Takeaway: Misconduct in the multitrillion dollar derivatives market can lead to massive recoveries for the government and whistleblowers alike. Even when the CFTC is already on the case, a whistleblower who tips off the government during an ongoing investigation may remain eligible for an award if they provide original information that “substantially contributes” to a successful enforcement action.
On October 21, 2021, the Commodity Futures Trading Commission (CFTC) announced that it had awarded nearly $200 million to a single whistleblower. This is not only the largest CFTC whistleblower award to date, it is the largest award provided to a single whistleblower under any whistleblower program.
Given the CFTC’s policy of protecting whistleblower confidentiality, the agency did not identify the whistleblower or the enforcement action to which the award was related. However, it has been widely reported that the award was related to enforcement actions against Deutsche Bank involving the alleged rigging of benchmark rates, most importantly LIBOR (London Inter-Bank Offered Rate).
While LIBOR is currently being phased out, for years it was an all-important benchmark tied to hundreds of trillions of dollars in derivatives and other financial instruments. Small fluctuations in LIBOR had massive ripple effects across financial markets, affecting everything from mortgages to interest rate swaps. By joining together to manipulate LIBOR higher or lower, financial institutions could profit off trades in the derivatives markets (and other financial markets) that were tied to LIBOR. Banks could also tweak LIBOR to make themselves appear more creditworthy. The LIBOR scandal led to numerous convictions, billions in government recoveries, and the demise of LIBOR itself.
Chief among the rate rigging recoveries was that involving Deutsche Bank. In 2015, the German bank agreed to pay approximately $2.5 billion to resolve claims brought by the CFTC ($800 million), Department of Justice ($775 million), New York Department of Financial Services ($600 million), and the United Kingdom Financial Conduct Authority (£227 million). The CFTC’s whistleblower award order suggests that the whistleblower was provided a share of each of these recoveries (save for the New York state recovery), highlighting the fact that whistleblowers can, in appropriate situations, be provided a share of not just the CFTC’s recovery but also those effectuated by certain other domestic and foreign authorities. Under the CFTC’s whistleblower program, whistleblowers can receive between 10% and 30% of the relevant governmental recoveries.
One may assume that, given the sheer size of the award, that the whistleblower’s information sparked the initial investigation, but that was not the case. Rather, the CFTC’s order indicates that the whistleblower submitted information to the CFTC only after the agency’s investigation had begun and after the agency had already learned of the specific trading positions raised by the whistleblower. This highlights the fact that whistleblowers can remain eligible for an award when they blow the whistle in the midst of an already active investigation. Specifically, a whistleblower whose original information “significantly contributes” to a successful enforcement action may remain eligible for an award even if the government was already on the trail.
Yet, receiving an award is no certainty. The whistleblower applied for an award but was initially denied any compensation. The whistleblower’s attorneys sought reconsideration of that determination and prevailed. While the CFTC’s order is heavily redacted (i.e., its reasoning is less than clear), the order suggests that while the whistleblower did not provide “direct evidence” of wrongdoing, he or she provided important information that helped the agency to focus its investigation into the specific trades raised by the whistleblower and led to direct evidence of wrongdoing. Thus, the agency found that the whistleblower substantially contributed to a successful enforcement action.
The CFTC’s whistleblower program has often been overlooked. Its payouts from its first award in 2014 to the end of fiscal year 2020 amounted to approximately $120 million (across 25 awards), a substantial sum on paper but one dwarfed by payouts under the False Claims Act and the SEC and IRS whistleblower programs. This unprecedented award may change things, giving whistleblowers a clear incentive to blow the whistle on wrongdoing, even when the government is already on the case. While the CFTC’s jurisdiction is more limited than that of its sister agency, the SEC, the derivatives markets policed by the CFTC are no stranger to misconduct. As the LIBOR scandal showed, given the sheer size of the derivates markets, a seemingly small fraud (e.g., numerically small ticks up or down in a benchmark rate) can have billion-dollar consequences.