A criminal indictment naming commodity pool operator Harris Landgarten was filed in a federal court in Brooklyn, New York, last week, charging the defendant with commodities fraud and wire fraud, as well as attempting to obstruct an investigation by the Commodity Futures Trading Commission. Separately, the CFTC filed a civil action in the same court against Mr. Landgarten claiming that, from at least July 2014 through at least March 2017, he defrauded participants in a commodity pool he operated – Tradeanedge Members Fund. Among other things, the CFTC charged that Mr. Landgarten would withdraw funds from the pool to pay for purported fund expenses (in fact they were often personal expenses), but not reflect such withdrawals on the stated value of the pool to its three investors. As a result, the investors believe the pool was valued higher than it was.

According to the indictment against Mr. Landgarten in May 2016, one investor filed a complaint against Mr. Landgarten with the Financial Industry Regulatory Authority and the National Futures Association because Mr. Landgarten failed to honor his request to return his investment in the pool. Both self-regulatory organizations referred the complaint to the CFTC. Between March 7 and 10, 2017, claimed the indictment, Mr. Landgarten affirmatively proposed to the investor that he withdraw his complaint from the CFTC and file an affidavit with the CFTC that he never was deceived or misled by Mr. Landgarten. Mr. Landgarten promised to return the investor’s investment in the pool only if the investor withdrew his CFTC complaint. On March 10, 2017, the investor rejected Mr. Landgarten’s proposal.

If convicted of the charges against him, Mr. Landgarten could be imprisoned 25 years. The CFTC seeks full restitution against Mr. Landgarten, disgorgement of all ill-gotten gains, a fine, and a permanent registration and trading ban, among other sanctions.

Legal Weeds: Late last year, James McDonald, the CFTC’s Director of its Division of Enforcement, indicated during multiple public speeches 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 reoccurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all.

According to Mr. McDonald, for a company to be credited for voluntarily self-reporting wrongdoing, the disclosure must be “truly voluntary… before an imminent threat of disclosure or of a Government investigation.” He also said the reporting must occur promptly after discovery and offer up “all relevant facts known to [the company] at the time.”Additionally, full cooperation, said Mr. McDonald, must involve ongoing revelation of facts as a company discovers them, including facts related to particular persons. Finally, the company must “timely and appropriately” remediate the conditions that led to the misconduct “to ensure that misconduct doesn’t happen again.” (Click here for details regarding the CFTC’s self-reporting policy 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.)

Settlements offered and agreed to by Deutsche Bank AG and its wholly owned subsidiary Deutsche Bank Securities Inc., as well as UBS AG in January 2018 in connection with CFTC enforcement actions claiming that the firms engaged in spoofing-type transactions in connection with the trading of futures contracts on United States market gave some insight into how the Division of Enforcement values cooperation.

Factually, the allegations against DB and UBS were materially similar. In both actions, traders at each firm engaged in alleged spoofing activity that constituted attempted manipulation for a significant period of time – in DB’s circumstance, from February 2008 through at least September 2014, and in UBS’s situation, from January 2008 through at least December 2013. Some facts varied in each enforcement action, but the agreed fine was US $30 million combined for DB and DBSI and $15 million for UBS. Although the CFTC acknowledged both firms’ cooperation in its investigations, the CFTC noted that, in connection with UBS, “[d]uring the course of an internal investigation, [the firm] discovered potential misconduct, of which the Division was previously unaware” and promptly self-reported the misconduct. The CFTC said that both firms’ fines were “substantially reduced” because of their cooperation, but UBS’s fine was one-half that of the DB entities’ combined fine.

Under the Division of Enforcement’s new math – come forward + come clean + remediate = substantial settlement benefits – it appears that, at least in these two matters, coming forward was worth a 50 percent savings off an already reduced settlement attributable to coming clean (Click here for further details regarding these enforcement actions in the article “CFTC Names Four Banking Organization Companies, a Trading Software Design Company and Six Individuals in Spoofing-Related Cases; the Same Six Individuals Criminally Charged Plus Two More” in the February 4, 2018 edition of Bridging the Week.)