On August 15, 2011, the Commodity Futures Trading Commission’s final rules expanding its ability to pursue fraud and manipulation claims in connection with any futures, swaps, or “contracts of sale of any commodity in interstate commerce” took effect. The new rules make clear that the CFTC intends to significantly enhance its enforcement capabilities. The new rules, which were among the first to be finalized by the CFTC under the Dodd-Frank Wall Street Reform and Consumer Protection Act, implement Section 753 of the Dodd-Frank Act. Among other things, the new rules (i) eliminate the requirement in Section 6(c) of the Commodity Exchange Act that the CFTC prove that the alleged fraud or manipulation had an effect on price, and (ii) lower the scienter standard to recklessness for cases involving fraud-based manipulation.
New Rule 180.1 is modeled on Rule 10b-5 under the Securities Exchange Act of 1934 and broadly prohibits manipulative and deceptive devices and contrivances – as well as attempts to use such devices and contrivances – in connection with any future, swap or “contract of sale of any commodity in interstate commerce,” regardless of whether the conduct was intended to create or did create an artificial price. In contrast to the CFTC’s prior enforcement authority, Rule 180.1 does not require proof of specific intent to defraud or manipulate, but instead extends to reckless conduct, thereby significantly lowering the CFTC’s burden of proof. Rule 180.1 is evidently not limited to fraudulent conduct in connection with the purchase or sale of a future, swap, or contract of sale of any commodity in interstate commerce; rather, the CFTC has stated that it also extends to conduct in connection with, among other things, the “pendency” of a contract. Although Rule 180.1 does not explicitly impose any new affirmative duties of inquiry, diligence or disclosure, the CFTC’s guidance provides that trading on the basis of material non-public information in breach of a pre-existing duty (established by another law or rule, agreement, understanding, or some other source), or trading on the basis of material non-public information that was obtained through fraud or deception, may nevertheless violate Rule 180.1.
In addition, in its release, the CFTC embraced the Bank of New England “collective knowledge” standard for organizational liability, which permits the conduct of one corporate agent to be aggregated with another corporate agent’s state of mind in order to hold the corporation liable for fraud. The CFTC’s embrace of “collective knowledge,” along with the other elements of Rule 180.1, increase significantly the importance of an effective compliance program. Finally, with respect to penalties under Rule 180.1, the CFTC will follow CEA Section 6(c)(10)(C)(ii), which provides that the CFTC may assess an amount equal to the greater of $1 million or triple the monetary gain for each such violation.
New Rule 180.2, which is more in line with the CFTC’s scope of power before the Dodd-Frank Act, codifies the CFTC’s long-standing authority to prohibit price manipulation by making it unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any futures, swaps or any “commodity in interstate commerce.” In contrast to Rule 180.1, specific intent is required under Rule 180.2 The rule’s application will be guided by the traditional four-part test for manipulation that has developed in the case law, which considers whether (1) the accused had the ability to influence market prices; (2) the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand; (3) artificial prices existed; and (4) the accused caused the artificial prices.