CFTC Investigation Defense
SEC Defense Team Lead
Former DOJ Trial Attorney
The Commodity Futures Trading Commission (CFTC) is the federal agency responsible for regulating the United States derivative market, including futures, swaps, and some kinds of options contacts. In pursuit of its mandate to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation,” the CFTC regularly conducts invasive investigations to uncover violations of the Commodity Exchange Act and Commission regulations. The CFTC investigates individuals and firms registered with the Commission and has the ability to pursue administrative proceedings as well as lawsuits in federal court.
CFTC investigations present high stakes, and those facing a CFTC investigation should immediately reach out to an experienced CFTC investigation defense law firm. At Oberheiden, P.C., our dedicated team of CFTC investigation defense lawyers have centuries of experience defending financial professionals in civil and criminal cases. Several of our senior attorneys held high-ranking positions in the federal government before joining Oberheiden, P.C., giving us unique insight into how these investigations proceed and what can be done to mitigate liability.
The CFTC Investigation Process
A CFTC investigation begins when the Commission receives information that an individual or firm may have violated the Commodity Exchange Act or regulations promulgated by the Commission. The Division of Enforcement handles all referrals.
According to the most recent version of the CFTC Enforcement Manual, the Division of Enforcement may come into the information of a potential violation in a number of ways, including “industry self-regulatory organizations, other governmental authorities, whistleblowers, victims, cooperating witnesses, self-reports, customer complaints, and members of the general public, as well as through the use of tools, means, and methods the Division has developed internally.”
When the CFTC receives a referral for investigation, it then engages in the Preliminary Inquiry process. This is essentially an internal review of the information to determine the viability of the referral as well as whether it justifies the commitment of additional CFTC resources.
If the CFTC determines an investigation is appropriate, the Commission has broad investigative authority under federal law. Typically, investigators will rely on a combination of the following when investigating a possible violation:
- Voluntary statements, submissions, and productions of documents by customers, industry participants, as well as the general public;
- Inspections of required records of boards of trade, intermediaries, reporting traders, and others required by law to register with the CFTC;
- Information provided by other federal and state departments or agencies, or self-regulatory organizations, such as the national futures association, boards of trade, or swaps execution facilities;
- Analysis of market data;
- Compelled testimony;
- Production of documents through administrative subpoenas; and
Once the CFTC completes its investigation, it may initiate administrative proceedings or seek injunctive and ancillary relief in federal court. Some of the civil remedies sought by the CFTC include:
- Civil monetary penalties;
- The suspension, denial, revocation, or restriction of registration and trading privileges; and
- Injunctions or cease-and-desist orders.
However, if the Commission determines that an individual or firm may have engaged in a criminal violation of the CEA, it will refer the case to the U.S. Department of Justice or state prosecutors. Often, these prosecutions involve allegations of criminal violations of the CEA in addition to claims that an individual or firm engaged in wire or mail fraud.
What Is the CFTC Looking for When Conducting an Investigation?
The CFTC is responsible for overseeing the commodity markets and ensuring their integrity. In carrying out this mandate, CFTC investigators review trading firm practices for violations of the following:
- A registrant’s failure to supervise;
- Disruptive trading practices, including disregard of orderly execution during the closing period and spoofing;
- Failure to comply with business conduct standards;
- Failure to maintain or produce required records;
- Failure to make required reports;
- Failure to segregate customer funds;
- False reporting;
- False statements to the CFTC;
- Fraud, including fraudulent solicitation, concealment, and misappropriation;
- Fraudulent trade allocation;
- Illegal off-exchange activity;
- Misappropriation of material, confidential, non-public information;
- Price manipulation;
- Registration violations;
- Trade-practice violations (trading ahead, prearranged trading, bucketing, trading at other than bonafide prices, wash sales, and position limits);
- Undercapitalization; and
- Use of a manipulative or deceptive device.
When CFTC investigators discover even a minor violation relating to any of these issues, it justifies a more expansive and invasive look into the subject’s trading practices. The result is that CFTC investigations often have a snowball effect, growing in scope as the investigation progresses. It is essential that those subject to a CFTC investigation have an experienced CFTC investigation defense attorney at their side to facilitate a limited investigation geared towards mitigating any finding of liability.
Should You Cooperate in a CFTC Investigation?
The CFTC makes its intentions to reward cooperative parties very clear in a recent Enforcement Advisory,
The U.S. Commodity Futures Trading Commission […] has long given credit to individuals who cooperate in the Commission’s investigations and enforcement actions. Cooperation by individuals can contribute significantly to the agency’s mission by enhancing the Commission’s ability to detect and pursue violations of the Commodity Exchange Act […] or Commission Regulations. More specifically, it can increase the effectiveness and efficiency of the Commission’s investigations and provide the Commission with important evidence in its enforcement actions.
However, in reality, cooperating with CFTC investigators is not a sure-fire way to avoid liability. In fact, cooperators often face increasingly burdensome requests for cooperation that come with the implicit threat of legal action if they fail to comply. Indeed, the CFTC qualifies its position regarding cooperative parties further down in the Enforcement Advisory by noting that the Division
Looks for more than ordinary cooperation or mere compliance with the requirements of law. In particular, the Division looks to what an individual voluntarily does, beyond what he or she is required to do. Recognition for cooperation is most likely to be given to an individual for conduct that is sincere, robustly cooperative, and indicative of a willingness to accept responsibility for the misconduct, where appropriate.
In determining whether to offer cooperation credits, the CFTC considers the following:
- The value of the cooperator’s assistance in investigating and enforcing potential violations;
- The value of the cooperator’s assistance to the overall enforcement of the law; and
- The level of the cooperator’s prior culpable conduct and history of violations.
Depending on how the CFTC resolves these three factors, the CFTC may either withdraw any enforcement action or recommend reduced charges. While it is tempting to cooperate in the face of a CFTC investigation, this is a decision that should not be taken lightly and certainly should not be made without first consulting with a CFTC investigation defense attorney. For example, once you start down the path of becoming a cooperator, you essentially lose all leverage and are at the whim of the CFTC. If the CFTC believes you have more information than you do, it can unilaterally decide that you are not entitled to cooperation credits. Thus, while cooperation is always an option, it shouldn’t necessarily be the default approach in every case. The better alternative is to reach out to a CFTC investigation defense lawyer at Oberheiden, P.C. We will take a comprehensive look at your past conduct as well as the information you have and can effectively advise you on your options.
Frequently Asked Questions:
Why don’t we call ourselves the “best CFTC investigation defense attorneys”?
At Oberheiden, P.C., we are confident in our ability to help traders, brokers and firms navigate all types of CFTC investigations. However, you may have noticed that we don’t refer to ourselves as the “CFTC investigation defense lawyers.” There are a few reasons for this. First, we recognize that our clients are sophisticated individuals who are not likely to be persuaded by marketing gimmicks or statements that we can’t substantiate. Moreover, we also believe that the term “best” is subjective and potentially misleading when used to describe an attorney. For example, who decides who the best CFTC investigation lawyers are? What criteria do they base this decision on? Because we take our ethical obligations seriously, we do everything possible to avoid making any misleading statements. However, for those looking for the CFTC investigation defense attorneys, we believe that our track record speaks for itself.
How Far Back Can CFTC Investigators Go Back When Looking for a Violation?
Civil enforcement actions stemming from CFTC investigations may be subject to a statute of limitations. Under Title 28 U.S.C. § 2462, unless Congress passes a law stating otherwise, “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.” However, according to the most recent CFTC guidance, “Some courts have held that the five-year statute of limitations in § 2462 applies to certain claims brought by the CFTC under the CEA and the Regulations.” Thus, the applicability of the statute of limitations is far from a guarantee. Additionally, when it appears as though a CFTC action may run up against the statute of limitations, the Commission may ask the subject of an investigation to sign a “tolling agreement,” under which the subject agrees to waive any statute of limitations defense during the pendency of the investigation. Of course, before signing a tolling agreement, a subject of a CFTC investigation should first consult with an experienced CFTC investigation defense lawyer to ensure they are not giving up a viable defense.
Do I need to comply with CFTC investigators’ requests?
It depends. The CFTC has the ability to issue legally enforceable subpoenas. Thus, if the Commission is in possession of a subpoena, any request contained in the subpoena must be honored, or the subject runs the risk of being found in contempt of court. Notably, CFTC subpoenas are not self-enforcing, and the CFTC must file the appropriate action in federal court if it intends to enforce a subpoena. Additionally, there are ways in which a subject can challenge the scope or enforceability of a CFTC subpoena. Absent a subpoena, CFTC investigators rely on the voluntary cooperation of a witness or subject. In this situation, there is nothing compelling a party to comply with investigators’ requests, and it is usually unwise to offer full cooperation without first speaking to a CFTC investigation defense lawyer.
If You Face an Upcoming CFTC Investigation, Reach Out to Oberheiden, P.C. to Discuss Your Defense Strategy
If you recently learned that the CFTC will be investigating your trading practices, it is essential that you are prepared for what lies ahead. CFTC investigations are both burdensome and high-stakes, potentially subjecting you to severe civil penalties and even the possibility of federal imprisonment. At Oberheiden, P.C., our CFTC investigation defense lawyers are standing by, ready to discuss your case and work with you to develop a comprehensive defense strategy that takes all contingencies into account. We have centuries of experience representing traders, brokers, and firms in all types of enforcement actions and are often able to resolve our clients’ cases without the filing of formal charges. To learn more, and to schedule a free case evaluation with a CFTC investigation defense attorney at Oberheiden, P.C., call 888-680-1745 today. You can also reach us through our online contact form.