Who approaches this bridge of death must answer me these questions three:
What is your name? Sir Galahad of Camelot.
What is your quest? I seek the Grail.
What is your favorite color? Blue. No, yellow – ahhhhhh! (Sir Galahad is launched into oblivion for attempting to immediately correct an incorrect answer.)
- From Monty Python and the Holy Grail
According to a recent case, a witness in a Commodity Futures Trading Commission (CFTC) investigation could be similarly condemned to oblivion – or at least enforcement action and a hefty fine – for giving false testimony, even if she corrects the falsehood in the same testimony session.
The CFTC has begun applying its “civil perjury” authority that was granted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that became law in 2010. Section 6(c)(2) of the Commodity and Exchange Act, as amended by Dodd-Frank, makes it unlawful:
“for any person to make any false or misleading statement of a material fact to the Commission … or to omit to state in any such statement any material fact that is necessary to make any statement of a material fact made not misleading in any material respect, if the person knew, or reasonably should have known, the statement to be false or misleading.”
7 U.S.C. § 9(c)(2).
Susan Butterfield of New Lenox, Illinois recently paid the price – a $50,000 penalty, to be exact, along with a cease and desist order – for making false statements in investigative testimony before the CFTC. Butterfield worked for an introducing broker (IB) registered with the CFTC handling clerical and administrative tasks, including accepting and recording customer orders and inputting electronic trades on the IB’s desk on the floor of the Chicago Board of Trade. During her testimony, Butterfield initially told CFTC staff that she “never pre-stamped any [order] tickets.” But during the same testimony session later in the day, after being shown documents contradicting her testimony, she “incrementally” admitted to various instances of pre-stamping. This information was significant because the practice of pre-stamping order tickets undermines the reliability of the audit trail of trades executed by the IB, and could be used to facilitate unlawful trade allocation schemes, which could allow brokers to profit at the expense of their customers.
The CFTC has used its new civil perjury authority in two other recent cases, both of which are in litigation. In CFTC v. Arista LLC, et al., the CFTC filed an amended complaint in an on-going fraud prosecution, adding a charge of making false statements to the staff based on allegedly misleading information provided by the defendants’ lawyers. The lawyers allegedly sent a letter to the CFTC that misrepresented the account balances, asset values and fee calculations that were material to the underlying fraud allegations against defendants. In CFTC v. Newell, the Commission buffeted its larger fraud case against Donald A. Newell and his company, Quiddity, LLC (a futures commission merchant), with a civil perjury charge. Newell allegedly stated that he always, or almost always, provided the proprietary account numbers when entering orders for a particular account when, it is alleged, he rarely did so. This appears to be a key factor in the CFTC’s larger fraud case against Newell.
The potential harm from the alleged civil perjury in the Arista and Newell cases – the perpetuation or concealment from the regulators of ongoing fraud schemes that harmed members of the public – provides ample justification for the CFTC’s first uses of its civil perjury authority. It is fair to ask whether its use as to Butterfield is similarly justified.
Butterfield was not a target of a fraud investigation. She apparently corrected her earlier false statements on the same day in which gave them. And the settlement order suggests that the CFTC staff already knew before her testimony that she did pre-stamp order tickets, based on admissions she had made to her supervisor. The CFTC indicated that she corrected her misstatements once the staff confronted her with contrary evidence, and it appears that, by the end of the session, the record was made clean. The settlement order presumes that, but for the staff’s efforts, the witness’s falsehoods would have remained on the record; the false testimony she initially provided “would have been her final word on the matter had CFTC staff not repeatedly confronted her with additional questions and documents that contradicted her testimony.” Would Butterfield have faced the same charges had she independently, or following her attorney’s advice, corrected her testimony during the same session without the staff’s confrontation? What if a witness tells a lie that the staff would have a more difficult time refuting? Does the Butterfield case provide a disincentive for the witness to have a change of heart and recant if she knows that, except for her recantation, the regulator will have no way to get at the truth?
It seems unusual that, after the staff put in the work to make an honest witness of the testifier, the government nevertheless imposed a perjury charge for the initial false testimony. There is no question that sworn testimony should be truthful – as Director of Enforcement David Meister stated in the CFTC’s press release, “lying is not an option” – and that it means more work for the staff to get the witness to provide truthful testimony through confrontation. But when the staff’s work is successful, should the witness still face perjury charges? Interestingly, the law governing grand jury proceedings is much more forgiving, specifically barring prosecution for perjury if the false testimony is recanted “in the same continuous court or grand jury proceeding.” 18 U.S.C. § 1623.
Attorneys advising a witness who is about to testify before the CFTC routinely emphasize the importance of telling the truth. The lesson of the Butterfield case is that the margin of error for telling even a temporary untruth appears to be extremely narrow.