On August 7, 2017, the Commodity Futures Trading Commission (CFTC) entered a settlement order In the Matter of Tokyo-Mitsubishi UFJ, Ltd., CFTC Dkt. 17-21 (Order).1 It is the latest CFTC case to settle involving alleged extended “spoofing” trading, in which a trader is said to have entered orders without any intention to consummate trades, an unlawful activity under the Commodity Exchange Act. Most interestingly, the emphasis of the Order and the accompanying press release2 was on the CFTC giving substantial credit for self-reporting and self-initiated remediation steps. Compared to other recent settlements, the CFTC does appear to have ordered a notably milder sanction than it otherwise might have. This suggests that affirmative steps to self-report and remediate misconduct may well reap benefits in dealing with the CFTC in the coming years.
In the Order, which was settled without any admission or denial of the truth of the charges, the CFTC finds that a trader engaged in spoofing in the course of trading “a variety of futures contracts” on the Chicago Mercantile Exchange and the Chicago Board of Trade, including Treasury and Eurodollar futures. The CFTC said that the conduct continued over a period of almost five and a half years, from July 2009 through December 2014, but that most of the activity occurred over two years, 2010 and 2011. The conduct is described as similar to that addressed in most CFTC spoofing cases in recent years: the placement of a relatively small trade or trades on one side of the market, and then placing larger trades on the other side of the market, intending not to execute the larger orders but rather to move the market favorably to the smaller trade or trades. When the smaller trades executed, the trader would cancel the larger trades on the other side of the market.
The Order demonstrates the CFTC’s continued focus on bringing cases for violating Section 4c(a)(5)(C) of the Commodity Exchange Act, which Dodd-Frank added to the statute and which outlaws “spoofing” on any CFTC-regulated trading facility.3 Most worthy of note, however, is that the Order and, more clearly, the accompanying press release draw attention to the relatively modest sanctions imposed, which the Director of Enforcement expressly attributes to the company’s self-reporting and cooperation, including self-initiated remediation.
The Order and the press release note that the company, once aware of the conduct in question, “promptly suspended” the trader and reported the conduct to the CFTC’s enforcement division. The company also started “an expansive internal review,” as well as “assisted” in the division’s investigation. Moreover, the company also, “at the same time,” started “an overhaul of its systems and controls and implemented a variety of enhancements to detect and prevent similar misconduct,” as well as “revis[ing] its policies, updat[ing] its training, and implement[ing] electronic systems to identify spoofing.”
The CFTC’s Enforcement Director, James McDonald, states that the direct result of these steps is that the company “benefitted . . . in the form of a substantially reduced penalty.” The company was penalized $600,000. To put this in context, less than two weeks earlier, the CFTC entered a settlement with an individual, who traded from home and for himself, for spoofing over about three and a half years, in which the CFTC fined him $635,000 and imposed permanent trading and registration bans. Moreover, back in January, the CFTC settled with a major financial institution by fining it $25 million for spoofing that occurred over about 18 months, despite saying there was cooperation credit there was well.
Since the settlement in January, however, there is a new President, a new Chairman of the CFTC and a new Director of Enforcement. That Director stated in the press release in this matter that, “This case shows the benefits of self-reporting and cooperation, which I anticipate being an important part of our enforcement program going forward.” While one should not read too much into a single settlement, this case could be a harbinger of a clearer benefit to be gained by self-reporting and proactive remediation than has been discernable in the past. It will be important to watch to see if this harbinger becomes a trend; if it does, companies will need to look carefully at the value of embracing more willingly opportunities to self-report misconduct and actively engaging in substantial remediation of policies and practices, rather than waiting for the CFTC to come knocking.