Concurring Statement of Commissioner Goldsmith Romero on the Importance of Protecting Commodity Markets Against Excessive Speculation in CFTC v. Commodity Broker CHS Hedging
December 20, 2022
One of the Commission’s core functions is to ensure that derivatives markets have integrity and that there is no market manipulation and excess speculation that can artificially increase prices. This function is particularly important since the pandemic, when families have faced hard choices at the grocery store given increased costs of food. In order to prevent excessive speculation, the Commission requires limits on trader positions—limits set by exchanges, and enforced against market participants. Brokers (referred to as futures commission merchants (FCMs)) serve as critical gatekeepers in preventing excessive speculation.
I support the Commission bringing an enforcement action against commodity broker and CFTC-registered FCM CHS Hedging, Inc. (CHS) for failing to implement anti-money laundering requirements and failing to prevent excess speculation (including during the pandemic) by Cody Easterday. Chief Judge Bastian recently sentenced Easterday to 11 years in prison, saying that the case involves “the biggest theft or fraud I’ve seen in my career—and the biggest I ever hope to see.” Easterday was a rancher who defrauded Tysons Food, Inc. and another company out of more than $244 million by charging them for approximately 265,000 head of cattle that did not exist (a.k.a. “ghost cattle”).
In 2021, the CFTC charged Easterday and Easterday Ranches, Inc. for fraud, making false statement to an exchange, and violating exchange-set position limits. Easterday accumulated more than $200 million in losses over a 10-year period from speculative trading in the cattle futures markets. Easterday devised the ghost cattle fraud scheme to generate money to cover margin calls on his millions in losses. The CFTC also charged him with defrauding the Chicago Mercantile Exchange (“CME”) in 2017 and 2018 to avoid disciplinary actions after exceeding position limits on cattle markets, and with violating position limits.
Easterday’s commodity broker CHS was in a position to stop violations of position limits, and stop or significantly reduce the fraud, but CHS violated its duties and the law. During the relevant period, Easterday made net margin payments of more than $147 million to CHS. CHS accepted these payments despite knowing that the financial statements that CHS requested from Easterday showed no cash or cash equivalents, substantially no short-term assets in excess of liabilities, negative or break-even cash flow, and drawn down credit lines. Some of the margin payments exceeded Easterday’s entire net annual operating income. CHS did not investigate the source of the funds, implement an adequate anti-money laundering program or implement risk-based trading limits on Easterday. CHS disabled trading limits for Easterday, and even raised limits. CHS provided Easterday with direct market access, but intentionally circumvented automatic pre-trade order screening on his account, allowing him to routinely exceed trading limits.
CHS ignored many red flags, including an independent audit that found that CHS should cease relying on the “type of customers it services, or the length of customer relationships to detect, investigate and report suspicious transactions that might constitute money laundering violations.” CHS failed to act on the auditor’s recommendation. CHS also failed to maintain pre-September 2019 communications between its salesperson and Easterday.
I applaud the CFTC enforcement staff for bringing this case against a key gatekeeper who failed to uphold its regulatory responsibilities and in so failing, violated the law. Unfortunately, this is not the first time that CHS has failed to follow laws and rules to uphold it regulatory responsibility.
CHS is a recidivist. There have been 22 enforcement actions by exchanges and the CFTC brought against CHS. Many of these involved failures related to record-keeping and reporting, including position reporting. In 2016, the Commission brought a $1 million enforcement action against CHS for 13 years of misreporting fixed cash positions, which are related to position limits.
While I support the Commission bringing an enforcement action against CHS Hedging, I do not support bringing this action as presented to the Commission because it does not bring sufficient accountability for or transparency to the harm caused by the broker’s illegal conduct. The complaint should identify Easterday’s criminal and civil violations of the law. The Commission should bring a very strong enforcement action against this broker—not one that does not fully describe the full scope and impact of the harm that could have been stopped or minimized had CHS legally executed its duties as a FCM, and harm that flowed. Providing the identity of Easterday and the multiple federal actions against him would provide significant transparency into real harm involved in this case. I see no valid reason to not reveal his identity or spare CHS of the consequences of its illegal actions—reputational or otherwise.
A key part of the CFTC’s mission is to promote market integrity and enforce our anti-money laundering requirements to promote market integrity. When one of our registrants violates these requirements for a favored customer, particularly in the face of compelling evidence of suspicious activity by that customer concerning the source of funds, we need to send a stronger message than what we are doing in this case.
I also do not support this settlement because it does not send a strong enough deterrent message. While a penalty of $6.5 million is significant for CHS based on its size, I cannot support the settlement without requiring the defendant to admit to its illegal actions. Requiring defendant admissions in CFTC enforcement actions serves the critical public interest goals of federal law enforcement programs—justice, accountability, and deterrence. I recently proposed the Heightened Enforcement Accountability and Transparency test (HEAT Test) to assist the Commission in assessing whether specific cases demand heightened justice for victims, heightened accountability, and heightened deterrence that would accompany defendant admissions. This would include cases with one or more of the following factors:
- Egregious conduct;
- The presence of a criminal scheme;
- Significant harm or risks of harm to investors and/or market participants;
- Significant harm or risks of harm to market integrity;
- A recidivist defendant;
- Obstruction, lying or concealment, in an investigation/examination by the CFTC, other federal authority on the same conduct, or a self-regulatory organization; and/or
- The need to send a pronounced message about particular conduct or practices.
Several of those factors exist in this case. CHS is a recidivist. There was significant harm to the market and market participants that flowed from CHS’s violations. There is a significant need for the CFTC to send a pronounced message about an FCM violating CFTC requirements to prevent excessive speculative trading, including during the pandemic. I issued a statement that the CFTC must ensure that excessive speculation does not distort and worsen existing challenges in commodities markets. Out of concern that families and businesses may pay artificially increased prices for commodities, I called for the CFTC to conduct deep dive studies into market manipulation and excessive speculation in commodities markets. As an FCM, CHS violated its legal responsibilities to prevent excessive speculation and to implement an anti-money laundering program, something they should admit for full accountability, transparency and deterrence.
 Eastern District of Washington | Tri-Cities Rancher Sentenced to Eleven Years in Federal Prison and Ordered to Pay $244 Million in Restitution for “Ghost Cattle” Fraud | United States Department of Justice.
 See Id.
 CFTC Charges Washington State Rancher and Feedyard with $233 Million Phantom Cattle Fraud Scheme | CFTC.
 See Id.
 See Id.
 See Id.
 In re CHS, Inc., CFTC No. 16-07, 2016 WL 913367 (Mar. 9, 2016) (consent order).
 Commissioner Christy Goldsmith Romero, Statement of Commissioner Christy Goldsmith Romero: Proposal for Heightened Enforcement Accountability and Transparency in Settlements | CFTC (September 19, 2022).
 See Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee, Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee | CFTC (September 20, 2022).