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.


Bob Zwirb

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.

Notwithstanding the objections of Commissioners Berkovitz and Behnam, it appears that the CFTC clearly does have such authority. As SEC Guidance on "Disqualification of Felons and Other 'Bad Actors' from Rule 506 Offerings and Related Disclosure Requirements" provides:

"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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