Bridging the Weeks - October 2019

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Last week, the Commodity Futures Trading Commission publicized a cascade of settlements of enforcement actions alleging breaches of laws and rules related to supervision, spoofing, reporting, and misappropriation of proprietary information, as well as of the obligation to provide the CFTC truthful and complete information when asked. The CFTC also brought an enforcement action against one individual for providing misleading information to multiple futures commission merchants, and referenced the actions or inactions of compliance personnel in three settlements with registered entities. Separately, the federal court of appeals considering the CFTC’s request for a mandamus order following the settlement of a CFTC enforcement action against two food giants made public all relevant court papers after a federal district court had cloaked them in secrecy since mid-August. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • CFTC Settles Avalanche of Enforcement Actions Alleging Failure to Supervise, Spoofing, Reporting Violations and Providing Misleading Information to the CFTC and FCMs (includes Compliance Weeds and My View);
  • District Court Inquisition Is Unlawful Argues CFTC in Opposing Potential Contempt Finding and Other Sanctions Arising From Enforcement Action Settlement With Two Food Giants (includes My View);
  • Blockchain Technology Company Agrees to Pay US $24 Million to Resolve SEC Allegations of an Unlawful Initial Coin Offering (includes Legal Weeds):

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CFTC Settles Avalanche of Enforcement Actions Alleging Failure to Supervise, Spoofing, Reporting Violations and Providing Misleading Information to the CFTC and FCMs:

The Commodity Futures Trading Commission brought and settled multiple enforcement actions last week – straddling the end of its 2019 fiscal year on September 30 – that alleged failure to supervise, spoofing, reporting violations, misappropriation and providing misleading information to the Commission as well as to futures commission merchants. In three matters, the CFTC also cited the role of the firm’s compliance department or compliance personnel as potentially contributing to the entity’s purported breaches.

Purported Failure to Supervise

RBC Capital Markets LLC – a registered futures commission merchant and a wholly owned indirect subsidiary of the Royal Bank of Canada – agreed to pay a fine of US $5 million to the CFTC for allegedly engaging in 385 instances of wash sales involving exchange for physical transactions in interest rate products from December 2011 through October 2015. According to the CFTC, these transactions were entered into by proprietary accounts that were not independently controlled in order to move positions between them because RBCCM “believed the [Chicago Mercantile Exchange] allowed it, and it was less costly and administratively cumbersome than other options to manage risk.”

The CFTC claimed that these purported illicit transactions occurred because RBCCM (1) failed to implement a number of policies and procedures of RBC despite RBC utilizing an enterprise-wide approach to oversee its subsidiaries and (2) did not have a process to ensure that its employees reviewed and followed RBC’s compliance manual. Moreover, the manual did not expressly set forth the requirements of EFPs until approximately March 2017, and RBCCM conducted no training regarding EFPs for futures traders or operations staff until approximately May 2015, said the CFTC.

The CFTC additionally alleged that, in response to a 2014 consent order between the CFTC and RBC related to purported wash and fictitious transactions (click here to access), RBC delegated to RBCCM surveillance responsibilities for certain futures transactions, including off-exchange transactions executed in the United States. The CFTC acknowledged that RBCCM implemented an electronic surveillance program in response and expected its futures compliance officer to evaluate and close out all alerts. However, charged the CFTC, the futures compliance officer was never directed to perform these tasks and the firm failed to ensure the tasks were completed. The CFTC said that the compliance officer “only cursorily reviewed selected alerts” and in one instance, closed out an alert where an EFP was executed by the same RBCCM trader on both sides “because he failed to make any inquiries.” Although RBCCM self-reported its wash sales issues in January 2016, the CFTC also alleged that RBCCM and RBC did not promptly produce records related to the self-report when required by the CFTC.

The CFTC charged RBCCM with violations of applicable law and relevant CFTC regulations for failure to supervise; wash sales and conducting EFPs not in accordance with CME rules; failure to submit or timely file five required risk exposure reports to the Commission from 2014 through 2016 (click here to access CFTC Rule 1.11(e)(2)); failure to disclose certain material compliance issues in its 2015 and 2016 chief compliance officer annual reports (click here to access CFTC Rule 3.3(e)); and failure to maintain and produce certain required records.

In addition to agreeing to pay a fine, RBCCM consented to a number of express undertakings to resolve the CFTC’s enforcement action.

Alleged Spoofing

Four entities and one individual were charged with spoofing on multiple occasions by the CFTC and agreed to fines totaling $5.5 million to resolve the CFTC’s allegations. In many cases, the CFTC recognized the respondents early resolution of their enforcement action and/or cooperation in requiring a lower fine.

In one action against Mitsubishi International Corporation, for example, the CFTC charged that a trader of the firm engaged in numerous spoofing transactions involving silver and gold futures traded on the Commodity Exchange, Inc. from approximately April 2016 through January 2018. The CFTC claimed that, on hundreds of occasions, the trader placed a genuine order on one side of the market – typically minimizing its visible size by placing it as an iceberg order – and then placed a larger order or series of orders on the other side of the market that he did not intend to execute; instead, he tried to move the market in the direction of his genuine order. After his genuine order was executed in whole or part, the trader cancelled the spoof order(s), charged the CFTC.

The CFTC expressly acknowledged that Mitsubishi suspended the trader as soon as it detected his activities, and reported his conduct to the Commission. The firm also initiated a review of its systems and controls and implemented measures to enhance its compliance and surveillance program.

Claimed Reporting Infractions

The CFTC charged five swap dealers with alleged failures to comply with certain reporting requirements under CFTC rules. These included obligations regarding real-time public reporting, public availability of swap transaction and pricing data, and reporting of creation and continuation data to registered swap data repositories (click here to access Part 43 and here for Part 45 of the CFTC’s rules) as well as large trader reporting requirements associated with commodity swaps (click here to CFTC Rule 20.4 and here for CFTC Rule 20.7). Firms were also charged with failure to correct erroneous swap data previously reported.

The five firms resolved the CFTC enforcement actions by agreeing to pay, in aggregate, US $5.3 million. The CFTC noted, in some instances, that the firms’ cooperation and remediation efforts resulted in lower fines.

In one enforcement action, the CFTC additionally charged HSBC Bank, N.A. with failing to designate a swap dealer governing body to evaluate and approve swap dealer risk management policies and procedures and not separately identifying and considering certain risks associated with its swap dealer business (as opposed to its non-swap activities) from January 2013 through November 2015. (Click here to access CFTC Rule 23.600 and here for Rule 23.603.)

In another enforcement action, the CFTC claimed that The Northern Trust Company's purported reporting issues were attributable to its “failure to devote adequate attention and resources to reporting solutions.” In addition to reporting violations, the CFTC charged Northern Trust with failure to supervise (click here to access CFTC Rule 23.602). The CFTC said that Northern Trust’s supervisory breakdown was aided, in part, because the firm “repeatedly hired compliance personnel for the [swap dealer] who possessed some financial industry and regulatory experience, but lacked the specific technical expertise necessary to ensure [swap dealer] compliance.”

Separately, the CFTC charged two agribusiness corporations – Intergrain S.A. and CHS Inc.— with failure to timely file accurate CFTC Form 204 reports monthly as required to support their claimed status as hedgers of certain agricultural futures positions. (Click here to access CFTC Rule 19.01.) The CFTC claimed Intergrain failed to timely file required CFTC Form 204 reports on 13 occasions from December 2017 through July 2019, while CHS did not file accurate reports on 37 occasions from January 2016 through January 2019.

CHS previously was sanctioned by the CFTC for CFTC Form 204 filing violations in March 2016; as part of its settlement at the time, it consented going forward to comply fully with CFTC reporting requirements. (Click here for background in the article “Another Non-Registrant Sanctioned by CFTC for Failure to File Accurate Monthly Reports of Cash Positions” in the March 13, 2016 edition of Bridging the Week.) According to the CFTC, CHS self-reported its new issues in May 2018; at the time, it determined these new issues had begun prior to issuance of the CFTC’s March 2016 order.

Misappropriation Charged

The CFTC brought and settled enforcement actions against Classic Energy LLC, a registered introducing broker, and Mathew Webb, its former founder, president and sole member, for purportedly defrauding Classic’s customers by executing 63 block trades between customers and a Classic proprietary account based on nonpublic information and for trading opposite Classic’s customers in block trades without disclosing that Classic was acting as a counterparty and not as a broker – the category the clients expected. The CFTC also charged Classic with failure to maintain records of block trades and failure to supervise. Among other things, the CFTC claimed that Classic’s compliance officer did not conduct sufficient checks of a system used by a third party retained to maintain audio recording of block trades for Classic to ensure that communications were being prepared and maintained as required.

Classic and Mr. Webb agreed together to pay an aggregate fine of US $1.5 million to resolve the CFTC’s enforcement action. Mr. Webb also agreed to disgorge revenue of US $413,065 (offset by any disgorgement previously remitted to ICE Futures U.S.) as well as not to trade on any CFTC-registered entity nor to engage in activities requiring CFTC registration until at least June 3, 2022.

The two defendants in the CFTC matter were previously subject to disciplinary actions and resolutions regarding the same underlying alleged facts with the National Futures Association and IFUS. (Click here for details in the article “Misusing Client Block Trades’ Information and Phone Recording Breakdown Result in NFA Sanctions Against Multiple Parties” in the June 9, 2019 edition of Bridging the Week.)

Providing Misleading Information Alleged

Two individuals settled actions filed by the CFTC that alleged they provided misleading statements during agency investigations. In a third case, a trader resolved an enforcement action filed against him because he misled multiple futures commission merchants regarding the true owner of corporate entity accounts.

In enforcement actions against Rafael Novales and Coby Tresner, the CFTC charged the individuals with providing a false or misleading statement to the Commission in connection with a material fact, or omitting to provide in a statement material information to not make the statement misleading. (Click here to access Commodity Exchange Act § 6(c)(2), 7 U.S.C. § 9(2).)

The CFTC claimed that, in connection with its investigation of an introducing broker that employed him, Mr. Novales at first said during an interview that he always had customer express authorizations when he placed orders, but later, under oath, said sometimes he placed orders for customers only after leaving voice messages on their telephone answering devices. The CFTC solely charged Mr. Novales with making a false statement and agreed to accept a fine of US $50,000 from him to resolve its charges. The CFTC charged Mr. Novales with no other violations.

Separately, the CFTC alleged that Mr. Tresner made false statements to the CFTC when, during an interview with Commission staff, he only identified one person from whom he received funds to trade commodity futures when he was asked to identify all such persons. Later, when Commission staff indicated it knew of at least two other persons, Mr. Tresner admitted he obtained funds from those two other persons too. The CFTC alleged that Mr. Tresner misappropriated the funds of all three persons for his own benefit. The CFTC charged Mr. Tresner with fraud, acting without appropriate registrations, and making false or misleading statements to the Commission. The CFTC said that Mr. Tresner’s correction of his misleading testimony did not exonerate his misstatements as it “was prompted by further inquiry of Commission staff.” Mr. Tresner agreed to pay restitution of US $55,000 to the three individuals; pay a fine of US $250,000; and to be permanently barred from engaging in trading on any CFTC-registered entity and being registered with the CFTC in any capacity to resolve the CFTC’s charges.

Finally, Aron Seidenfeld consented to pay a fine of US $160,000 to settle CFTC charges that he made misrepresentations to multiple FCMs regarding the ownership of accounts he opened. According to the CFTC, Mr. Seidenfeld was the trustee of an irrevocable trust which owned three corporate entities. After sustaining an unsecured debit of US $2.1 million at one FCM for one of his corporations, Mr. Seidenfeld opened accounts at other FCMs for the other corporations. However, at the subsequent FCMs, Mr. Seidenfeld did not disclose the trust as the owner of the other corporations or himself as the controller. Each of the two other corporations sustained aggregate losses at two other FCMs of approximately US $540,000.

The CFTC charged that Mr. Seidenfeld’s purported dishonesty in not correctly identifying his corporation’s ownership and control constituted a deceptive device or contrivance in connection with futures contracts, a material misstatement, and an act or practice that operated as a fraud or deceit on the FCMs in violation of applicable law and CFTC rule. (Click here to access CEA § 6(c)(1), 7 U.S.C. § 9(1) and here for CFTC Rule 180.1(a)(2) and (3).)

Mr. Seidenfeld also agreed to a 90-day trading prohibition on CFTC-regulated markets and from registering with the Commission in any capacity to resolve the CFTC’s enforcement action.

Compliance Weeds: The CFTC maintains an extensive large trader reporting program that must be strictly complied with by reporting entities. For futures and related options, large trader data must be provided to the Commission by futures commission merchants and foreign brokers. Generally, if at the end of a day a reporting firm has a customer with a position at or exceeding the Commission’s reporting level in any single futures or options expiration month, the firm must report all of the customer’s positions in futures and options in that commodity no matter the size of the positions in the other months. (Click here for current CFTC reporting levels for futures.) Similarly, clearing members and swap dealers are required to file daily with the CFTC large trader reports for physical commodity swaps and swaptions when their positions exceed the equivalent of 50 related futures contracts (such swaps and swaptions must relate to certain covered agricultural and exempt futures contracts; click here to access a list of relevant covered contracts). The report must include certain required information in a format mandated by the Commission – including converting swap positions to futures contracts at equivalent levels. (Click here to access the helpful CFTC publication “Large Trader Reporting for Physical Commodity Swaps: Division of Market Oversight Guidebook for Part 20 Reports” published June 22, 2015.)

Separately, persons trading futures in any of the futures contracts for which the CFTC has established express position limits must be mindful of their potential obligation to file Form 204s with the CFTC if they are hedgers and exceed such levels, except for persons trading cotton that may have additional requirements under Form 304. (The relevant futures are those involving corn and mini-corn, oats, soybeans and mini-soybeans, wheat and mini-wheat, soybean oil, soybean meal, hard red spring wheat, cotton no. 2 and hard winter wheat; click here to access CFTC Rule 150.2.)

CFTC Form 204 (Statement of Cash Positions in Grains, Soybeans, Soybean Oil and Soybean Meal) and Parts I and II of Form 304 (Statement of Cash Position in Cotton – Fixed Price Cash Positions) must be filed by any person who holds or controls a position in excess of relevant federal speculative position limits that constitutes a bona fide hedging position under CFTC rules. These documents must be prepared as of the close of business on the last Friday of each relevant month.

Part III of CFTC Form 304 (Unfixed Price Cotton “On-Call”) must be filed by any cotton merchant or dealer that holds a so-called reportable position in cotton (i.e., pursuant to large trader reportable levels; this is currently 100 contracts) regardless of whether or not it constitutes a bona fide hedge. Form 304 (Part III) must be prepared as of the close of business on Friday every week, and received by the CFTC in New York by no later than the second business day following the date of the report.

Form 204 must be received by the CFTC in Chicago by no later than the third business day following the date of the report, while Parts I and II of Form 304 must be received by the Commission in New York by no later than the second business day following the date of the report.

(Click here to access applicable CFTC rules related to Forms 204 and 304. Click here to access a 2013 CFTC Advisory on Form 304.)

The CFTC proposed changes to its Form 204s and 304s as part of its re-proposed regulations establishing position limits for 25 core physical commodity futures contracts and their economically equivalent futures, options and swaps. (Click here for details in the December 19, 2016 Advisory “CFTC Finalizes Aggregation Rules and Re-Proposes Positions Limits Rules” by Katten Muchin Rosenman LLP.)

My View: Two clear messages emerge from the CFTC’s fiscal year-end avalanche of enforcement settlements: don’t mislead and be mindful if you are a compliance officer.

Previously, it should have been understood that misleading the CFTC or a self-regulatory organization could be considered a violation of law by the CFTC. Now, however, misleading a registrant, like an FCM, might also be considered a law violation.

Separately, in three separate actions the CFTC referenced the acts of the compliance department and/or a compliance officer as contributing to a registrant’s alleged substantive violations. This increased focus on the role of compliance officers generally, coupled with express obligations of the chief compliance officer under CFTC rules, is a warning flag. (Click here for obligations of CCOs in CFTC Rule 3.3(d).)

This story was amended subsequent to publication to correct the aggregate fine and number of respondents' in the section Alleged Spoofing.

Briefly:

  • District Court Inquisition Is Unlawful Argues CFTC in Opposing Potential Contempt Finding and Other Sanctions Arising From Enforcement Action Settlement With Two Food Giants: Last week, sunlight was let into the previously closed federal district court proceeding related to a request by two principal food processing firms for a contempt order and other sanctions against the Commodity Futures Trading Commission, and the CFTC’s request for a mandamus order against the relevant federal district court judge, following settlement of an enforcement action by the CFTC against the firms.

The companies – Kraft Foods Group, Inc. and Mondelez Global LLC – alleged that the CFTC by its commissioners and staff purposely violated a mutually agreed joint gag order contained in an order settling the enforcement action, while the CFTC sought an order from a federal appeals court prohibiting the relevant federal district court judge from conducting an alleged inquisitorial hearing that would be of the nature of a criminal proceeding. In response, the US Court of Appeals for the Seventh Circuit stayed all proceedings at the federal district court, pending its consideration of the CFTC’s petition. (Click here for background in the article “Appeals Court Delays District Court Consideration of CFTC Contempt Charges and Promises Public Filings Absent Law or Executive Privilege” in the September 29, 2019 edition of Bridging the Week.)

Up until last week, all papers and transcripts of the district court and appeals court proceedings had been nonpublic; the court of appeals opened the files on October 2.

According to the CFTC in a petition for a Writ of Mandamus filed on September 13, an appropriate order should issue because the district court proposed an evidentiary hearing in response to the defendants’ civil contempt motion that would be of the nature of a criminal proceeding. This is because the relevant federal judge – the Hon. John Blakey – suggested that the outcome of the proposed evidentiary hearing might be a “referral for a criminal contempt [or] a punitive sanction to deter future potential misconduct which would not be a civil contempt,” argued the Commission. The CFTC claimed that if Judge Blakey believed that the CFTC may have committed criminal contempt, the proper course would be to refer the matter to a prosecutor “rather than assume an inquisitorial role inappropriate to the Judicial Branch.” Although the district court judge termed the pending hearing like “a law school question,” by compelling the appearance of three commissioners, including the CFTC chairman, the director of the Division of Enforcement, and five CFTC DOE staff members, and threatening criminal sanctions, he transformed the hearing into a criminal proceeding requiring a full range of “Constitutional protections, including the right to counsel, proof beyond a reasonable doubt, appropriate notice of the specific conduct to be prohibited and the sanction imposed, and in many cases the right to a jury trial", noted the Commission.

Moreover, a critical component of the defendants’ civil contempt claim is that statements issued by two commissioners – Rostin Behnam and Dan Berkovitz – at the time of the settlement constituted a breach of the order binding the parties. The CFTC claimed that commissioners cannot be legally barred from issuing concurring views, and, in any case, they were not parties to the settlement order. The CFTC argued to the court of appeals that this issue should be determined solely based on the language of the settlement order itself and does not require the presence of commissioners at an evidentiary hearing.

The CFTC also requested in its petition that, should the court of appeals authorize the evidentiary hearing to proceed, Judge Blakey be prohibited from presiding over the matter and another judge appointed instead.

The defendants have until October 7 to respond to the CFTC’s petition.

Previously, the defendants disputed the CFTC’s positions. They argued in papers and in meetings before the district court judge that the CFTC only acts through its commissioners and other employees, and, as a result, the gag order in the settlement was binding on the commissioners. Moreover, the provision of law cited by the Commission to support the requirement that commissioners must be able to issue dissents, concurrences or separate opinions in connection with official publications issued by the Commission only applies to Commission opinions related to budget requests and legislative recommendations to congressional committees. (Click here to access the relevant provision of law, Commodity Exchange Act § 2(a)(10)(C), 7 U.S.C. § 2(a)(10)(C).)

The defendants also earlier argued that, prior to finalizing the settlement order, one CFTC official told the defendants that two commissioners objected to inclusion of a gag order binding on the Commission and asked for its removal. They claimed that the official said that, for the commissioners, this was a matter of principle only, and they did not intend to make any statement. The defendants rejected the official’s request. Moreover, argued the defendants, at no time did the official disclose that he, anyone else in the relevant CFTC division or any commissioner believed that commissioners would not be bound by the gag order in the CFTC settlement. The defendants claim these episodes evidence the relevant commissioners’ and CFTC’s purposeful abrogation of the gag order's obligations and bad faith.

According to released transcripts of a settlement conference before Judge Blakey, the parties agreed to all the terms of the consent settlement order on March 22, 2019, including the joint gag order, the inclusion of no findings of fact or conclusions of law, and a US $16 million fine to be paid by the defendants. CFTC representatives made clear, however, that the Commission could not formally agree to the order until its commissioners signed off.

The defendants claimed that the CFTC violated the gag order included in the settlement order resolving the CFTC’s enforcement action charging the two firms with manipulating or attempting to manipulate the price of the December 2011 wheat futures contract traded on the Chicago Board of Trade and cash wheat. The defendants said that the CFTC immediately disregarded the gag order when it published a press release, a formal statement, and a statement by two commissioners contemporaneously with its August 15 publication of the consent order of settlement. (Click here for details regarding this dispute in the article “Contempt and Sanctions Hearing Against the CFTC Arising From Manipulation Complaint Settlement Delayed to October 2” in the September 2, 2019 edition of Between Bridges.)

My View: Upton Sinclair once wrote “[i]f you like laws and sausages . . . you never should watch either one being made.” However, the same principle does not apply to judicial decisions involving allegations of misconduct against a government unit. In a democracy like ours, no matter how cacophonous the process, sunlight is critical to the making of laws and rules that may impact our lives and equally important to judicial outcomes that shed insight into the behavior of government agencies that are entrusted to enforce those laws and rules. Last week, the Court of Appeals for the Seventh Circuit correctly released all records related to the dispute between the CFTC and the defendants pertaining to the Commission's adherence to the joint gag order contained in a consent order of settlement between the parties. Now let the process of justice work to determine the merits of each side’s position in full view.

  • Blockchain Technology Company Agrees to Pay US $24 Million to Resolve SEC Allegations of an Unlawful Initial Coin Offering: Block.one, a technology corporation and developer of the EOSIO software, settled allegations brought by the Securities and Exchange Commission that it engaged in an unlawful securities offering to US persons when it conducted an initial coin offering between June 2017 and June 2018. The SEC claimed that, during the relevant time, the company offered and sole 900 million ERC-20 EOS digital tokens in exchange for ether valued in excess of “several billion dollars.” The SEC claimed that the digital tokens were securities under US law, as prescribed by the landmark 1946 Supreme Court decision SEC v. W.J. Howey and the SEC’s 2017 investigative report regarding The DAO. (Click here to access a copy of the Howey decision and here for background on The DAO order in the article “SEC Declines to Prosecute Issuer of Digital Tokens That It Deems Securities Not Issued in Accordance with US Securities Laws” in the July 26, 2017 edition of Between Bridges.)

In its order, the SEC acknowledged, however, that Block.one’s digital token offering began prior to issuance of the SEC’s The DAO investigative report and that the firm took express measures to preclude US persons from participating in the ICO. The SEC claimed, however, that Block.one made clear that the proceeds of its ICO would be used to pay general administrative and operating expenses and to fund development of its blockchain consulting business. Moreover, said the SEC, the firm engaged in direct selling efforts to US persons, including participating in a prominent conference in New York City in May 2017 to promote Block.one and advertising EOSIO, at the time, on a large billboard in Times Square.

Block.one agreed to pay a fine of US $24 million to resolve the SEC’s allegations.

The relevant ERC-20 digital tokens initially issued by Block.one as part of its ICO are no longer in circulation. They became fixed and nontransferable after the close of Block.one’s ICO. Holders were required to register their ERC-20 digital token ownership in order to receive equivalent value EOS tokens issued through EOSIO software.

Contemporaneously with entry of its settlement order, Block.one applied for and was granted a waiver by the SEC from any prohibition to rely on SEC Regulations A or D in order to issue securities exempt from ordinary registration requirements. (Click here to access the SEC’s order granting waiver, and here for Block.one’s waiver request.) Block.one also issued a press release saying that it believes the SEC’s action “evidences Block.one’s continuing commitment to compliance and best practices in the United States and globally.” (Click here to access the full Block.one press statement.)

Legal Weeds: As part of its settlement with Block.one, the SEC did not require an offer of restitution to investors in its ICO or registration of the relevant digital tokens. This is a departure from recent cases charging non-fraudulent ICOs and SEC staff guidance.

In February 2019, Gladius Network LLC settled SEC allegations that its initial coin offering of GLA tokens intended to be used as the currency for its blockchain-enabled cybersecurity service constituted an offering of unregistered securities in violation of applicable law. To resolve the SEC’s allegations, Gladius agreed to register GLA tokens as a class of security and compensate investors, among other undertakings. However, the SEC imposed no fine on Gladius because of the firm’s remedial steps, including its self-reporting of a possible securities law violation and cooperation with SEC staff. (Click here for background in the article “ICO Promoter Settles SEC Enforcement Action for No Fine After Self-Reporting Potential Securities Law Violations” in the February 24, 2019 edition of Bridging the Week.)

In November 2018, the SEC filed and settled two enforcement actions against issuers of ICOs – Carrier EQ Inc. d/b/a/ AirFox and Paragon Coin, Inc. – for violating securities registration requirements. These cases represented the first time the SEC assessed fines in connection with a non-fraudulent ICO.

To resolve these actions, each respondent agreed to pay a fine of US $250,000, file a registration statement with the SEC, and pay back, upon request, any initial purchaser of a digital token from the issuer.

Contemporaneously with the SEC publishing the AirFox and Paragon settlement orders, the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets issued a “Statement of Digital Asset Securities Issuance and Trading” that, among other things, noted that the two settlements provided a “path to compliance” for prior issuers of unregistered or not lawfully exempt cryptosecurities. (Click here for background regarding the SEC’s Divisions’ statement as well as the AirFox and Paragon settlement in the article "SEC Assesses Penalties for Non-Fraudulent Initial Coin Offerings and Requires Registration; Issues Advisory on Issuance and Trading of Cryptosecurities" in the November 18, 2018 edition of Bridging the Week.)

In its settlement with Block.one, the SEC did not suggest or imply that non-ERC-20 EOS digital tokens received by investors at the termination of the EOS ICO through the EOSIO software constituted securities.

More Briefly:

  • Circuit Court of Appeals Declines to Reconsider Decision Upholding CFTC Views of Actual Delivery and Deceptive Device or Contrivance: A three-judge panel of the United States Court of Appeals for the Ninth Circuit declined to rehear the July 2019 reversal of on an order by a federal district court dismissing the Commodity Futures Trading Commission’s September 2017 lawsuit against Monex Credit Company and related companies and principals (collectively, “Monex”). Monex is a retail precious metals dealer based in Newport Beach, California. In its July 2019 decision, the federal court of appeals held that the district court misapplied the relevant law that exempts leveraged or margined retail commodity transactions from CFTC oversight where “actual delivery [occurs] within 28 days” (click here to access Commodity Exchange Act § 2(c)(2)(D)(ii)(III)(aa), 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa)), and said the CFTC has authority to bring enforcement actions where it alleges either a manipulative device or a deceptive device or contrivance; it need not charge both. The federal court of appeals determined the word “or” in the phrase “manipulative or deceptive device or contrivance” in the relevant statute (emphasis added) must be read disjunctively and not conjunctively. (Click here to access the relevant legal provision, CEA §6(c)(1), U.S.C. § 9(1); click here for additional background in the article "Federal Appeals Court Upholds Expansive CFTC View of Prohibition Against Manipulative or Deceptive Device and Restrictive View of Actual Delivery" in the July 28, 2019 edition of Bridging the Week.)
  • Two Interdealer Brokerage Firms Settle With CFTC and NY Attorney General for US $25 Million Out-of-Pocket Fines for Alleged Fraud in FX Options Transactions: The New York Attorney General and the Commodity Futures Trading Commission resolved allegations against two interdealer brokers – BGC Financial LP and GFI Securities LLC for misleading customers to believe that certain bids and offers involving foreign exchange options were executable when they were not and that certain trades had taken place, when they had not. The regulators claimed that the interdealer brokers made these claims to suggest that greater liquidity and tighter spreads were available in emerging markets’ foreign exchange options in order to induce client orders at times and prices when they might not have otherwise placed orders. The regulators observed that, at times, brokers for the interdealer brokers expressly acknowledged this purportedly illicit conduct in online chats. BGC agreed to pay a fine of US $15 million and GFI a sanction of US $10 million to resolve the CFTC enforcement matter; BGC consented to a pay a fine of US $7.5 million and GFI a penalty of US $5 million to settle the NY AG’s claims. However, one-half of amounts owed by each entity as a CFTC fine would be satisfied by payments to the NY AG making the firms' aggregate out-of-pocket obligation equal to US $25 million. The CFTC claimed that GFI’s wrongful conduct occurred between July 2013 and at least December 31, 2015, while BGC’s happened from January 2014 through at least December 2015. In connection with their settlement with both regulators, the interdealer brokers also agreed to institute certain remedial measures. The CFTC acknowledged both firms’ cooperation in its investigation.

    This story was amended subsequent to initial publication to reflect the out-of-pocket offset to the stated fine amounts by the CFTC for payments to the NY AG.
  • SEC Proposes Changes in Exchange Fees Be Subject to Public Comment: The Securities and Exchange Commission proposed requiring national securities exchanges’ new or amended fee charges to become effective, if at all, only after submission to the Commission, publication of the proposal for public comment, and issuance of a formal Commission order after closing of the public comment period. Currently, fee proposals are effective immediately upon submission to the SEC. The SEC will accept comment on its proposal for 50 days following publication in the Federal Register.
  • Number of Registered Firms Declined 3 Percent From 2017 to 2018 and 11 Percent From 2014 Per 2019 FINRA Snapshot: The Financial Industry Regulatory Authority’s 2019 Industry Snapshot observed that the number of FINRA-registered firms continues to decline. From year-end 2014 to 2018, the number of registered firms declined from 4,067 to 3,606, a decrease of 11 percent. From year-end 2017 to 2018, the number of registered firms decreased from 3,726 to 3,607, a decline of 3 percent. Most of the decrease in registered firms has been among mid-size and small entities; the number of large firms (i.e., 500 or more registered representatives) has held approximately constant from year-end 2014 to 2018 (178 firms at year-end 2014 v. 173 at year-end 2018). The number of registered representatives also stayed approximately the same since 2017, declining slightly from 630,273 at year-end 2017 to 629,544 at year-end 2018.

For further information:

Blockchain Technology Company Agrees to Pay US $24 Million to Resolve SEC Allegations of an Unlawful Initial Coin Offering:
https://www.sec.gov/litigation/admin/2019/33-10714.pdf

Circuit Court of Appeals Declines to Reconsider Decision Upholding CFTC Views of Actual Delivery and Deceptive Device or Contrivance:
/ckfinder/userfiles/files/Monex%20Denial%20Rehearing.pdf

CFTC Settles Avalanche of Enforcement Actions Alleging Failure to Supervise, Spoofing, Reporting Violations and Providing Misleading Information to the CFTC and FCMs:

District Court Inquisition Is Unlawful Argues CFTC in Opposing Potential Contempt Finding and Other Sanctions Arising From Enforcement Action Settlement With Two Food Giants:
/ckfinder/userfiles/files/CFTC%20Court%20Write%20of%20Mandamus.pdf

Number of Registered Firms Declined 3 Percent From 2017 to 2018 and 11 Percent From 2014 Per 2019 FINRA Snapshot:
https://www.finra.org/sites/default/files/2019%20Industry%20Snapshot.pdf

SEC Proposes Changes in Exchange Fees Be Subject to Public Comment:
https://www.sec.gov/rules/proposed/2019/34-87193.pdf

Two Interdealer Brokerage Firms Settle With CFTC and NY Attorney General for US $25 Million Fine Out-of-Pocket for Alleged Fraud in FX Options Transactions:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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