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.
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.
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.
- 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.
- 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:
Circuit Court of Appeals Declines to Reconsider Decision Upholding CFTC Views of Actual Delivery and Deceptive Device or Contrivance:
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:
Number of Registered Firms Declined 3 Percent From 2017 to 2018 and 11 Percent From 2014 Per 2019 FINRA Snapshot:
SEC Proposes Changes in Exchange Fees Be Subject to Public Comment:
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: