A futures trader gets points for cooperating with a CFTC investigation only if the trader truthfully answers the investigator’s questions.
The CFTC, in three separate orders, settled with Bank of Nova Scotia (BNS) for $127.4 million, comprised of a record-breaking $77.4 million for spoofing and making false statements and another $50 million for failing to diligently supervise its swap dealers’ activities (In the Matter of Bank of Nova Scotia, Release nos. 8220-20, 8221-20 and 8222-20). The penalties were particularly egregious because while BNS had previously attempted to cooperate with the CFTC, it did not provide all of the requested information necessary for the CFTC to close the investigation.
Spoofing and attempted manipulation. The CFTC’s first and second settlement orders required BNS to pay $77.4 for spoofing and attempted manipulation. Additionally, BNS was mandated to cease and desist from violating Commodity Exchange Act Sections 6(c) and 9(a). Throughout the relevant period, between January 2008 and July 2016, four BNS traders oftentimes successfully executed illegal spoofing trades by manually placing bids and offers for certain gold and silver futures contract with the intent to cancel those orders before execution. The traders repeatedly performed this act to create a false impression of buying or selling interest, with the intent to manipulate prices reflecting the traders’ desired price rather than the legitimate price derived from supply and demand forces. This repeated action over an eight-year period inflicted harm on the markets and other market participants, thereby causing approximately $6.6 million in market losses (In the Matter of Bank of Nova Scotia, CFTC Docket No. 20-27, August 19, 2020).
By the time the CFTC issued its initial settlement order in 2018, BNS had cooperated with the CFTC Enforcement Division staff by firing the principal spoof trader. But after entry of the 2018 order, staff discovered that BNS had made multiple materially false and misleading statements during the investigation which included omissions about the universe of BNS’s precious metals future accounts, the identities of the traders who traded in precious metals futures, and BNS’s failure to maintain a central repository documenting those traders (In the Matter of Bank of Nova Scotia, CFTC Docket No. 20-28, August 19, 2020).
Failure to supervise swap dealers. The third settlement order mandated BNS to pay $50 million for failing to diligently supervise its swap dealers’ activities in violation of Commodity Exchange Act (CEA) Sections 4s and 6s and corresponding CEA regulations (In the Matter of Bank of Nova Scotia, CFTC Docket No. 20-26, August 19, 2020). Specifically, from around May 2013 through the end of 2017, and then at times through at least the end of 2019, BNS’s swap dealer desks provided counterparties with inaccurate and untimely pre-trade mid-market marks (PTMMMs) which affected tens of thousands of swaps (to be accurate, a PTMMM must exclude any amounts for profit, credit reserve, hedging, funding, liquidity, or other costs or adjustments). The swap dealers’ failure to exclude these items concealed BNS’s full markup from its swaps’ counterparties in violation of the above CEA provisions.
Furthermore, while BNS took some cooperative steps to assist the CFTC’s investigation, it simultaneously impeded the investigation by failing to preserve audio recordings, making false statements to the CFTC Enforcement Division staff, and providing untimely, inaccurate, and incomplete responses to the staff’s requests for documents and information. These BNS incomplete responses required the CFTC to expend extra resources to identify gaps and errors and then pursue BNS for complete and accurate responses.
CFTC Chairman Heath P. Tarbert said "these record-setting penalties reflect not only our commitment to being tough on those who break the rules, but also the tremendous strides the agency has made in data analytics. Our ability to go through the electronic order book and look across markets has enabled the CFTC to not only spot misconduct, but also to uncover false and misleading statements." CFTC Enforcement Division Director James McDonald proclaimed "entities seeking to cooperate with the CFTC, like all others that interact with the Commission, must tell the truth. We now have the tools, including through the development of our data-analytics program, to better test and verify the information we receive. When entities are not completely truthful, they will be penalized."
Parallel criminal proceeding. Separately, BNC entered into a deferred prosecution agreement with the Department of Justice (DOJ) in New Jersey’s District Court. BNC will pay $60.4 million in criminal fines, forfeiture and restitution for attempted price manipulation and wire fraud, but a part of this monetary penalty will be offset by the money owed in the CFTC’s above-mentioned spoofing order.
The DOJ’s Fraud Section Chief in the Criminal Division, Robert A. Zink, declared that "this deferred prosecution agreement—which includes a criminal monetary penalty at the top of the United States Sentencing Guidelines range, money to compensate victims, and an independent compliance monitor—reflects the seriousness of the offense and the state of Scotiabank’s compliance program, and further helps to promote the integrity of our public markets." U.S. Attorney Craig Carpenito for the District of New Jersey stated "in the conduct described here, four Scotiabank traders attempted to rig precious metals futures prices in their favor by placing thousands of orders they knew they would cancel before the trades were executed. In this way, they sought to illegally manipulate the market to their own advantage, and to the disadvantage of other traders. The resolution announced requires Scotiabank to pay a substantial penalty and places them under watch by an independent compliance monitor."
The CFTC Docket Nos. are 20-26, 20-27 and 20-28; and Release Nos. 8220-20, 8221-20 and 8222-20.
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