountability that features in the SEC’s annual report and in statements by the SEC, CFTC and other law enforcement agencies over the past several years. The Division noted its view that “a consensus appears to have developed that a robust cooperation and self-reporting program serves as a powerful tool to pursue individual liability,” and that it agrees with that consensus. This is not a new focus, as the CFTC issued new enforcement guidance focused on cooperation in September 2017 (PDF: 56.1 KB) that emphasized individual accountability and self-reporting. The Report does, however, further illustrate the culture of self-reporting that the Division seeks to encourage. To that end, the Report includes the following anecdote as being consistent with a “true culture of compliance:”
Imagine a CEO standing in front of the company’s new hires on their first day on the job. Imagine the CEO telling the new staff about the various trainings to come as part of the onboarding process—compliance, ethics, human resources, and the like. And imagine the CEO telling the new staff that, notwithstanding those various internal company regimes, if they break the law, their problems won’t stop with the compliance, ethics, or human resources department. Their problems will come from the CFTC (and perhaps even the DOJ and the FBI). They know this because, the CEO tells the staff, the company is committed to identifying any misconduct, and to reporting it out to the relevant authorities. That’s the sort of behavior we’re seeking to foster. That’s the sort of commitment, we believe, that creates the culture of compliance we want to see in all of our market participants. And that’s the end goal at which our enforcement efforts are aimed.
In exchange for such self-reporting, the Division has pointed to a program of providing greater certainty and clear incentives. By way of example, the Report points to the Division’s recent settlement with a trader who was accused of fraudulently mismarking swap valuations to conceal significant trading losses. In that case, the Division recognized the self-reporting, full cooperation, and proactive remediation of the trader’s employer, Deutsche Bank Securities Inc., by issuing the first public declination letter (PDF: 46.1 KB) closing its related investigation of the employer without recommending any enforcement action. We find interesting the Report’s apparent emphasis on cooperation as a tool to pursue individual accountability as an objective unto itself, although the Report also emphasizes that the objective of all of the Division’s activities centers on encouraging compliance.
The Report provides little explicit guidance on the Division’s priorities for the coming year. Based on the current administration’s areas of focus as well as the consistent statements by the Director of the Enforcement Division, James McDonald, however, we anticipate that 2019 will feature more cases by the Division’s task forces: spoofing and manipulative trading, virtual currency, insider trading and protection of confidential information, and the Bank Secrecy Act. We expect the Division to continue to be an active enforcer in the commodities and adjacent markets, marked by significant and headline grabbing enforcement actions in the areas of manipulation and virtual currency.
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