On September 16, 2019, the US Department of Justice (DOJ) indicted three precious metals traders for allegedly violating six criminal statutes, including the Racketeer Influenced and Corrupt Organizations Act (RICO).1 According to the indictment, individuals employed or involved with a bank’s Precious Metals Desk participated in a racketeering conspiracy to maximize trading profits and minimize trading losses for more than eight years. They allegedly engaged in spoofing by placing orders to buy and sell precious metals futures contracts, with the intent to cancel those orders before execution to artificially affect prices and deceive other market participants, while simultaneously harming the bank and its customers. Earlier this year, the bank disclosed that it is cooperating with the DOJ’s investigation.
That same day, the Commodity Futures Trading Commission (CFTC) Division of Enforcement Spoof Task Force brought a parallel civil enforcement action against two of the individuals, seeking civil penalties, disgorgement, restitution, trading bans, and a permanent injunction against future violations.2 The CFTC also settled charges with a fourth trader3 not the subject of the criminal indictment and issued a four-month suspension and ordered him to pay a $130,000 civil monetary penalty in addition to other sanctions.4
In recent years, the DOJ and CFTC have indicated a desire to ramp up parallel enforcement in a variety of areas, including spoofing. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act to provide a separate civil violation for spoofing behavior,5 in addition to criminalizing spoofing.6 Spoofing occurs when a person engages in any trading, practice, or conduct involving bidding or offering “with the intent to cancel the bid or offer before execution.”
The CFTC and the DOJ have both aggressively pursued spoofing cases in recent years. The simultaneous indictment and enforcement actions in this case are just the latest example of their continued coordination. Historically, the CFTC has been more successful than the DOJ in pursuing spoofing violations, which may in part be due to the different burdens of proof in the civil and criminal contexts. The CFTC has civil enforcement authority, so it only needs to prove intent to engage in spoofing by a preponderance of the evidence—by contrast, in a criminal proceeding, the DOJ must prove that a defendant had the requisite intent beyond a reasonable doubt. The DOJ’s struggles may also be a result of jurors’ difficulty in understanding the crime of spoofing and wading through massive amounts of order entry, cancellation, and fulfillment data put forth as evidence of the trader’s intent.
The DOJ’s decision to indict these individuals on RICO charges, which carry severe penalties, is a new strategy in the DOJ’s pursuit of spoofing misconduct. Jurors may be more likely to convict on RICO charges, as they are likely to have a more intuitive understanding of criminal enterprises than of spoofing. Using the RICO charges, the DOJ can reframe its arguments into a more accessible, juror-friendly narrative. To violate RICO, a person must engage or agree to engage in a pattern of racketeering activity—such as wire fraud—that is connected to an enterprise. While an enterprise can be a crime family, a street gang, or a drug cartel, it can also be a corporation or another company through which individuals commit crimes. In a spoofing case, an enterprise could potentially be a bank or any trading company through which individuals engage in spoofing activity that affects interstate or foreign commerce. Because RICO conspiracy was charged in this case, the government will also need to prove the existence of an agreement among two or more people to violate the law.
While the DOJ is pursuing new strategies in areas usually enforced by the CFTC, the CFTC is simultaneously trying to expand into areas traditionally pursued by the DOJ. For example, in March 2019, the CFTC announced that it would coordinate with the DOJ and the Securities and Exchange Commission to investigate foreign bribery and overseas corruption offenses.7 In the announcement, James McDonald, the CFTC enforcement chief, expressly aligned the CFTC with the DOJ’s policy, echoing the DOJ’s emphasis on cooperation and self-reporting. Mr. McDonald and Assistant Attorney General of the Department of Justice’s Criminal Division Brian A. Benczkowski both noted future enhanced coordination between and parallel enforcement by the CFTC and DOJ. Mr. McDonald also disclosed that the CFTC had already opened investigations involving foreign bribery.
In addition to bribery and corruption, the CFTC has taken concrete steps to expand its enforcement efforts into areas traditionally subject to criminal prosecution. On September 19, 2019, the CFTC announced its fourth whistleblower initiative intended to encourage whistleblowers to provide information on misconduct related to money laundering, insider trading, and virtual currency fraud violations. The CFTC’s prior whistleblower initiatives have been successful in attracting additional tips and complaints. For example, the CFTC received 760 tips in fiscal year 2018, representing a more than 60% increase over tips received in fiscal year 2017. Given the prior successes of the CFTC’s whistleblower initiatives, the CFTC will likely be able to attract additional whistleblower tips related to these areas, which are typically prosecuted by the DOJ. Armed with that information, the CFTC is more likely to bring parallel enforcement actions—and the CFTC may be more successful than the DOJ in pursuing such charges given its lower burden of proof in the civil context.
As CFTC whistleblower reports continue to rise, companies and individuals active in the futures markets should consider paying close attention to areas subject to parallel CFTC and DOJ scrutiny. Companies and individuals would be wise to re-evaluate the risks of government inquiries and potential exposure to civil CFTC enforcement in new areas—such as foreign bribery and insider trading—as the CFTC and the DOJ seem to be teaming up now more than ever.