CFTC Enforcement Director James McDonald declared the past year to be "among the most vigorous in the history of the CFTC” from an enforcement perspective, in a speech before NYU’s Program on Corporate Compliance & Enforcement. In his remarks, McDonald covered quite a bit of ground, including an update on the division’s activity over the fiscal year (ending September 30th), priorities and initiatives going forward, as well as recent developments regarding the division’s cooperation and self-reporting program. The DOE’s 2018 Annual Report was released in connection with the speech.
A robust enforcement agenda in 2018. After 2017, a year where civil monetary penalties and case filings plummeted, fiscal year 2018 was an extraordinary year for DOE by any number of measures. McDonald noted this year saw the third highest number of cases filed in commission history, the fourth highest amount of penalties imposed, the most ever number of cases involving manipulative conduct, and parallel criminal actions. The director also indicated that more than two-thirds of cases brought included individual charges, which is the highest percentage ever for the commission. Moreover, the number of whistleblower cases and their associated awards were also the highest in the agency’s history.
A journey behind the numbers—a look at division priorities. McDonald endeavored to take the audience behind the numbers as he identified the following four central priorities ungirding the DOE’s program:
- Preserving market integrity. Price discovery is at the heart of the commission’s mission. During Fiscal Year 2018, the CFTC brought 26 cases involving misconduct related to interfering with price discovery processes, the most in its history. In comparison, from 2009 to 2017, the CFTC, on average, brought about six such cases per year.
- Protecting customers. The commission brought a case centering around a massive national and international binary options fraud ring involving approximately 75,000 victims, as well as numerous cases involving fraud in connection with virtual currencies. The DOE has successfully taken a number of these matters to trial when necessary.
- Promoting individual accountability. Over two-thirds of commission cases involved charges against individuals, including personnel at financial institutions, proprietary trading firms, and managed funds. Those charged have included primary wrongdoers, as well as those who have facilitated misconduct as aiders and abettors. Actions have also been based upon failure to supervise and control person liability which has led to charges being brought against supervisors, desk heads, CEOs, and a Chairman of the Board.
- Enhancing coordination with other regulators and criminal authorities. McDonald pointed to parallel actions involving spoofing and manipulative conduct that the CFTC filed together with the Department of Justice and FBI in January 2018. The commission, for its part, filed charges against three financial institutions and six individuals which included a $30 million fine, the largest civil monetary penalty ever imposed for spoofing-related misconduct. The director noted that a robust combination of criminal and regulatory enforcement is critical to achieving optimal deterrence.
The early returns look good—an update on cooperation and self-reporting. Through the end of September, the CFTC had issued three significant orders which involved self-reporting. Each of those matters included a civil monetary penalty that reflected a significant reduction on account of the self-report, cooperation, and remediation. Moreover, the commission advanced its individual cooperation program to sign up individuals to cooperation agreements, which led to significantly reduced penalties, and in some cases, no civil monetary penalty whatsoever was imposed.
McDonald noted that through the self-reporting program, the commission has brought actions against both companies and individuals, including supervisors and senior management, that it otherwise might not have been able to charge. Moreover, McDonald indicated that the self-reporting program continues to grow, and two additional matters of import have been brought in the past five weeks.
Notably, the CFTC recently brought an action against a managing director at Deutsche Bank in connection with fraud arising out of his mismarking swap valuations in an attempt to cover up more than $10 million in trading losses. Notwithstanding, the DOE declined to prosecute the bank on account of its self-reporting, cooperation, and remediation, and issued its first ever declination letter reflecting the same. On this score, McDonald concluded, "this is how our self-reporting program is designed to work. We want companies to have sufficient internal controls to catch wrongdoing when it happens." He added, "When they find misconduct, we want them to take appropriate remedial steps—to fix the problem, and to make sure it won’t happen again."
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