CFTC Fiscal 2013: Significant Cases, Increasing Criminalization

 The CFTC stepped up its enforcement activity in fiscal 2013, bringing a number of significant actions, according to a recent report by the agency. Last year the trading Commission filed 82 enforcement actions while opening 290 new investigations. Over the past three years the agency brought 282 enforcement actions, almost double the number initiated in the prior three years. Those actions resulted in Orders imposing about $1.5 billion in penalties and requiring the payment of approximately $200 million in restitution and disgorgement. The Commission also reported that about 93% of its major fraud cases had a parallel criminal investigation, reflecting the continued criminalization of regulatory enforcement.

Significant cases brought by the CFTC last year included:

Interest rate benchmarks:

In re UBS AG, CFTC Docket No. 13-09 (Filed Dec. 19, 2012) is a settled action against the financial institution charging manipulation, attempted manipulation and false reporting of LIBOR and other benchmark interest rates for at least six years. The papers document more than 2,000 instances of unlawful conduct. UBS resolved the action by paying a $700 million civil money penalty.

In re The Royal Bank of Scotland plc, CFTC Docket No. 13-14 (Filed Feb. 6, 2012) is an action charging the financial institution with manipulation, attempted manipulation and false reporting relating to LIBOR for Yen and Swiss Franc over about four years. RBS resolved the proceeding, paying a $325 million civil money penalty.

In re ICAP Europe Ltd., CFTC Docket No. 13-38 (Filed Sept. 25, 2013) is an action charging that for over four years ICAP engaged in manipulation, attempted manipulation, false reporting and aiding and abetting derivatives traders’ manipulation and attempted manipulation relating to the LIBOR for Yen. The exchange resolved the matter by paying a $65 million monetary penalty.

Customer protection rules

CFTC v. MF Global Inc., Civil Action No. 13 Civ 4463 (S.D.N.Y. Filed June 27, 2013) is an action against the firm, its former CEO, Jon Corzine, and former assistant treasurer, Edith O’Brien, centered on allegations relating to the unlawful use of customer funds. The firm agreed to settle and reimburse customers 100% of the about $1 billion in funds lost its customers. The individuals are litigating the case.

CFTC v. Peregrine Financial Group, Inc., Civil Action No. 1:12-cv-06383 (N.D. Ill. Filed Feb. 13, 2013) is an action against the firm and its owner, Russell Wasendorf, Sr. alleging the misappropriation of about $200 million in customer funds. The Court entered injunctions prohibiting future violations based on a default and reserved the question of monetary relief. There are two related actions, one against the auditors and a second against the financial institution which held customer segregated funds. In re Veraja-Snelling, CFTC Docket No. 13-29 (Filed Aug. 26, 2013)( action against the audit firm of Peregrine for failing to conduct the audits in accord with GAAS; the case is being litigated); CFTC v. U.S. Bank, N.A., No. 13-Civ-2041 (N.D. Iowa Filed June 5, 2013)(action against the financial institution that held the customer segregated funds alleging misuse; the case is being litigated).

Manipulation/spoofing

CFTC v. Moncada, Civil Action No. 12-cv-8791 (S.D.N.Y. Filed Dec. 4, 2012) is an action against Eric Moncada, BES Capital LC and Serdika LLC alleging attempted manipulation of wheat futures prices. The complaint claims in part that Moncada entered and immediately canceled numerous large-lot orders for wheat futures that were not intended to be filled, creating a misleading impression of increasing marketplace liquidity which the firm used to its advantage. The case is in litigation. See also In re Gelber Group, LLC, CFTC Docket No. 13-15 (Filed Feb 8, 2013)(alleging similar conduct pre-open; settled with the payment of a $750,000 monetary penalty); In re Lorenzen, CFTC Docket No. 13-16 (Filed Feb. 8, 2013)(alleging similar conduct pre-open; settled with the payment of a $250000 civil monetary penalty).

In re Panther Energy Trading LLC, No. 13-26 (Filed July 22, 2013) is the first proceeding brought under the new Dodd-Frank anti-spoofing provision. Here the Respondents utilized a computer algorithm designed to illegally place and quickly cancel large bids and offers in futures contracts on CME Group’s Globex trading platform. The orders created a false impression of trading interest which was exploited. The matter was resolved with the firm paying $1.4 million in disgorgement and a $1.4 million monetary penalty.

Markets

CFTC v. Byrnes, Civil Action No. 13 CIV 1174 (S.D.N.Y. Filed Feb. 21, 2013) is an action against the new York Mercantile Exchange, Inc which is owned and operated by the CME Group, and two former CME NYMEX employees, William Byrnes and Christopher Curtin. The complaint alleges the unlawful disclosure of material nonpublic customer information over two and one half years to an outside commodity broker. The case is in litigation.

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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