A version of this alert was originally published in Law360, July 31, 2017

The US Commodity Futures Trading Commission recently announced its first-ever use of nonprosecution agreements. The agreements were reached in a spoofing case that helped secure a US$25 million fine against a large financial institution and two of its traders. Why is the CFTC’s new use of NPAs significant, and what can we expect to see from the regulator moving forward? First and foremost, we can expect to see the CFTC bring more circumstantial cases, including cases the regulator would have shied away from historically.

Nonprosecution agreements have long been used by the US Department of Justice and the US Securities and Exchange Commission to elicit cooperation from both individuals and entities. In the securities, Foreign Corrupt Practices Act and antitrust contexts, for example, individuals and entities routinely self-disclose serious wrongdoing to avoid prosecution. Without the potential for an NPA, many would refrain from disclosing wrongdoing because there would be little incentive, particularly in cases where regulators might have jurisdictional or evidentiary problems. NPAs allow for a win-win—individuals and companies can self-disclose in the hopes of paying a manageable fine and avoiding conviction, while regulators can secure some form of fine or disgorgement, and often, public notice of wrongdoing.

With the CFTC announcing its new use of NPAs, the regulator is not sending smoke signals about its new enforcement strategy, but rather, is shouting through a bullhorn that it is shifting gears. The regulator is articulating its desire to bring enforcement actions both in substantive enforcement areas it has historically struggled with, and in matters where the evidence may, at first blush, seem thin. As the CFTC’s new head of enforcement, James McDonald, recently noted, “For many types of complex cases, there is simply no substitute for cooperating witnesses, who can tell the inside story of the fraud or misconduct at issue.”

It is no accident that the CFTC’s first use of nonprosecution agreements came in a spoofing case. Spoofing involves “bidding or offering with the intent to cancel the bid or offer before execution.” Spoofing cases are notoriously difficult to prove for a number of reasons, including (1) they turn entirely on a trader’s intent, (2) SEC statistics show that as many as 97 percent of all orders placed are canceled before execution and (3) traders often place and cancel orders in milliseconds (1/1000th of a second) or microseconds (1/1 millionth of a second). Given this landscape, it can be very challenging for regulators to discern whether orders were placed and canceled for legitimate or illegitimate reasons, and spoofing cases are almost sui generis in their inability to be brought solely with circumstantial evidence. In our large financial institution case, for example, the three traders who received NPAs detailed their efforts to create “book imbalances” that would trick algorithms into making certain trades. The fraudulent order placements often took less than a second to execute.

Both inside and outside the spoofing world, NPAs will provide the CFTC with a valuable tool by which it can coax important evidence out of reluctant co-conspirators. Co-conspirator evidence is valuable not only because it offers an up-close walkthrough of the wrongdoing, but also because it usually leads regulators to other, more tangible forms of proof: emails buried in previously unknown accounts, information hidden with heretofore unidentified witnesses and corroboration from records of which investigators may have been unaware.

Why hasn’t the CFTC used nonprosecution agreements until now? The SEC has been using them since 2010, and the DOJ since the early 1990s. One reason could be the CFTC’s recent change in management: James McDonald, who became the head of the CFTC’s enforcement division this past spring, was a federal prosecutor in the Southern District of New York before assuming his new role. As a federal prosecutor, McDonald would be intimately familiar with the concept of immunizing witnesses in exchange for leniency, and has surely seen first-hand the benefits NPAs provide to both the government and potential defendants. Although other CFTC enforcement heads have also been federal prosecutors, the CFTC’s fresh face appears to have brought a fresh look at the enforcement division and areas where improvements could be made.

NPAs may also have arrived as a result of recent criticism the CFTC has weathered for its alleged failure to bring more spoofing cases and enforcement actions generally, and to receive more significant fines. Like any federal agency, the CFTC receives funding from Congress, and in order to justify its funding, the regulator must produce results. In many ways, NPAs function as an evidentiary end-run around the lengthy process of building a case solely through administrative subpoenas and record analysis. And an ability to expedite the investigation of cases means more cases will be enforced, generating more fines and statistics for the regulator.

Despite the many advantages NPAs offer, there are pitfalls the CFTC must be mindful of when deploying these agreements. First, evidence gathered from immunized or co-conspirator witnesses is always subject to significant cross-examination at trial. In addition, to the extent the CFTC is relying on a cooperating witness to make its case, the CFTC will need to make sure to have other, more reliable forms of evidence to buttress the cooperator’s statements, such as emails, phone records and corroborating documents or financial records. While the CFTC can use administrative subpoenas to gather such materials, gathering other forms of corroborating evidence is more difficult for the CFTC than for federal prosecutors because the CFTC cannot avail itself of the grand jury, nor can it conduct wiretaps or execute search warrants without partnering with federal prosecutors. And if the CFTC does partner with federal prosecutors, it must do so carefully so as not to draw accusations of abusing the parallel civil and criminal investigative process or misusing federal prosecutors as investigative stalking horses.

Such challenges are on full display in the fight a global financial institution trader is currently waging against the SEC’s cooperation program in the Second Circuit. In that case, the SEC imposed a five-year industry ban against the global financial institution trader after he allegedly participated in a stock-parking scheme with a co-conspirator. The SEC had offered a cooperation agreement to the alleged co-conspirator in what was touted as the first litigated action featuring testimony from an SEC cooperator. The SEC is now defending accusations that its program violated the separation of powers by giving the SEC control over both prosecution and sentencing.

Because the CFTC’s enforcement actions rarely result in trials, however, and because NPAs will presumably allow the CFTC to expedite enforcement of many complex matters, on balance, the benefits of using the agreements seem to far outweigh the dangers. But the CFTC will want to tread carefully with NPAs, as the agreements can be both a golden gift and the very undoing of the enforcement actions they deliver.