SPEECHES & TESTIMONY

Keynote Address of Director of Enforcement James M. McDonald at the Practising Law Institute's White Collar Crime 2019 Program

September 25, 2019

 

The mission of the CFTC’s Division of Enforcement is to protect the public and preserve market integrity by detecting, investigating, and prosecuting violations of the Commodity Exchange Act (the Act or CEA) and Commission Regulations.  This mission fits within the Agency’s broader goal of fostering open, transparent, competitive, and financially sound commodities and derivatives markets. 

Vigorous enforcement is essential to fulfilling the CFTC’s broader goals, as Chairman Tarbert has made clear in stating that the CFTC will be tough on those who break the law.  Well-functioning commodities and derivatives markets should work for all Americans.  These markets ensure the stability in prices that customers have come to expect, and the economic growth Americans enjoy.  For the economy to grow, businesses and individuals need to have confidence they are competing on a level playing field.  Unlawful activity puts honest businesses at a disadvantage.  It impedes free and fair competition.  It dampens economic growth.  And it undermines our democratic values, public accountability, and the rule of law.  That’s why we are committed to ensuring all companies and individuals in our markets play by the rules.

We’ve worked hard to carry through on this commitment.  That’s illustrated by the substance and impact of the cases we’ve filed.[1]  But at the same time we’ve pursued these substantive cases, we’ve developed a number of initiatives designed to advance our enforcement efforts programmatically, across all substantive areas.  These initiatives include enhancing our ability to detect misconduct using data analytics, building out our cooperation and self-reporting program, promoting individual accountability, increasing the transparency of our processes and actions, and fostering true cultures of compliance among our market participants. 

Today, I want to talk about one initiative in particular where we have made great strides:  Our parallel enforcement program.

Before I go on, please keep in mind that these comments are my own, and do not necessarily reflect the views of the CFTC, its Commissioners, or its Staff.

Parallel Enforcement with the Department of Justice

Our parallel enforcement program starts with the premise that we can most effectively protect our markets when working together with our colleagues in the enforcement and regulatory community, both criminal and civil, domestic and international. 

In particular, we believe a robust combination of criminal prosecution and regulatory enforcement is critical to deterring violators, punishing misconduct, preserving market integrity, and protecting market participants.  This is not a new idea.  Indeed, it is now more than two decades ago that the Department of Justice instructed its attorneys to develop “greater cooperation, coordination and teamwork between the criminal and civil prosecutors who are often conducting parallel investigations of the same offenders and matters.”[2]  More recently, the Attorney General explained that “[b]y working [in parallel with civil regulatory agencies], the Department can better protect the government’s interests . . . and secure the full range of the government’s remedies.”[3]  We agree.

We at the CFTC have the prerequisite authority to develop a robust parallel enforcement program:  Under the Act, violations of the federal commodities laws can constitute criminal violations if done willfully.[4]

 

We also have the right motivation.  Our ultimate goal is to deter wrongdoers from committing misconduct in the first place.  And in pursuing this goal, we know there is no greater deterrent than the prospect of criminal prosecution—and the reality of time in jail.  When those 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.  In addition, our criminal law enforcement partners can bring tools to bear on a particular case that fall outside the CFTC’s authority.  It is entirely proper for us to use the fruits of those efforts, so long as we conduct our investigations—as we do—independently and in parallel with the criminal authorities.[5] 

 

The corresponding benefits to our criminal law enforcement partners are equally significant.  As the regulators of these markets, we bring specialized expertise to any parallel investigation—especially in markets that are particularly complex or for activity that requires a deep understanding of market data.  We also have a unique view into the commodities and derivatives markets, which allows us to identify misconduct that others may not be able to see.  Parallel enforcement matters often start with a CFTC surveillance analyst or investigator spotting suspicious activity in the market, and then the enforcement attorney putting the initial case together.  In other instances, these matters start with a CFTC whistleblower offering a tip that initiates the investigation, or with one of our policy divisions identifying anomalous activity and referring the matter to enforcement.  All of this means that much, and perhaps most, of the misconduct at issue in these parallel actions could not be addressed without the CFTC’s involvement. 

 

In addition, the CFTC has tools that our other enforcement partners do not.  For example, the CFTC has authority to seek an emergency asset freeze through a statutory restraining order, which, in some cases, is essential to ensure existing assets are preserved, and that victims receive some measure of recompense.[6]  The CFTC also has other remedies—like trading and registration bans—that, in the appropriate cases, can enhance the specific deterrent effect of an enforcement action and reduce the prospect of recidivism.

 

By any measure, we believe, our parallel enforcement initiative has been a success.  For starters, this program has yielded significant actions.  Indeed, under this program, we have filed more cases in parallel with the Department of Justice than ever before.[7]  This is a trend that I expect to continue, as Chairman Tarbert has made enhancing these parallel efforts a priority going forward.

These actions have covered a wide range of misconduct—from retail fraud, to digital assets, to market manipulation. Consider just a few examples. 

In the retail fraud area, we filed charges against an array foreign currency trading firms and their principles, in parallel with a DOJ action, alleging a $75 million fraud involving hundreds of victims.[8]  As part of the CFTC’s action, the Court froze assets and appointed a temporary receiver to take control of the corporate defendants’ assets, as well as the assets of the individual defendants.  We also continued our pursuit, in parallel with DOJ, of fraud among managed funds,[9] and in markets like binary options.[10]

We’ve seen similar positive results in the digital asset space.  This includes a fraud action in which the defendant took advantage of customers’ interest in trading Bitcoin and Litecoin in his scheme to defraud them.  The CFTC action resulted in a precedent-setting victory in the Eastern District of New York after the CFTC team prevailed in a bench trial.[11]  The Department of Justice also charged the defendant with fraud, which later resulted in a guilty plea.[12]  In another action, the CFTC filed charges against a trading platform and its CEO for unlawfully offering products margined in Bitcoin without the required anti-money laundering protections in place.  We brought the civil action, and DOJ and the FBI secured an order seizing the platform’s website and shutting it down.[13]  

The same trend shows up in cases involving market manipulation and spoofing.  Again, to highlight a couple of recent examples:  In CFTC v. Merrill Lynch Commodities Inc., the CFTC brought charges including manipulation and spoofing in the precious metals futures markets.  In the action, the Commission imposed approximately $25 million in combined penalty, restitution, and disgorgement.  The Department of Justice resolved criminal charges against Merrill Lynch in parallel with the CFTC’s action.[14]

And just last week, the CFTC charged traders at a major U.S. bank with manipulative conduct and spoofing, also in the precious metals futures markets.[15]  The Department of Justice announced its own charges the same day.  Assistant Attorney General Brian Benczkowski described the charges as “the government’s most significant step to date in [its] ongoing efforts to identify and prosecute fraud and manipulation in our Nation’s commodities markets.”[16]

As this sampling of cases shows, working in parallel with our criminal counterparts can enhance our ability to hold both individual and corporate wrongdoers accountable, and to increase the deterrent effect of our actions.

But these cases are important for another reason.  They show how some of the other initiatives we’ve developed operate in conjunction with our parallel enforcement program. The Merrill Lynch case, for example, involved our use of sophisticated data analytics to detect suspicious activity in our markets.  This data project has been a multi-year effort, through which we have developed an ability to identify, in the trading data, forms of misconduct in ways that complement our understanding of the activity through our other enforcement tools.  In certain instances, it has allowed us to identify wrongful conduct that may have otherwise gone undetected.  We have invested significant resources in our data analytics capabilities, in an effort to maximize our ability to detect, and ultimately deter, misconduct across a range of trading activities.  We are now starting to see the results, and the Merrill Lynch case stands as one of them.

These parallel cases also show our corporate and individual cooperation program in action.  When we announced our cooperation program, we explained that we expected it to serve as a powerful tool to allow us to pursue additional avenues of accountability.  This initiative also has borne fruit, both in our parallel enforcement and standalone matters.  With respect to individuals, this program has helped us work our way up the chain, to hold accountable the highest-level culpable individuals.  With respect to companies, this program has helped us identify the compliance or supervision failures that created the opening for the misconduct to take place.  This is an area, too, that I expect to see our enforcement program continue to develop going forward.

Parallel Enforcement with Civil Regulators, Self-Regulatory Organizations, and the States

I’ve now talked at some length about our parallel enforcement program in the context of our matters with DOJ.  But we have also seen positive results from our cooperative efforts with our fellow civil regulators, the self-regulatory organizations, and the States.  This type of coordination, we believe, is just as significant.  That is particularly true as our markets evolve and become more interconnected.  Bad actors do not conform their misconduct to the technical boundaries of different regulatory jurisdictions.  Nor do they pause as they cross international borders.  So the enforcement community must work together to ensure the entire scope of misconduct is identified, investigated, and prosecuted.

Take our parallel actions with the SEC.  Just a few weeks ago, the CFTC and SEC filed cases charging a clearing organization, registered with both agencies, for failing to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security.  This filing constituted the first action for the CFTC charging violations of Core Principles applicable to Derivatives Clearing Organizations, and the first for the SEC charging violations of that agency’s clearing standards.[17] 

The CFTC and SEC also recently filed parallel charges against a portfolio manager for mismarking swaps that spanned across the respective agencies’ jurisdictions.[18]  And the two agencies continue to successfully litigate in parallel a series of cases filed in Federal District Court in Florida in which we allege a fraud in the binary options markets that harmed tens of thousands of victims and yielded the defendants tens of millions dollars in ill-gotten gains.[19] 

The story is the same with respect to the self-regulatory organizations.  Just in the last few months, we’ve filed a number of cases in parallel with the CME, in matters involving spoofing, unauthorized trading, and fraud.[20]

So too with the States.  In fact, we are currently litigating one case, alleging a $200 million precious metals fraud, as co-plaintiffs with the State of Utah.[21]  The CEA includes a provision that allows States to join a CFTC action as co-plaintiffs and litigate their state law claims alongside us in federal court.[22]  That’s the process we used in the Utah case, and we will look to do it more going forward—particularly where a fraud spans across several states, and multiple state actions could be consolidated in a single federal case.

Standalone CFTC Actions Will Continue To Serve as the Core of the Enforcement Program

Although my focus today has been on the development of our parallel enforcement program, standalone CFTC enforcement actions constitute the vast majority of our cases, and I don’t expect that to change going forward.  The CFTC’s enforcement efforts must always be guided by the CFTC’s mission, and the CFTC’s mission alone.  There are good reasons why we will bring cases that criminal authorities elect not to bring, or cannot bring.  For one thing, we are charged with broadly regulating our markets for a wide range of conduct.  As part of our mission, we bring enforcement actions that do not involve criminal conduct.  These types of cases might involve regulatory failures, compliance problems, or issues where several people fall short, but where no single person acted intentionally.  Even for intentional wrongdoing—the sort that is susceptible to criminal prosecution—our enforcement authority is broader than the authority of our criminal enforcement counterparts.  And finally, we must always exercise our own independent judgment regarding whether conduct violates the Act, and we must be vigilant in carrying out our enforcement obligations.     

The upshot is that we will, and should, continue to bring cases that the criminal authorities may elect not to bring, or may not have the statutory authority to bring.  But for all the reasons I’ve discussed this morning, I expect our parallel enforcement program to play an increasingly significant part in our enforcement program as well. 

 

[1] See Commodity Futures Trading Commission, Annual Report of the Division of Enforcement at 7-13 (Nov. 2018), at https://www.cftc.gov/sites/default/files/2018-11/ENFAnnualReport111418_0.pdf.

[2] Memorandum from the Attorney General to Federal Attorneys (July 28, 1997).

[3] Memorandum from the Attorney General to all United States Attorneys (Jan. 30, 2012).

[4] See CEA § 9(a)(5); 7 U.S.C. § 13(a)(5) (2012).

[5]See United States v. Kordel, 397 U.S. 1, 11 (1970).

[6] See CEA § 6c(a); 7 U.S.C. § 13a-1(a) (2012); Fed. R. Civ. P. 65.                                                           

[7] See Commodity Futures Trading Commission, Annual Report of the Division of Enforcement at 12-13 (Nov. 2018), at https://www.cftc.gov/sites/default/files/2018-11/ENFAnnualReport111418_0.pdf.

[8] See Press Release 7915-19, CFTC Charges Forex Trading Firms and Principals in $75 million Fraud, at https://www.cftc.gov/PressRoom/PressReleases/7915-19.

[9] See Press Release 7927-19, CFTC Charges CEO of Managed Fund with Misappropriation, Fraud, and Making False Statements to NFA, at https://www.cftc.gov/PressRoom/PressReleases/7927-19

[10] See Press Release 7995-19, CFTC Charges International Enterprise with Operating a $103 Million Fraudulent Binary Options Trading Scheme, at https://www.cftc.gov/PressRoom/PressReleases/7995-19.

[11] See Press Release 7774-18, CFTC Wins Trial Against Virtual Currency Fraudster, at https://www.cftc.gov/PressRoom/PressReleases/7774-18.

[12] See Press Release, Staten Island Man Pleads Guilty to Defrauding Investors in Virtual Currency, at https://www.justice.gov/usao-edny/pr/staten-island-man-pleads-guilty-defrauding-investors-virtual-currency.  

[13] CFTC v. 1Pool Ltd., No. 18-CV-02243 (D.D.C. 2018); see also Federal Bureau of Investigation, Information on 1Broker.com Seizure (2018), at https://www.fbi.gov/investigate/cyber/information-on-1broker-com-seizure (detailing seizure of 1Broker.com trading platform).  For other examples of parallel actions involving digital assets, see Press Release 7820-18, Federal Court Finds that Virtual Currencies Are Commodities, at https://www.cftc.gov/PressRoom/PressReleases/7820-18 and Press Release, New York Man Charged with Cryptocurrency Scheme, at https://www.justice.gov/opa/pr/new-york-man-charged-cryptocurrency-scheme (parallel criminal action), as well as Press Release 7714-18, CFTC Charges Multiple Individuals and Companies with Operating a Fraudulent Scheme Involving Binary Options and a Virtual Currency Known as ATM Coin, at https://www.cftc.gov/PressRoom/PressReleases/7714-18.    

[14] See Press Release 7946-19, CFTC Orders Merrill Lynch Commodities, Inc. to Pay Approximately $25 Million for Spoofing, Manipulation, and Attempted Manipulation in Precious Metals Futures, at https://www.cftc.gov/PressRoom/PressReleases/7946-19.

[15] See Press Release 8013-19, CFTC Charges Traders at Major U.S. Bank with Manipulating the Precious Metals Futures Markets, at https://www.cftc.gov/PressRoom/PressReleases/8013-19.

[16] Opening Remarks by Assistant Attorney General Brian A. Benczkowski on Press Call Announcing United States v. Gregg Smith, et al., at https://www.justice.gov/opa/speech/opening-remarks-assistant-attorney-general-brian-benczkowski-press-call-announcing-united.

[17] See Press Release 8000-19, SEC and CFTC Charge Options Clearing Corp. with Failing to Establish and Maintain Adequate Risk Management Policies, at https://www.cftc.gov/PressRoom/PressReleases/8000-19.

[18] See Press Release 7979-19, CFTC Orders Former Hedge Fund Portfolio Manager to Pay More than $700,000 in Monetary Sanctions for Fraudulently Mismarking Swaps, at https://www.cftc.gov/PressRoom/PressReleases/7979-19.

[19] See Press Release 7807-18, CFTC Charges Eleven Individuals and Five Entities in Nationwide Binary Options Fraud Ring, at https://www.cftc.gov/PressRoom/PressReleases/7807-18.

[20] See Press Release 7865-19, CFTC Charges Proprietary Trader with Spoofing in Soybean Futures Markets, at https://www.cftc.gov/PressRoom/PressReleases/7865-19; Press Release 7988-19, CFTC Charges Trader with Spoofing in Financial Futures Markets, at https://www.cftc.gov/PressRoom/PressReleases/7988-19; Press Release 8015-19, CFTC Charges Futures Trader and Industrial Firm with Spoofing in Precious Metals Futures, at https://www.cftc.gov/PressRoom/PressReleases/8015-19; Press Release 8002-19, CFTC Orders Registrant to Pay $1.25 Million for Fraud, Unauthorized Trading, and Violating Speculative Position Limits in Live Cattle Futures, at https://www.cftc.gov/PressRoom/PressReleases/8002-19.

[21] See Press Release 7842-18, CFTC and State of Utah Charge Salt Lake City Precious Metals Dealer and His Company with Engaging in $170 Million Precious Metals Ponzi Scheme, at https://www.cftc.gov/PressRoom/PressReleases/7842-18.

[22] See CEA § 6d; 7 U.S.C. § 13a-2 (2012).