I. INTRODUCTION
In 2016, the Commodity Futures Trading Commission (CFTC or Commission) continued to pursue high-profile enforcement cases and to test its new enforcement authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). On the regulatory front, the Commission issued several major final rules (margin for uncleared swaps, cross-border requirements for the margin rules, aggregation of positions and cybersecurity) and several important proposals which remain pending (position limits, Regulation AT, cross-border application of the registration thresholds and external business conduct standards, and swap dealer and major swap participant capital requirements).
Looking forward to 2017, the Commission's composition and regulatory agenda are certain to change. The Trump Administration, together with a Republican-majority Congress, likely will cause a significant shift in the regulatory landscape, both through the administration's appointments and through new legislation. The new president will have an opportunity to appoint three new members to the Commission in early 2017, and Congress has already begun work on CFTC reauthorization. Typically, the agency's enforcement agenda has not varied as much as the regulatory agenda from one administration to the next, but even here significant shifts in emphasis or focus are possible. Nevertheless, it is too early to predict the course of the next administration and exactly how expansive the shifts in the regulatory and enforcement programs will be.
II. ENFORCEMENT
The CFTC filed 68 enforcement actions in Fiscal Year 2016 (ended in September), obtaining $1.29 billion in restitution, disgorgement and civil monetary penalties.1 Although the number of actions is consistent with the CFTC's recent enforcement activity, the amount of monetary sanctions represents a decrease from the $3.14 billion obtained in 2015 and the record $3.27 billion obtained in 2014. The Commission filed an additional four enforcement actions from October 1 through December 31, 2016, and settled or obtained judgment in an additional nine actions during this period.
The following discussion highlights the noteworthy enforcement efforts in 2016.
A. Manipulation and Attempted Manipulation
In 2016, the Commission continued to apply its new anti-manipulation and anti-spoofing authorities.
Spoofing
In October 2016, the Commission agreed to settle its closely watched case against Igor B. Oystacher and 3 Red Trading LLC. The settlement, which was approved in December by the US District Court for the Northern District of Illinois, requires the defendants to pay a civil monetary penalty of $2.5 million.2
The Commission had charged Oystacher and 3 Red with repeatedly engaging in an alleged spoofing scheme in certain futures contracts across five derivatives markets, in violation of Sections 4c(a)(5)(C) and 6(c)(1) of the CEA and Regulation 180.1. The CFTC alleged that Oystacher and 3 Red "manually place[d] large . . . passive order(s) on one side of the market at or near the best bid or offer price, which were intended to be canceled before execution," and then "cancel[ed] or attempt[ed] to cancel all of the spoof order(s) before they were executed."3 The CFTC further alleged that Oystacher and 3 Red then attempted to "virtually simultaneously 'flip' their position from buy to sell (or vice versa) by placing at least one aggressive order on the other side of the market at the same or better price to trade with market participants that had been induced to enter the market by the spoof orders they just canceled."4
The court's order requires that an independent monitor assess and monitor for three years all of Oystacher's and 3 Red's futures trading for the purpose of identifying any future violations of CFTC Regulations or CEA requirements. It also requires Oystacher and 3 Red to employ certain compliance tools with respect to all of Oystacher's trading on US futures exchanges for a period of 18 months, and permanently prohibits Oystacher and 3 Red from spoofing or using any manipulative or deceptive devices while trading futures contracts.
In November 2016, the CFTC entered into a consent order issued by the US District Court for the Northern District of Illinois to settle its spoofing and price manipulation case against Navinder Singh Sarao.5 Sarao had been charged with price manipulation, spoofing and use of a manipulative device in connection with his trading of and submitting bids and offers regarding the E-mini S&P 500 contract on a large number of occasions between April 2010 and April 2015. Among other admissions, Sarao admitted to spoofing and the use of a "dynamic layering" program on May 6, 2010, the day of the Flash Crash. The order requires Sarao to pay a civil penalty of $25.74 million and a disgorgement of $12.87 million. The order imposes permanent trading and registration bans against Sarao and prohibits Sarao from further violations of the CEA and CFTC Regulations. Just prior to entering into the order, Sarao pleaded guilty to one count of spoofing and one count of wire fraud in the same court in a related criminal case brought by the US Department of Justice.
Manipulation
On September 30, 2016, in the case of CFTC v. Wilson & DRW Investments, an action brought by the CFTC alleging that the defendant manipulated and attempted to manipulate the settlement price of certain interest rate futures contracts, the US District Court for the Southern District of New York held that in order to establish attempted manipulation, the CFTC must prove that "Defendants had the specific intent to affect market prices that 'did not reflect the legitimate forces of supply and demand.' This means, that there is 'no manipulation without intent to cause artificial prices.'"6 The CFTC had contended that it could establish intent by showing only that the defendant had an intent to "affect market prices." The court expressly disagreed with this contention, stating that the CFTC "base[d] its position on shorthand language suggesting that the intent standard is merely the intent to affect prices. But it is well established that the intent to create an artificial price is the correct standard."7 The court held a bench trial in the case in early December; both parties have filed post-trial memorandums and are awaiting the judge's decision.
In 2016, the Commission continued to investigate and impose significant penalties for benchmark manipulation. In May, the CFTC reached settlements with Citibank in two actions alleging attempted manipulation and false reporting relating to the London Interbank Offered Rate (LIBOR), the European Tokyo Interbank Offered Rate (Euroyen TIBOR), and the US Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX) global benchmarks.8 The CFTC orders alleged that Citibank and its Japanese affiliates engaged in multiple acts of attempted manipulation in violation of Sections 6(c), 6(d) and 9(a)(2) of the CEA and required Citibank and its affiliates to pay a total of $425 million in civil monetary penalties and to undertake remedial steps to improve internal controls and ensure the integrity and reliability of the benchmarks.
In December 2015, the Commission issued a $3.6 million penalty against and imposed a two- year trading limitation on a Houston-based natural gas trading and marketing firm and a trader for their attempts to manipulate the monthly index settlement prices of natural gas at four major trading locations during monthly settlement periods.9
Insider Trading
The CFTC brought another insider trading case under Regulation 180.1 for an employee's misappropriation of nonpublic, confidential and material trading information from his employer and using such information to trade for his personal benefit.
In September 2016, the Commission ordered Jon P. Ruggles to pay a $1.75 million penalty and to disgorge more than $3.5 million in ill-gotten profits, and banned him from trading and registration.10 Ruggles was responsible for developing his employer's fuel-hedging strategies and for executing futures and options trades on NYMEX. In violation of his duties to his employer, Ruggles traded in the same NYMEX products in personal accounts in his wife's name, which he controlled.
The Ruggles order followed the CFTC's first insider trading case under Regulation 180.1 in December 2015. In that case, the Commission ordered Arya Motazedi to pay a civil monetary penalty of $100,000 and restitution of more than $216,000, and banned him from trading and CFTC registration.11 Motazedi, who was employed as a gasoline futures trader, was charged with breaching his duties to his employer by misappropriating trading information gained from his employment and placing personal orders based on that information ahead of the orders he placed for the company's trading account.
These cases mark a significant development in CEA enforcement. Historically, "insider trading" was not prohibited by the commodities laws. With the adoption of CEA Section 6(c)(1) and CFTC Regulation 180.1, the Commission now has broad-based authority to bring "insider trading" actions based on deceptive conduct, similar to the Securities and Exchange Commission's (SEC's) authority under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Nonetheless, the differences in trading between futures and securities make it unlikely that insider trading enforcement will become a centerpiece of the CFTC's enforcement program as it is for the SEC's.
B. Failures to Register, Illegal Off-Exchange Contracts
Trading or advising clients without proper registration remains a focus of the CFTC's enforcement program, particularly where fraud is involved. Last year, the CFTC targeted several unregistered firms and individuals involved in fraudulent trading schemes.12
In September, the Commission filed a civil enforcement action against Jamal Y. Vance and his firm, All City Investments, LLC, in the US District Court for the Southern District of New York. The Commission alleged that Vance and All City fraudulently solicited customers for the purported purpose of trading in off-exchange foreign currency accounts and operated as commodity trading advisors without being registered as such with the CFTC.13 Vance and All City contest the Commission's allegations, and the matter is currently before Judge Alison J. Nathan.
Also in September, the CFTC filed a complaint in the Southern District of New York against Kevin Michael Symons; his company, FTS Financial, Inc.; and Jerry Austin Simmons, alleging that the defendants fraudulently solicited and sold access to an online futures trading forum.14 FTS marketed its "Real Time Trade Room" as a way for clients to observe Simmons as he traded futures contracts in "real time"; in reality, Simmons never actually traded any futures contracts in the room. The Commission further alleged that Simmons solicited managed futures accounts but failed to register with the Commission as an associated person of a commodity trading advisor. This matter is still pending before Judge Ronnie Abrams in the Southern District.
In another matter, the CFTC settled charges with Advanced Trading Workshop, Inc. (ATW), for fraudulently soliciting clients to participate in a managed account program and failing to register as a commodity trading advisor as required.15 ATW was also charged with fraudulently soliciting clients to purchase access to an online trading room. The CFTC ordered ATW to pay a civil monetary penalty of $470,000 and disgorgement of $470,000.
Finally, the Commission settled charges against Raja Michael Mawad and his firm, RNS Holdings LP, charging them with fraud in connection with operation of a commodity pool.16 Mawad was charged with withdrawing more than $189,000 from the fund for unauthorized personal and other expenses over a six-year period, none of which were disclosed to pool participants, in violation of Section 4o(1)(B) of the CEA. In addition, RNS was charged with failing to distribute to participants or submit to the National Futures Association (NFA) required annual reports for 2013 and 2014, in violation of Regulation 4.22(c).
C. Trade Practice Violations—Wash Trades, Fictitious Trades, Position Limits, Trading Ahead
The Commission settled charges against Russia-based JSC VTB Bank (VTB) and its affiliate VTB Capital PLC for executing over 100 fictitious block trades in Russian ruble/US dollar futures contracts, with a total notional value of approximately $36 billion, in violation of Sections 4c(a)(1) and (2) of the CEA and Regulation 1.38(a). VTB was charged with not seeking price quotes from unrelated third parties and obtaining from its affiliate pricing that was more favorable than it could have obtained from the broader market. The CFTC found that the block trades were structured to negate market risk and avoid price competition. As a result, VTB and VTB Capital were ordered to pay a $5 million civil monetary penalty.
D. CFTC Whistleblower Program
The CFTC continued to grow its Whistleblower Program in 2016, including by making its largest award to date and by launching a public-facing website, whistleblower.gov, in January. The Whistleblower Program, which was authorized by Section 748 of the Dodd-Frank Act, provides for monetary awards to whistleblowers who voluntarily provide original information to the Commission that results in a successful enforcement action involving sanctions greater than $1 million. Under the program, whistleblowers may receive 10-30 percent of the monetary sanctions collected.
Ten final orders were issued under the Whistleblower Program in 2016. Of these, two granted awards and eight denied awards. In March 2016, the CFTC announced a whistleblower award of more than $10 million, the largest amount awarded by the Commission to date.17 In July the Commission announced its fourth whistleblower award, in the amount of approximately $50,000.18
In September, the CFTC issued a proposed rule to "enhance the process for reviewing whistleblower claims" and clarify various other authorities.19 The proposed rule also would reinterpret the Commission's anti-retaliation authority to permit the Commission to bring enforcement actions against any person or entity that retaliates against a whistleblower.20
E. Other Enforcement Actions
Conflicts of Interest
In December 2015, JPMorgan Chase Bank, N.A., agreed to settle allegations that it had failed to disclose certain conflicts of interest to its wealth management business clients, in violation of Section 4o(1)(B) of the Act and Regulation 4.41(a)(2).21 In particular, the Commission alleged that with respect to certain discretionary portfolios, JPMorgan Chase failed to disclose its preference for proprietary hedge funds and mutual funds and failed to disclose its preference for retrocession-paying third-party hedge fund managers.
Reporting and Recordkeeping Violations
Emphasizing that accurate reporting is critical to its surveillance and enforcement programs, the Commission initiated a number of actions against swap dealers, futures commission merchants (FCMs) and companies for various recordkeeping violations.
In the first action of its kind, the Commission in August 2016 brought a federal court action against a swap dealer for failing to comply with the reporting requirements of Parts 43 and 45 of the CFTC Regulations. The Commission filed the complaint in the US District Court for the Southern District of New York against Deutsche Bank AG, charging the firm with a number of swap reporting violations and related supervisory failures.22 The Commission found that, following a systems outage, Deutsche Bank did not report any swap data for multiple asset classes over a five-day period, and the firm's attempts to rectify its errors created new reporting problems. The Commission further found that the firm failed to have in place an adequate business continuity and disaster recovery plan. In October, at the parties' request, Judge William Pauley appointed an independent monitor to test the adequacy of the firm's swaps reporting systems, assess the adequacy of previously reported data, and recommend improvements to its reporting and supervisory systems.
In December 2016, the CFTC ordered Société Générale SA to pay a $450,000 civil monetary penalty for failing to timely report certain swap transactions, in violation of Parts 43 and 45 of the CFTC Regulations.23 Specifically, Société Générale was charged with failing to report non- deliverable forwards, FX swaps and FX forwards to a registered swap data repository in a timely manner. The order recognized that Société Générale self-reported the matter, undertook an internal investigation and remediated its reporting failures.
Risk Management and Failure to Supervise
In September 2016, the Commission brought its first action under Regulations 1.11 and 1.73, which impose risk management program and supervision obligations for FCMs and clearing member FCMs, respectively. The CFTC ordered Advantage Futures LLC, an FCM, to pay a $1.5 million civil monetary penalty for failure to diligently supervise the handling of certain commodity interest accounts, despite notifications from three exchanges that they had observed an Advantage customer engaging in unlawful trading. The Commission also found that Advantage had deficient risk management and credit risk practices and knowingly made inaccurate statements in its Annual Chief Compliance Officer Report filed with the Commission.24 Additionally, the Commission charged Advantage's chief executive officer and chief risk officer with supervision failures.
False Statements to the NFA
The Commission continued to bring actions against firms and individuals for making false statements or knowingly providing inaccurate information to regulators. For example, the CFTC found that Edmund Hysni and his firm, Atlantas Group, Inc., willfully made false statements to the NFA in connection with its investigation into the firm's solicitation fraud, in violation of Section 9(a)(4) of the Act.25
Retail Commodity Fraud
Last year the Commission continued its long-standing efforts to crack down on fraudulent activity involving the sale of precious metals to retail customers. For example, in August 2016, the CFTC won a fraud trial in the US District Court for the Southern District of Florida against Miami-based Robert Escobio and his companies, Southern Trust Metals, Inc., and Loreley Overseas Corporation.26 The defendants were found to have falsely told retail customers that they could purchase physical precious metals on a leveraged basis, when, in reality, there were no physical precious metals and no loans. The court ordered the defendants to pay approximately $2.5 million in restitution and penalties, and permanently banned the defendants from trading. The CFTC's complaint alleged violations of Sections 4(a); 4b(a)(2)(A), (B) and (C); 4d; and 6(c) of the CEA, and Regulation 180.1(a).
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Footnotes
1. Press Release, Commodity Futures Trading Comm'n, CFTC Releases Annual Enforcement Results for Fiscal Year 2016, PR7488-16 (Nov. 21, 2016).
2. Consent Order of Permanent Injunction, Civil Monetary Penalty, and Other Equitable Relief Against Igor B. Oystacher and 3 Red Trading LLC, CFTC v. Oystacher, No. 15-cv-09196 (N.D. Ill. Dec. 20, 2016).
3. Complaint at 2, CFTC v. Oystacher, No. 15-cv-09196 (N.D. Ill. Oct. 19, 2015).
4. Id.
5. Consent Order of Permanent Injunction, Civil Monetary Penalty, and Other Equitable Relief Against Navinder Singh Sarao, CFTC v. Sarao, No. 15-cv-3398 (N.D. Ill. Nov. 14, 2016).
6. Memorandum and Order at 26, CFTC v. Wilson & DRW Investments, No. 13-cv-7884 (S.D.N.Y. Sept. 30, 2016) (quoting In re Amaranth Nat. Gas Commodities Litig., 730 F.3d 170, 183 (2d Cir. 2013)).
7. Id. at n.14.
8. In re Citibank, N.A., CFTC Docket No. 16-16 (May 25, 2016); In re Citibank, N.A.; Citibank Japan Ltd.; and Citibank Global Markets Japan Inc., CFTC Docket No. 16-17 (May 25, 2016).
9. In re Total Gas & Power North America, Inc., CFTC Docket No. 16-03 (Dec. 7, 2015).
10. In re Jon P. Ruggles, CFTC Docket No. 16-34 (Sept. 29, 2016).
11. In re Arya Motazedi, CFTC Docket No. 16-02 (Dec. 2, 2015).
12. In addition, the Commission has issued a number of Fraud Advisories, warning individuals about commodity pool fraud, forex fraud and other trading scams. See CFTC Fraud Advisories.
13. Complaint for Injunctive and Other Equitable Relief and for Civil Monetary Penalties Pursuant to the Commodity Exchange Act, CFTC v. All City Investments, LLC, Case No. 1:16-cv-07372 (S.D.N.Y. Sept. 21, 2016).
14. Complaint for Injunctive and Other Equitable Relief and Civil Monetary Penalties Under the Commodity Exchange Act, CFTC v.FTS Financial, Inc., No. 1:16-cv-07513 (S.D.N.Y. Sept. 26, 2016).
15. In re Advanced Trading Workshop, Inc., CFTC Docket No. 16-31 (Sept. 27, 2016).
16. In re RNS Holdings LP, CFTC Docket No. 16-28 (Sept. 20, 2016).
17. CFTC Whistleblower Award Determination No. 16-WB-06 (Mar. 28, 2016); Press Release, Commodity Futures Trading Comm'n, CFTC Announces Whistleblower Award of More Than $10 Million, PR7351-16 (Apr. 4, 2016).
18. CFTC Whistleblower Award Determination No. 16-WB-08 (July 19, 2016); Press Release, Commodity Futures Trading Comm'n, CFTC Announces Fourth Whistleblower Award, PR7411-16 (July 26, 2016).
19. Press Release, Commodity Futures Trading Comm'n, CFTC Seeks Public Comment on Proposed Whistleblower Rule Amendments, PR7435-16 (Sept. 1, 2016).
20. Whistleblower Awards Process, 81 Fed. Reg. 59551 (Aug. 30, 2016). The Commission stated that this new interpretation would conform the CFTC's anti-retaliation authority with that of the SEC.
21. In re JPMorgan Chase Bank, N.A., CFTC Docket No. 16-05 (Dec. 18, 2015).
22. Complaint for Injunctive Relief, Civil Monetary Penalties, and Other Equitable Relief, CFTC v. Deutsche Bank AG, No. 1:16-cv-06544 (S.D.N.Y. Aug. 18, 2016).
23. In re Société Générale SA, CFTC Docket No. 17-01 (Dec. 7, 2016).
24. In re Advantage Futures LLC, CFTC Docket No. 16-29 (Sept. 21, 2016).
25. In re Atlantas Group, Inc., CFTC Docket No. 16-23 (July 14, 2016). In another matter underscoring the importance of full and prompt cooperation with the NFA, last year the NFA issued a complaint against 18-year-old trader Jacob Wohl and his firm, Nex Capital Management LLC, alleging a failure to cooperate promptly and fully with the NFA during an attempted examination, in violation of NFA Compliance Rule 2-5. In re Nex Capital Management LLC, NFA Case No. 16-BCC-011 (Aug. 19, 2016).
26. Final Judgment, CFTC v. Southern Trust Metals, Inc., No. 1:14-cv-22739 (S.D. Fla. Aug. 29, 2016).
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