Expanded Authority, Increasing Numbers and Record Fines: The Changing Landscape of the CFTC’s Enforcement Actions

April 22, 2013

During the past four years, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) has substantially expanded its regulatory reach and flexed stronger enforcement muscles.  Since 2010, the CFTC has dramatically increased its annual enforcement action totals, and has imposed record high financial penalties on significant market participants.  In 2011 and 2012, the CFTC filed at least 201 enforcement actions, almost as many as the past five years combined, and has already recovered approximately $1.8 billion in total sanctions.[1]  As CFTC Chairman Gary Gensler has stated, “Dodd-Frank expands the CFTC’s arsenal of enforcement tools.  We will use these tools to be a more effective cop on the beat, to promote market integrity, and to protect market participants.”[2]  Notwithstanding budgetary constraints, the next four years are likely to show continued emphasis on expanded enforcement efforts as the agency implements its new rules.  This alert focuses on the CFTC’s new rulemakings and how Title VII has increased the CFTC’s power to create and police the derivatives markets.

I.   Expanding the CFTC’s Enforcement Actions

Over the past two years, the agency has hit record levels of enforcement actions and civil penalties imposed.  Figure 1 below details the types of enforcement actions that the CFTC has brought from 2006 through 2012, as well as the total amounts of monetary penalties it recovered during each fiscal year.

Figure 1:[3]

Fiscal Year 2006 2007 2008 2009 2010 2011[4] 2012[5]
Total number of enforcement actions filed 33 37 39 50 57 99 102
Total monetary penalties recovered and sanctions imposed (millions) $446 $542 $636 $280 $200 $450 $935
Manipulation, attempted manipulation, false reporting 2 3 3 2 6
Commodity pools, hedge funds 11 8 13 15 12
CTAs, managed accounts, and trading systems 6 3 1 3 3
Fraud 2 1 1 1
Forex fraud 6 6 1 16 14
Statutory disqualification 5 4 5 2 2
Other illegal off exchange 1 1 1
Supervision and compliance 8 9 8 7
Trade practice 4 5 3 12

In contrast to earlier years,[6]  in 2011 and 2012, the CFTC brought actions involving major market participants which captured significant attention in the media and have led to some of the largest monetary fines ever levied by the CFTC.  Several have arisen out of the multi-agency and multi-national investigations of the LIBOR market, investigations in which the CFTC has had a central role.  For example, in 2012, the CFTC filed charges against Barclays PLC and two affiliates for alleged attempted manipulation and false reporting of benchmark interest rates.  The charges were simultaneously settled pursuant to an order requiring Barclays to pay $200 million, the largest fine ever imposed by the CFTC to that date, and requiring Barclays to implement a number of remedial measures to ensure the integrity of the bank’s benchmark submissions.[7]  Also in 2012, the CFTC filed charges against JPMorgan Chase Bank for its allegedly unlawful handling of Lehman Brothers, Inc.’s customer segregated funds before and after Lehman filed for bankruptcy in the midst of the financial crisis of 2008.  This action too was settled pursuant to an Order requiring JPMorgan to pay $20 million, the largest CFTC sanction for a segregated fund violation to date.[8]  In 2013, the CFTC imposed its largest penalty to date when it ordered the Royal Bank of Scotland plc and RBS Securities Japan to pay a $325 million penalty to resolve charges of manipulation, attempted manipulation, and false reporting of LIBOR.[9]  The CFTC has also imposed large fines on individuals and their companies for allegedly fraudulent conduct.  For example, on April 3, 2013, a federal court ordered defendants and their company to pay a total penalty of over $4.8 million, in an action that the CFTC brought for misappropriation and issuing false statements in a fraudulent commodities scheme.[10]

The CFTC continues to bring forex and commodity futures enforcement actions alleging violations as to retail customers, and has done so on a larger scale than in the past.  For example, in 2012, the CFTC filed charges against a Texas corporation and its principals, alleging they conducted a global off-exchange forex scheme accepting at least $53 million from at least 960 clients.[11]  In March 2013, the CFTC obtained a federal court judgment against two Mexican companies and their forex divisions, requiring them to pay more than $57 million in sanctions for defrauding their U.S. forex customers.[12]  One critical factor in the CFTC’s recent enforcement expansion is the increased authority that Congress granted to the CFTC in the Dodd-Frank Act.  The following section describes some of the most important ways in which the Dodd-Frank Act has expanded the CFTC’s authority, and how it has enabled the CFTC to cast a wider net over previously unregulated behavior.

II.   The Dodd-Frank Act’s Expansion of the CFTC’s Enforcement Authority

          A.   New Regulation of the Swaps Market

Title VII extended the CFTC’s jurisdiction from conventional derivatives (futures and options) to include the vast majority of the swaps market.[13]  The term “swap” is broadly defined in Commodity Exchange Act (“CEA”) Section 1a(47) and further defined in CFTC Regulation 1.3(xxx).[14]  Pursuant to the legislation, the CFTC has issued rules regulating (i) new swap “registrants” (e.g., swap dealers (“SDs”) and major swap participants (“MSPs”)), each of whom must now register, meet capital and margin requirements, maintain records and meet reporting requirements; and (ii) new “registered entities” (e.g., swap execution facilities (“SEFs”) and swap data repositories (“SDRs”)), each of whom must now register and comply with core principles and other requirements.[15]  CFTC registrants and registered entities that historically had been regulated only with respect to futures-related activities (e.g., commodity pool operators (“CPOs “), commodity trading advisors (“CTA”), futures commission merchants, introducing brokers, designated contract markets, and derivatives clearing organizations) are now being regulated with respect to their swaps activities.  Title VII and the CFTC’s regulations extend requirements (e.g., reporting, clearing, trade execution) to all swap market participants, including non-registered commercial end-users.

Most of the Dodd-Frank rules are in place and the CFTC is expected to promulgate the remaining rules this year.[16]  For example, the CFTC has already finalized rules for clearing, reporting, real-time public reporting, and business conduct standards for SDs and MSPs.[17]  The agency is expected to finalize rules relating to trading, capital and margin requirements later this year.

          B.   Expanded Authority to Prosecute Cases Alleging Manipulation and Fraud

Section 753 of the Dodd-Frank Act significantly enhanced the CFTC’s “anti-manipulation authority” by amending CEA Section 6(c).[18]  In particular, amended CEA Section 6(c)(1) is virtually identical to the language in Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”).[19]  Congress modeled the amended CEA Section 6(c)(1) after Exchange Act Section 10(b) to harmonize the definition of manipulation, expand the CFTC’s authority, and strengthen the CFTC’s enforcement powers to the level of the SEC.[20]   Accordingly, the Commission adopted CFTC Regulation 180.1 as the functional equivalent of SEC Rule 10b-5.[21]  The CFTC has noted that by modeling CFTC Regulation 180.1 after Rule 10b-5, its goal was to “take an important step toward harmonization of regulation of the commodities, commodities futures, swaps and securities markets.”[22]  The CFTC has also stated that, given the similarities between CEA Section 6(c)(1) and Exchange Act Section 10(b), the CFTC “will be guided, but not controlled, by the substantial body of judicial precedent applying the comparable language of SEC Rule 10b-5.”[23]

                    1.   The CFTC may rely on evidence of “reckless” misconduct rather than “specific intent” to prove manipulation.

CFTC Regulation 180.1 lessens the CFTC’s burden of proving manipulative or fraudulent conduct.  Heretofore, the CFTC was required to prove a defendant’s specific intent to create an artificial market price.[24]  While the CFTC had settled numerous manipulation and attempted manipulation cases, CFTC Commissioner Bart Chilton stated in 2009, “in the CFTC’s 35-year history we have only successfully prosecuted and won a single case of manipulation in the futures markets . . . [p]roving manipulation under current law is so onerous as to be almost impossible.”[25]

The Dodd-Frank Act changed the intent requirement to prohibit “the reckless use of fraud-based manipulative schemes.”[26]  Because proof of reckless conduct does not rely exclusively on the defendant’s state of mind, this change closes a significant gap in CFTC authority.  Secondly, Dodd-Frank allows the agency to bring anti-manipulation or fraud actions under CFTC Regulation 180.1 without having to always prove concrete changes on market price.[27]  The CFTC has stated that while a market or price effect “may well be indicia” of manipulation, “a violation of final Rule 180.1 may exist in the absence of any market or price effect.”[28]  Due to these decreased evidentiary requirements, the CFTC is now able to bring anti-fraud and manipulation actions more readily, increasing the chances that market participants could face high monetary penalties for previously unregulated conduct.

Finally, the Dodd-Frank Act also establishes limits on insider trading in futures and swaps based on material nonpublic information. [29]  The CFTC has recognized that unlike securities markets, derivatives markets have long operated in a way that permits market participants to trade on the basis of lawfully obtained, material nonpublic information, and therefore has limited the scope of CFTC Regulation 180.1.  Accordingly, CFTC Regulation 180.1 only prohibits trading on the basis of material nonpublic information as provided in the Commission Determination[30] or as otherwise prohibited by law.  Thus, CFTC Regulation 180.1 prohibits trading based on misappropriated information obtained or used in breach of a duty of confidence owed to the source of the data.  Furthermore, the Commission has noted that CFTC Regulation 180.1 does not create an affirmative duty of disclosure (except, as provided by Section 6(c)(1), such disclosure may be required “as necessary to make any statement made to the other person in or in connection with the transaction not misleading in any material respect”).[31]

                    2.   Dodd Frank expands the CFTC’s authority to sanction false reporting. 

The Dodd-Frank Act also expanded the CFTC’s authority to bring new types of enforcement actions alleging false statements to the CFTC.  CEA Section 6(c) previously prohibited the dissemination of false information to the Commission in registration applications or reports filed with the Commission.  However, the Dodd-Frank Act expanded this prohibition to also forbid the dissemination of false information through false statements made in “any statement of material fact made to the Commission in any context.” (emphasis added).[32]  The CFTC has increased its prosecution of false statement actions in recent years.  For example, in a 2012 fraud action against an Illinois resident registered as a CPO and CTA, and his company, the CFTC used its new Dodd-Frank “civil perjury” authority to charge the defendant with making material false statements to the CFTC during its investigation of this matter.[33]  The penalties that entities and individuals can face for making false statements to the CFTC have also increased.  As recently as February 2013, the CFTC announced that a federal court imposed over $2.8 million in sanctions against a Florida resident and his company for making false statements to the National Futures Association, a self-regulatory organization responsible, under CFTC oversight, for certain aspects of futures and swaps regulations.[34]

          C.   Expanded Prohibitions of Disruptive Trading Practices

The Dodd-Frank Act amends the CEA to prohibit “disruptive practices”, making it unlawful for market participants to (A) violate bids or offers; (B) intentionally or recklessly disregard the orderly execution of transactions during the closing period; or (C) engage in “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution).[35]  One especially important aspect of this legislation that could dramatically expand liability is that the prohibition on violating bids or offers, contained in CEA Section 4c(a)(5)(A), does not contain an intent requirement.  Recognizing the vagueness of these prohibitions, the CFTC has proposed an interpretive order relating to the new disruptive trading practices prohibitions in CEA Section 4c(a)(5)(A).[36]    The CFTC’s proposed interpretation of CEA Section 4c(a)(5)(A) would prohibit any person from buying a contract at a price higher than the lowest available price and/or selling a contract at a price that is lower than the highest available price.[37]  The CFTC asserts that because Congress did not include an intent requirement, it is therefore a “per se” offense.[38]  Under the proposed interpretive order, the CFTC may not be required to show that a defendant intended to disrupt fair and equitable trading.[39]

Unlike failure to honor bids or offers, the orderly execution prong of CEA Section 4c(a)(5)(B) requires the CFTC to prove recklessness.[40]  While the CFTC’s proposed interpretive order considers CEA Section 4c(a)(5)(B) to encompass any trading, conduct, or practices occurring inside the closing period, potential disruptive conduct outside that period may nevertheless form the basis for an investigation of potential violations.  For example, the CFTC explains that with respect to swaps executed on a swap execution facility, a swap would be subject to Section 4c(a)(5)(B) if a closing period or daily settlement price exists for the particular swap.[41]

“Spoofing” is a bid or offer placed with the intention of cancellation before execution.  In the CFTC’s view, a “spoofing”[42] violation of CEA Section 4c(a)(5)(C) does not require proof of a pattern of activity[43] –the CFTC has suggested that even a single instance of trading activity can be disruptive of fair and equitable trading.[44]  Additionally, the CFTC has said that it has significant discretion in deciding what constitutes “spoofing” behavior.  The proposed interpretive order states that to determine whether a “spoofing” violation has occurred, the CFTC will evaluate “market context, the person’s pattern of trading activity (including fill characteristics), and other relevant facts and circumstances.”[45]  These factors give the CFTC broad discretion and do not lend themselves to a bright line test.  Thus, while the CFTC has proposed that the legitimate, good-faith cancellation of partially filled orders would not violate CEA Section 4c(a)(5)(C), it has also proposed that a partial fill would not be exempt.[46]  Therefore, it is difficult to predict how the CFTC may choose to evaluate a particular type of conduct.

          D.   The CFTC’s Anti-Evasion Authority

Under the Dodd-Frank Act, transactions that are willfully structured to evade the requirements of the Dodd-Frank Act will be treated as swaps.[47]  Here too, the agency has sought to retain discretion and has abjured a standardized bright line test as to what constitutes evasion.[48]  Instead, the CFTC has said that it will consider the extent to which the entity has a “legitimate business purpose” for its actions.[49]  As a result, the CFTC “will retain the flexibility, via an analysis of all relevant facts and circumstances, to confirm not only the legitimacy of the business purpose of those actions but whether the actions could still be determined to be willfully evasive.”[50]

III.   What to Expect from the CFTC Going Forward

The CFTC has shown that it will seek serious financial penalties and given its expanded authority under the Dodd-Frank Act, it can be expected that the agency will continue this trend.  At a recent conference organized by the Securities Industry and Financial Markets Association Legal & Compliance Society  (“SIFMA C&L”), CFTC officials indicated that the agency will prioritize investigations that involve some of the new anti-fraud provisions granted to the agency under its increased Dodd-Frank authority, such as the false reporting authority discussed above.  Another aspect of the CFTC’s anti-fraud authority is its expanded ability to bring enforcement actions against tippers of material non-public information.

We also anticipate that the CFTC will use its new recklessness theories of liabilities in many of its actions.  Supervision is another likely area of focus.  In bringing an enforcement action, the CFTC will often look if there has been a violation of CFTC Regulation 166.3,[51] requiring Commission registrants to “diligently supervise” the activities of its partners, officers, employees, and agents.  Additionally, the CFTC, like the SEC, has a whistleblower program with attendant statutory protections.  While the CFTC does not receive the same volume of tips as the SEC, CFTC staff has indicated that some of the biggest enforcement investigations currently in progress are derived from whistleblower tips.

With respect to implementation of new Dodd-Frank rules, CFTC enforcement staff noted at the recent SIFMA C&L conference that it places a great emphasis on candor between market participants and the Division of Enforcement.  If a participant is unable to comply with a rule, and proactively communicates with the CFTC promptly following that rule’s enactment with an explanation and steps taken to comply, the CFTC may be less likely to bring an enforcement action.  However, if, for example, a participant waits until a year after a rule’s enactment, does not put sufficient resources towards compliance, and then asks for an extension, an enforcement action is more likely.

Budget constraints will, however, require the CFTC to be selective in its enforcement activities.  Chairman Gensler recently testified before the Senate that the CFTC’s team “is less than 10 percent more in numbers than at our peak in the 1990s.  Yet since that time, the futures market has grown five-fold, and the swaps market is eight times larger than the futures market…”[52]  When questioned whether the CFTC has adequate oversight resources,  Chairman Gensler replied “No, we absolutely do not.  We are currently shelving enforcement [cases]…we just have to because of limited resources.”[53]  “Shelving” does not mean closing, and, while CFTC resources may remain limited, this scarcity may induce the agency to seek more severe relief in those actions it does commence to maximize their deterrent value.

IV.   Conclusion

With the passage of Dodd-Frank and the support of an administration which believes in its mission, the CFTC’s days of relative obscurity are over.  Because its authority to regulate swaps affects all market participants, the agency’s regulatory and enforcement actions warrant scrutiny not only by financial markets participants, but all businesses engaging in hedging transactions.

   [1]   See Figure 1.  Overall, from 2006 through 2010, the CFTC filed a total of 216 enforcement actions and was awarded approximately $2 billion in total sanctions.

   [2]   Enhanced Oversight after the Financial Crisis, The Wall Street Reform Act at One Year: Hearing before the S. Comm. on Banking, Housing, & Urban Affairs, 112th Cong. (2011) (statement of CFTC Chairman Gary Gensler), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-87.

   [3]   Data is compiled from CFTC Annual Performance Reports from each fiscal year, and from the CFTC enforcement archives.  The case breakdown from each year is approximate, as the CFTC may report cases in more than one category, and in some cases, did not provide data categorizing all of the cases it brought in a given year.

   [4]   The CFTC provided limited data for FY 2011, and did not provide a case breakdown in the Annual Performance Report as it had done in past years.

   [5]   The full Annual Performance Report for FY 2012 is not yet available.  The Summary of Performance and Financial Information for FY 2012 does not contain a complete case breakdown.

   [6]   As data in Figure 1 indicates, historically, the CFTC brought the majority of its enforcement actions in the areas of retail forex violations and commodity pools.  See, e.g., CFTC v. Valko, et al., No. 06-060001-CIV-DIMITROULEAS/SELTZER (S.D. Fla. filed Jan. 3, 2006) (alleging defendants defrauded approximately 205 retail customers of at least $1.13 million while purportedly trading foreign currency options); CFTC v. UForex Consulting, LLC, et al., No. 6:07-CV-0046 (W.D. La. filed Jan. 9, 2007) (alleging fraudulent solicitation of more than $3.7 million from at least 127 retail customers for the purported purpose of trading OTC forex contracts); CFTC v. CRE Capital Corp., et al., No. 1 09-CV-0115 (N.D. Ga. filed Jan. 15, 2009) (charging defendants with operating a Ponzi scheme involving more than 100 people and approximately $25 million in connection with forex transactions); CFTC v. Billion Coupons, Inc., et al., No. CV09-00069 JMS LEK (D. Haw. filed Feb. 18, 2009) (alleging that defendants solicited approximately $4.4 million from more than 125 customers in a Ponzi scheme in connection with commodity futures and forex trading); CFTC v. WeCorp, Inc., et al., No. CV09-00153 (D. Haw. filed April 7, 2009) (civil injunctive action charging defendants with fraudulently soliciting $1.5 million from more than 20 people to trade off-exchange forex); CFTC v. SNC Asset Management, Inc., et al., No-09-2555PJH (N.D. Cal. filed June 9, 2009) (charging defendants with operating an $85 million fraudulent forex scheme involving approximately 500 customers); CFTC v. Driver, et al., No. SACV09-0578 (C.D. Cal. filed May 14, 2008) (charging fraudulent solicitation, misappropriation, and issuing false statements to participants in a $13.5 million commodity pool fraud involving over 100 participants); CFTC v. Castillo, et al., No. C-06-540 (N.D. Cal. filed April 12, 2006) (alleging that defendants fraudulently solicited $800,000 from the retail public to purchase commodity trading advice and services relating to the trading of S&P 500 commodity futures and options contracts).

   [7]   In the Matter of Barclays PLC, Barclays Bank PLC and Barclays Capital Inc., Respondents, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as Amended, Making Findings and Imposing Remedial Sanctions, CFTC Docket No. 12-25 (June 27, 2012), available here.

   [8]   In the Matter of JP Morgan Chase Bank, N.A., Respondent, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as Amended, Making Findings and Imposing Remedial Sanctions, CFTC Docket No. 12-17 (April 4, 2012), available here.  See also “CFTC Releases Enforcement Division’s Annual Results”, Press Release PR6378-12, October 5, 2012, available at http://www.cftc.gov/PressRoom/PressReleases/pr6378-12 .

   [9]   In the Matter of the Royal Bank of Scotland plc and RBS Securities Japan Limited, Respondents, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, CFTC Docket No. 13-14 (February 6, 2013), available here.

  [10]   CFTC v. Summit Trading & Capital, LLC, Brian L. Rushton, and Melissa C. Rushton, Order of Final Judgment, Case No. 1:11-cv-01436-JES-JAG (C.D. Ill. April 3, 2013), available here.

  [11]   CFTC v. Senen Pousa, Investment Intelligence Corporation, DBA Prophetmax Managed FX, Joel Friant, Michael Dillard, and Elevation Group, Inc., Case No. A12CV0862LY (W.D. Tex. filed September 18, 2012), available here.

  [12]   CFTC v. MXBK Group S.A. de C.V. and MBFX S.A., Default Judgment Order of Permanent Injunction and Other Ancillary Relief against Defendants, Case No: 2:10-cv-01172-TS (D. Utah March 7, 2013), available here.

  [13]   The Securities and Exchange Commission (“SEC”) has jurisdiction only over security-based swaps which generally include single-name and narrow-based equity and credit default swaps.  The CFTC has jurisdiction over all other swaps including interest rate, foreign exchange, credit default (broad-based and index), equity (broad-based and index) and other commodity swaps (including all agriculture, energy, etc.).

  [14]   See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed. Reg. 48207 (August 13, 2012).

  [15]   For example, the Dodd-Frank Act amended the CEA to add Section 4s, which provides, among other things, for the registration and regulation of SDs and MSPs.  The new legislation also requires certain standardized swaps to be traded on futures exchanges or SEFs, and cleared through derivatives clearing organizations.  See CEA Sections 2(h)(1) and 2(h)(8).

  [16]   Wall Street Reform, Oversight of Financial Stability and Consumer and Investment Protections: Hearing before the S. Comm. on Banking, Housing, & Urban Affairs, 113th Cong. (2013) (statement of CFTC Chairman Gary Gensler), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-131.

  [17]   See, e.g., Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74284 (December 13, 2012); Swap Transaction Compliance and Implementation Schedule: Clearing Requirement Under Section 2(h) of the CEA, 77 Fed. Reg. 44441 (July 30, 2012); Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (January 13, 2012); Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 Fed. Reg. 35200 (June 12, 2012); Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 Fed. Reg. 9734 (February 17, 2012); Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1182 (January 9, 2012).

  [18]   See Prohibition of Market Manipulation, 75 Fed. Reg. 67657 (November 3, 2010); Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41398 (July 14, 2011).  New CEA Section 6(c)(1) makes it a violation for “any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance . . .”

  [19]   See 76 Fed. Reg. at 41399.  However, in note 6, the Commission states that differences between the wording of Exchange Act Section 10(b) and CEA Section 6(c)(1) include, but are not limited to, the express prohibition of the “attempt to use” any “manipulative or deceptive device or contrivance” in CEA Section 6(c)(1), and the absence of a “purchase or sale” requirement in CEA Section 6(c)(1).  The Commission also notes that under SEC Rule 10b–5 a plaintiff is not required to prove that money was actually invested in a specific security.  See, e.g., SEC v. Zandford, 535 U.S. 813,819–21 (2002).

  [20]   See 76 Fed. Reg. at 41399, note 10: Morissette v. United States, 342 U.S. 246, 263 (1952) (noting that where Congress borrows terms of art it “presumably knows and adopts the cluster of ideas that were attached to each borrowed word”); Nat’l Treasury Employees Union v. Chertoff, 452 F.3d 839, 857 (DC Cir. 2006) (stating that “[t]here is a presumption that Congress uses the same term consistently in different statutes.”).  Similarly, United States Senator Carl Levin, Chairman of the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, has commented that the CFTC and SEC should “harmonize their regulatory structures for combating disruptive and manipulative activities.”  76 Fed. Reg. at 41400.

  [21]   Specifically, CFTC Regulation 180.1 prohibits fraud and fraud-based manipulations, and attempts: (1) By any person (2) acting intentionally or recklessly (3) in connection with (4) any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity (as defined in CEA Section 1a(40)).  See 76 Fed. Reg. at 41400, note 13: Santa Fe Industries v. Green, 430 U.S. 462, 473–76 (1977); Dirks v. SEC, 463 U.S. 646, 667 n.27 (1983) (concluding that “to constitute a violation of Rule 10b–5, there must be fraud”); Chiarella v. United States, 445 U.S. 222, 234–35 (1980) (stating that Exchange Act “Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud”); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976) (rejecting argument for imposition of negligence standard that “simply ignore[d] the use of the words ‘manipulative,’ ‘device,’ and ‘contrivance’—terms that make unmistakable a congressional intent to proscribe a type of conduct quite different from negligence. Use of the word ‘manipulative’ is especially significant. It is and was virtually a term of art when used in connection with securities markets. It connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.”) (internal citations omitted).

  [22]   76 Fed. Reg. at 41399, note 11.

  [23]   76 Fed. Reg. at 41399.  Similarly, the Federal Energy Regulatory Commission and the Federal Trade Commission have also relied on a statutory framework largely identical to Exchange Act Section 10(b) when promulgating rules similar to SEC Rule 10b–5.  By doing so, both agencies stated their intent to be guided by securities law precedent, as fits their unique regulatory missions.  See FERC, Prohibition of Energy Market Manipulation, 71 Fed. Reg. 4244, 4250 (Jan. 26, 2006) (FERC final anti-manipulation rule); FTC, Prohibitions on Market Manipulation, 74 FR 40686, 40688–89 (Aug. 12, 2009) (FTC final anti-manipulation rule); 76 Fed. Reg. at 41399, note 12.

  [24]   Statement of Chairman Gensler, 76 Fed. Reg. at 41410, Appendix 2.

  [25]   Speech of Commissioner Bart Chilton before the Argus Media Summit, October 21, 2009, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opachilton-28.

  [26]   Statement of Chairman Gensler, 75 Fed. Reg. at 41410, Appendix 2.  The Commission defines recklessness as “an act or omission that ‘departs so far from the standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was doing'”, citing Drexel Burnham Lambert Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (holding that recklessness under SEC Rule 10b–5 means ”an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it”) (internal quotation marks and citation omitted); and SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1093–94 (9th Cir. 2010) (“scienter [under SEC Rule 10b–5] requires either deliberate recklessness or conscious recklessness, and [ ] it includes a subjective inquiry turning on the defendant’s actual state of mind”) (internal quotation marks and citations omitted).  76 Fed. Reg. at 41404.

  [27]   While CFTC Regulation 180.1 broadly prohibits actual and/or attempted fraud and manipulation, CFTC Regulation 180.2 specifically prohibits actual and/or attempted price manipulation in connection with swaps, cash commodity transactions, and futures (and related options).  CFTC Regulation 180.2 mirrors the text of amended CEA Section 6(c)(3), and the Commission has stated that in applying final Regulation 180.2,  it will be guided by the traditional four-part test for manipulation that has developed in case law arising under CEA Sections 6(c) and 9(a)(2): (1) That the accused had the ability to influence market prices; (2) that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate sources of supply and demand; (3) that artificial prices existed and (4) that the accused caused the artificial prices.  76 Fed. Reg. at 41407.

  [28]   76 Fed. Reg. at 41401.

  [29]   See 76 Fed. Reg. at 41403.  See also “Justification of Resources for Dodd-Frank Authority”, available at http://www.cftc.gov/reports/presbudget/2012/2012presidentsbudget0604.html.

  [30]   76 Fed. Reg. at 41403.  “Depending on the facts and circumstances, a person who engages in deceptive or manipulative conduct in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, for example by trading on the basis of material nonpublic information in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source), or by trading on the basis of material nonpublic information that was obtained through fraud or deception, may be in violation of final Rule 180.1.”  Id.

  [31]   Id.

  [32]   76 Fed. Reg. at 41398.

  [33]   CFTC v. Donald A. Newell and Quiddity, LLC, Case No. 1:12-CV-06763, (N.D. Ill. filed August 23, 2012).

   [34]   CFTC v. Angus Jackson, Inc., Martin Harold Bedick, and Martin B. Rosenthal, Case No. 12-60450-CIV-COHN/SELTZER/PALERMO, (S.D. Fla. January 28, 2013).  The CFTC’s complaint alleged that Defendants willfully concealed material facts and made false statements in violation of CEA Section 9a(4), which prohibits false statements to a “registered entity, board of trade, swap data repository, or futures association designated or registered under this chapter acting in furtherance of its official duties under this chapter.”

  [35]   Section 747 of the Dodd-Frank Act amends CEA Section 4c(a), adding a new section entitled “Disruptive Practices” (CEA Section 4c(a)(5)).

  [36]   See Antidisruptive Practices Authority, Proposed Interpretive Order, 76 Fed. Reg. 14944 (March 18, 2011).

  [37]   See 76 Fed. Reg. at 14946.  Section 4c(a)(5)(A) does not include an intent requirement, while CEA Sections 4c(a)(5)(B) and 4c(a)(5)(C) do contain such a requirement.

  [38]   Id.

  [39]   Id.  The proposal did provide some limitations in the proposed interpretive order explaining that it would only apply to trading environments where a person exercises control over his or her bids (not in an electronic trading system using algorithms), would be confined to the specific trading unit that a person is using, and would not apply when a person is “buying the board” of all available bids.

  [40]   Id.

  [41]   See id. at 14946.  Additionally, CEA Section 4c(a)(5)(B) violations will include executed orders as well as any bids and offers submitted by individuals for the purposes of disrupting fair and equitable trading.

  [42]   For purposes of CEA Section 4c(a)(5)(C), the CFTC defines “spoofing” as “bidding or offering with the intent to cancel the bid or offer before execution.” Id. at 14944.

  [43]   See id. at 14947.

  [44]   Id.

  [45]   Id.

  [46]   Id.

  [47]   Sections 721(c) and 725(g) of the Dodd-Frank Act, and CEA Sections 1a(47)(E) and 2(i) provide the CFTC with the authority to promulgate anti-evasion rules.

[48]   Q & A – Proposed Rules and Interpretive Guidance Further Defining “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Regarding “Mixed Swaps”; and, Governing Books and Records for “Security-Based Swap Agreements”, Commodity Futures Trading Commission Office of Public Affairs, 4, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/pd_qa.pdf.

[49]      77 Fed. Reg. at 48301.

[50]      Id.

[51]     CFTC Regulation 166.3 states, “Each Commission registrant, except an associated person who has no supervisory duties, must diligently supervise the handling by its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) of all commodity interest accounts carried, operated, advised or introduced by the registrant and all other activities of its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) relating to its business as a Commission registrant.”  48 Fed. Reg. 35304 (Aug. 3, 1983).

  [52]   Oversight of the Commodity Futures Trading Commission: Hearing before the S. Comm. on Agriculture, Nutrition & Forestry, 113th Cong. (2013) (statement of CFTC Chairman Gary Gensler), available at http://www.cq.com/doc/congressionaltranscripts-4227347?print=true.

  [53]   Id.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn lawyer with whom you work or the authors:

John H. Sturc – Washington, D.C. (202-955-8243, [email protected])
Jeffrey L. Steiner – Washington, D.C. (202-887-3632, [email protected])

Please also feel free to contact any of the following members of the firm’s Securities Enforcement Practice Group or its Financial Institutions Practice Group:

Securities Enforcement Practice Group:
John H. Sturc – Washington, D.C. (202-955-8243, [email protected])
Barry R. Goldsmith – New York (212-351-2440, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [email protected])
Michael Li-Ming Wong – San Francisco (415-393-8234, [email protected])

Financial Institutions Practice Group:
Dhiya El-Saden – Los Angeles (213-229-7196, [email protected])
Amy G. Rudnick – Washington, D.C. (202-955-8210, [email protected])
Michael D. BoppWashington, D.C. (202-955-8256, [email protected])
Arthur Long – New York (212-351-2426, [email protected])

Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Kimble Cannon – Washington, D.C. (202-887-3652, [email protected])
Jeffrey L. Steiner – Washington, D.C. (202-887-3632, [email protected])

© 2013 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice