At New York University last month, James McDonald, Director of Enforcement of the Commodity Futures Trading Commission (“CFTC”), announced the CFTC’s publication of an “Updated Advisory on Self Reporting and Cooperation” (“Updated Advisory”). The Updated Advisory supplemented two January 2017 Enforcement Advisories, by “providing additional information regarding voluntary disclosures and the substantial credit companies and individuals can expect from the [CFTC] if they voluntarily disclose misconduct and fully cooperate with the [CFTC’s] investigation.” The January 2017 Advisories, entitled “Cooperation Factors in Enforcement Division Sanction Recommendations for Companies” and “Cooperation Factors in Sanction Recommendations for Individuals” had detailed factors that the Enforcement Division may consider to assess the quality and value of cooperation. But, they offered little insight about precisely what is required to obtain mitigation credit and what companies and individuals who meet the requirements can expect. The Updated Advisory was intended to provide “greater transparency” about what the Enforcement Division requires and what companies and individuals who self-report, cooperate, and remediate can expect.
McDonald began his remarks with a colorful story about how, as a federal prosecutor in the Southern District of New York, he used RICO to charge gang members with crimes for which they would face mandatory life sentences or the death penalty, prompting low-level gang members to cooperate and provide an “inside perspective” into the workings of the gang thus allowing the government to successfully prosecute and hold high-level gang members responsible. The prosecutions then enabled community members to “clean up” their neighborhood and maintain order by teaching younger members to respect the law and report misconduct. Although McDonald noted that he was not intending to compare corporate misconduct to RICO murder, he certainly appears to have intended to draw attention to his desired message, which was that Wall Street companies are the best position to detect wrongdoing, to report it, and to help the CFTC go up the chain of command looking for the culpable senior managers.
McDonald then outlined a self-reporting and cooperation program that he acknowledged is very similar to other agencies’ programs, particularly that of the Justice Department. He explained that companies that meet the Enforcement Division’s requirements can expect clear communication from the Division on expectations regarding self-reporting, cooperation, and remediation and “concrete benefits.” He also emphasized the CFTC’s commitment to “aggressively prosecut[e], not just the company ultimately responsible for the misconduct, but also the individuals involved.” He warned that “[w]e’ll work hard to move up the chain to the supervisors who made the decision behind the act, or who directed it. Just like in a racketeering case, when we talk cooperation, we’re talking cooperating up, not down.” McDonald also cautioned that companies who choose not to self-report will be met with “vigorous, aggressive prosecution, accompanied by full monetary penalties.”
To obtain a “substantial” reduction in civil monetary penalties, the Updated Advisory requires: (1) voluntary disclosure prior to “an imminent threat of exposure” and “within a reasonably prompt time after the company or individual becomes aware of the misconduct” of “all relevant facts” including “all relevant facts about the individuals involved in the misconduct”; (2) full cooperation; and (3) timely and appropriate remediation of “flaws in compliance and control programs.” A company that fails to self-report but cooperates may receive a reduced civil penalty. The “most substantial” reductions will be reserved, however, for companies and individuals who meet all of the requirements. In “extraordinary circumstances,” such as being the first to report pervasive misconduct across an industry, the Enforcement Division may recommend a declination of prosecution.
Notably absent from the January 2017 Advisories, the Updated Advisory and McDonald’s remarks was concrete information about the promised reductions in civil monetary penalties for companies that meet the enumerated requirements. Unlike the Foreign Corrupt Practices Act Enforcement Plan and Guidance that was issued by the Department of Justice's Fraud Section, which sets forth the precise amount of reductions that companies can expect, the CFTC’s Advisories only promise “substantial” reductions. Nor did McDonald or the Advisories refer to recent settlements as points of reference that might serve as guidance to companies weighing the potential consequences before deciding whether to cooperate. Adding to the uncertainty, an earlier draft of McDonald’s remarks reportedly stated that “the agency expected to reduce penalties by roughly 75 percent for those that fully cooperate . . . [and i]n rare instances . . . cases would be dropped altogether.” But, McDonald told The New York Times that he and CFTC Chairman, J. Christopher Giancarlo, “had changed their minds and decided against setting a 75 percent target.”
McDonald acknowledged that “to achieve optimal deterrence . . . law enforcement need[s] buy-in from the communities [it] police[s].” The CFTC is unlikely to create partnerships with its constituents by running regulatory investigations like RICO murder or criminal fraud investigations. Like many other regulators, McDonald's experience as a federal prosecutor certainly will inform his role as the CFTC's Enforcement Chief. But, query whether threatening “vigorous, aggressive prosecution” of wrongdoers that fail to self-report or cooperate will result in the “buy-in” that he seeks. Culpability in regulatory investigations can be vastly more nuanced than in murder investigations, or even criminal fraud cases. Given the lack of clarity about the potential rewards for self-reporting and cooperation, it remains to be seen whether companies that suspect wrongdoing – but are not certain whether the conduct is truly a regulatory violation – will self-report under the CFTC's program.