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Most Read Contributor in United States, November 2019
The CFTC and DOJ (the "Agencies") settled charges (see
here and here) with a proprietary trading firm for
engaging in spoofing in equity futures contracts over a two-year
period. According to the DOJ, as a result of the illegal activity,
the firm earned $10.5 million in profits and caused other traders
losses of $32,593,849.
To settle the various CFTC and DOJ charges, the firm agreed to
(i) cease and desist from further violating CFTC rules, (ii) pay a
restitution amount equal to customer losses, (iii) disgorge an
amount equal to its gains, (iv) pay a civil monetary penalty of
$24,400,000, and (v) comply with a number of undertakings. The
regulators acknowledged the broker-dealer's cooperation during
the investigation.
The CFTC Order also contains a provision granting the defendant,
a waiver from the "bad actor" disqualification in SEC
Rule 506.
CFTC Commissioners Dissenting Statements
Two CFTC commissioners disagreed with the agency's grant of
a disqualification waiver for the firm.
In a concurring statement, CFTC Commissioner Rostin Behnam expressed "extreme reservations"
with the CFTC's issuance of a Consent Order that included
advice that automatic disqualification, under
Securities Act Rule 506 regulations, should not be imposed. He
claimed that due to the "unprecedented levels of
spoofing" conducted by the firm, he did not agree with
advising that the SEC not apply an automatic disqualification. Mr.
Behnam said that since the firm had not previously been registered
with the SEC or CFTC, there is still time for the SEC to determine
if the CFTC action should lead to an automatic
disqualification.
CFTC Commissioner Dan M. Berkovitz also disagreed with the CFTC Order for granting a
waiver for the firm from the "bad act" disqualification
under SEC regulations. He asserted that the CFTC "has neither
the legal authority nor the expertise" to determine how public
and private securities offerings should be dealt with and how to
best protect investors.
At issue is whether 1) the CFTC has the authority to issue a
waiver from the "bad actor" disqualification provision in
SEC Rule 506, and 2) if so, whether the issuance of such a waiver
through written "advice" to the SEC represents a good
exercise of that authority.
"Waiver based on determination of issuing
authority. Rule 506(d)(2) of Regulation D provides another
way for issuers to request a waiver of disqualification.
Disqualification will not arise if . . . the
court or regulatory authority that entered the relevant
order, judgment or decree advises in
writing—whether in the relevant judgment, order or
decree or separately to the Commission or its
staff—that disqualification under Rule 506 should not
arise as a consequence of such order, judgment or
decree." (Emphasis added.)
Here, the CFTC followed the procedure laid out by the SEC for
providing a waiver. So it is not clear what Commissioners Berkovitz
and Behnam are complaining about when they state that this is a
matter solely for the SEC to determine.
Second, the CFTC's Order expressly notes that the defendant
not only cooperated with the Division of Enforcement but that it
"proactively engaged in remedial measures" and
implemented "enhancements of its supervisory structure and
compliance program." The Order also notes defendant's
"significant investments in sophisticated trade surveillance
tools" and "substantial investments in staffing and
resources" for its legal and compliance teams to prevent
recurrence. Had the defendant not taken these remedial actions,
presumably the government could have thrown the book at it and
could have included federal criminal racketeering charges as it did
in a
similar case.
As it is, the defendant is being subject to two forms of legal
jeopardy from the CFTC and DOJ (and in the latter to criminal
charges and sanctions) along with fairly steep monetary sanctions.
While matters like this involve judgment on the part of enforcement
authorities, it is not clear, given all the facts and
circumstances, what a third form of jeopardy in the form of SEC
sanctions would add to the picture.
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