The Bank of Nova Scotia – a Toronto, Canada-headquartered bank – agreed to pay a fine of US $800,000 to resolve charges brought by the Commodity Futures Trading Commission related to purported spoofing transactions by unnamed traders on its New York precious metals trading desk from June 2013 through June 2016.
Typically, said the CFTC, a trader would place a small order for gold or silver futures on the Commodity Exchange, Inc. at or near the best price, followed by a larger order on the opposite side of the market away from the best price. The goal of the spoofing order was to suggest greater buying or selling interest, and to induce execution of the trader’s small order. If the trader was successful, the trader’s small order would be executed after which the trader would cancel the larger order, alleged the CFTC.
According to the CFTC, BNS was alerted to the potential spoofing trading of one its NY-based traders by its futures commission merchant. In response, BNS conducted an internal review, terminated the one trader, and self-reported the trading activity to the CFTC, including providing “thousands of documents,” other information and analysis. BNS also implemented an enhanced surveillance system, hired a full-time surveillance monitor, and augmented its spoofing training programs, said the CFTC.
In a press release issued by the CFTC in connection with publication of the relevant settlement order, James McDonald, CFTC Director of Enforcement, stated that BNS received a “substantially-reduced penalty” because of its self-reporting and cooperation.
Legal Weeds1: Last year, Mr. McDonald made clear that potential wrongdoers who voluntarily self-report their violations, fully cooperate in any subsequent CFTC investigation, and fix the cause of their wrongdoing to prevent a re-occurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. (Click here for background in the article “New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief” in the October 1, 2017 edition of Bridging the Week.)
Since then, the CFTC Division of Enforcement has routinely reiterated this view in connection with settlements of enforcement actions where it acknowledged self-reporting and cooperation. This settlement is the latest example.
Legal Weeds2: I don't ordinarily cover traditional fraud cases in Bridging the Week as they don't typically provide insight into novel legal theories or important new lessons for legitimate industry participants. However, a recent victory by the CFTC in its enforcement action against Gregory L. Gramalegui is worth noting. In that case, the CFTC prevailed in a litigation against Mr. Gramalegui where it had charged violations of the anti-fraud provisions of relevant law and disclosure requirements of CFTC rules in connection with his solicitation of customers for a futures trading system and an advisory service, among other offenses. The federal court in Colorado hearing this matter found that the CFTC proved its allegations and assessed a fine against Mr. Gramalegui of US $1.9 million and ordered disgorgement.
Among its claims, the CFTC charged Mr. Gramalegui with making false statements to it in connection with a provision of law added as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. This provision renders it illegal for a person to make a false or misleading statement to the CFTC or omit material information to deceive the Commission, "if the person knew, or reasonably should have known, the statement was false or misleading" in connection with material facts. (Click here to access 7 U.S.C. § 9(2).)
According to the Court, "a statement is actionable under this section when it is either literally untrue or when it fails to include all information necessary to give the recipient a complete and accurate picture of the state of affairs communicated." Here the court found that the defendant violated this provision of law when he told the CFTC in connection with a deposition that he did not advertise for clients but that clients found him through Google and other search engines; he did not send out marketing emails between September 2014 and 2015; and he played no role in a statement on his website that "most traders have made enough on one trade to pay for the[ir] monthly subscription," as well as when he did not tell the CFTC that he communicated to customers other than through one identified email account and that he had altered the copy of his website prior to producing it to the CFTC, among other statements and misstatements. Each of these statements was false or misleading, said the court. Moreover, the court concluded that each of these misstatements and omissions was material and, accordingly, gave rise to a violation of the relevant provision of law.
Mom always said to tell the truth. The CFTC has tools to sanction persons for not following mom's advice. (Click hereto access the court's full decision.)