On March 14, 2018, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo gave a speech at the Futures Industry Association (“FIA”) annual meeting in Boca Raton, Florida, in which he reviewed the CFTC’s activities during the past year and provided a preview of CFTC priorities for the coming year.[1]  Among the issues addressed in Chairman Giancarlo’s speech were the CFTC’s successes and priorities in enforcement, including in particular initiatives in the area of anti-spoofing and virtual currencies.

Aggressive Year of Enforcement

At a time when other authorities have been less active, Chairman Giancarlo reported that the CFTC is in the midst of a busy period.  He warned that “there will be no pause, no let up and no reduction in [the CFTC’s] duty to enforce the law and punish wrongdoing in our derivatives markets.”[2]  During the past five months, he reported, the Division of Enforcement has filed nearly as many fraud and manipulation cases as it has in any previous fiscal year.  Indeed, the last several months have seen a sweep of notable CFTC enforcement actions, including:

  • In February, the CFTC achieved a $70 million resolution with Deutsche Bank related to alleged attempted manipulation of the U.S. Dollar ISDAFIX benchmark swap rates.[3]
  • In January, the CFTC, along with the Department of Justice, brought the largest futures market criminal enforcement action in U.S. history, involving criminal and civil enforcement actions against three major banks and six individuals related to alleged manipulation and spoofing in the precious metals market.[4]
  • Also in January, the CFTC brought three separate enforcement actions related to virtual currency schemes allegedly run by My Big Coin Pay, Inc., CabbageTech, Corp., and The Entrepreneurs Headquarters Limited.[5]

Chairman Giancarlo also noted that during the past year, the CFTC has developed new, sophisticated data analysis tools, which the Division of Enforcement used to detect certain of the conduct alleged in these actions.  It is likely that the Division of Enforcement will continue to deploy these tools in the future to aid in the identification and punishment of unlawful trading activity, particularly activity involving spoofing.

Anti-Spoofing Enforcement

One of the main enforcement priorities that Chairman Giancarlo highlighted was anti-spoofing.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) banned the practice of spoofing, defined as “any trading, practice or conduct” that “is, is of the character of, or is commonly known to the trade as ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).”[6]  The spoofing prohibition is enforced by the CFTC pursuant to the Commodity Exchange Act.[7]

In January 2018, CFTC Director of Enforcement James McDonald announced the creation of a new Spoofing Task Force, which he explained would be “a coordinated effort across the Division … to root out spoofing from our markets.”[8]  He further noted that the recent actions should send a strong signal of the CFTC’s commitment to holding individual bad actors accountable, consistent with the Division of Enforcement’s dual aims of wrongdoer accountability and deterrence.[9]

Notably, while the CFTC has been increasingly active in the area of anti-spoofing enforcement, the Dodd-Frank spoofing prohibition has also been the subject of intense litigation.  In July 2016, Michael Coscia became the first person convicted and sentenced for spoofing, receiving a three-year prison sentence.[10]  The United States Court of Appeals for the Seventh Circuit affirmed his conviction in August 2017.[11]  A petition for certiorari is currently pending before the Supreme Court, in which Mr. Coscia argues that the definition of spoofing under Dodd-Frank is unconstitutionally vague because the term “spoofing” is not a “practice … commonly known to the trade.”[12]

Virtual Currency Enforcement

Chairman Giancarlo also highlighted a series of virtual currency civil enforcement actions.  For example, in September 2017, the CFTC charged Gelfman Blueprint, Inc. and its CEO and Head Trader with operating a Bitcoin Ponzi scheme and misappropriating over $600,000.[13]  The CFTC alleged that the defendants fraudulently solicited investments from approximately eighty persons for algorithmic trading in virtual currency, circulated false performance reports, and distributed alleged profits from other customers’ misappropriated funds.  Four months later, in January 2018, the CFTC charged My Big Coin Pay, Inc., its founder, and another individual associated with the corporation with commodity fraud and misappropriation.[14]  The defendants allegedly fraudulently solicited over $6 million dollars from customers for investment in a virtual currency known as My Big Coin, and subsequently transferred the customer funds into their personal bank accounts.  Just two days after bringing those charges, the CTFC charged CabbageTech, Corp. d/b/a Coin Drop Markets with fraud and misappropriation.[15]  The CFTC alleged that the defendants induced customers to send them money and virtual currencies by promising real-time Bitcoin and Litecoin trading advice as well as purchasing and trading services, which the defendants never provided.  Both of the actions filed in January 2018 were brought in connection with the Division of Enforcement’s new Virtual Currency Task Force.

Notably, on March 6, 2018, a judge in the Eastern District of New York upheld the CFTC’s authority to prosecute fraud concerning not only virtual currency futures and derivatives, but also spot transactions in virtual currencies on the basis that such currencies are “commodities” that fall within the scope of the anti-fraud and anti-manipulation provisions of the CEA.[16]  That decision is addressed in our March 15 Alert Memorandum.

Broader CFTC Priorities

In addition to setting out the CFTC’s enforcement priorities, Chairman Giancarlo reflected on the CFTC’s priorities in other areas.  Although the CFTC is an independent agency, the Chairman undertook in 2017 to voluntarily align the CFTC’s approach with the President’s Executive Order on “Enforcing the Regulatory Reform Agenda.”  In his speech, Chairman Giancarlo reiterated that “the time has come to re-examine the implementation of our regulations” and to “identify areas where regulations could be simpler, more coherent, and more understandable.”  He highlighted the CFTC’s “Project KISS” – as in “Keep It Simple Stupid” – initiative, which is “designed to simply and make our rules and regulations less complex, less costly, less burdensome.”

Chairman Giancarlo also addressed other CFTC priorities, including the creation of a market intelligence branch designed to understand and analyze current market dynamics and trends, the LabCFTC initiative to engage with FinTech innovators, the commitment to “right-sizing the CFTC’s regulatory footprint,” and a variety of specific regulatory initiatives.

Finally, in an area that has drawn considerable interest recently, Chairman Giancarlo addressed efforts to coordinate regulations across borders, particularly as between the U.S. and the European Union.  He highlighted as particular successes the CFTC’s recent determinations of comparability and equivalence of margin for uncleared swaps and an equivalence and exemption framework for swaps trading platforms, efforts that he said were “tangible successes” that “represent the CFTC’s willingness to work in good faith with the E.U. to avoid disruption to the trans-Atlantic market.”  Cross-border regulatory recognition has been an area of priority for Chairman Giancarlo, who in February 2018 testimony before the U.S. Senate Agriculture Committee addressed efforts by some E.U. policymakers to renegotiate a 2016 equivalence agreement related to supervision of Central Counterparties, saying “[we] honor our commitments and expect others to do the same.”[17]

Looking Forward

While Chairman Giancarlo’s speech did not point to radical changes in approach, it did serve to underscore that the CFTC continues to view itself as a serious and aggressive regulator and enforcement authority.  We expect that in the coming year, the CFTC will continue to tenaciously pursue enforcement actions, particularly in the priority areas of spoofing and virtual currencies.

[1] See Keynote Address of CFTC Chairman J. Christopher Giancarlo Before FIA Annual Meeting (Mar. 14, 2018), http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo40.

[2] Id.

[3] See CFTC Orders Deutsche Bank Securities Inc. to Pay $70 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates (Feb. 1, 2018), https://www.cftc.gov/PressRoom/PressReleases/pr7692-18.

[4] See CFTC Files Eight Anti-Spoofing Enforcement Actions Against Three Banks (Deutsche Bank, HSBC & UBS) & Six Individuals (Jan. 29, 2018), http://www.cftc.gov/PressRoom/PressReleases/pr7681-18.

[5] See CFTC Charges Randall Crater, Mark Gillespie, and My Big Coin Pay, Inc. with Fraud and Misappropriation in Ongoing Virtual Currency Scam (Jan. 24, 2018), http://www.cftc.gov/PressRoom/PressReleases/pr7678-18; CFTC Charges Patrick K. McDonnell and His Company CabbageTech, Corp. d/b/a Coin Drop Markets with Engaging in Fraudulent Virtual Currency Scheme (Jan. 19, 2018), http://www.cftc.gov/PressRoom/PressReleases/pr7675-18;  CFTC Charges Colorado Resident Dillon Michael Dean and His Company, The Entrepreneurs Headquarters Limited, with Engaging in a Bitcoin and Binary Options Fraud Scheme (Jan. 19, 2018), https://www.cftc.gov/PressRoom/PressReleases/pr7674-18.

[6] 7 U.S.C. § 6c(a)(5)(C).

[7] Id. § 6c(a)(6).

[8] See Statement of CFTC Director of Enforcement James McDonald (Jan. 29, 2018), http://www.cftc.gov/PressRoom/SpeechesTestimony/mcdonaldstatement012918.

[9] Id.

[10] See High-Frequency Trader Sentenced to Three Years in Prison for Disrupting Futures Market in First Federal Prosecution of “Spoofing” (July 13, 2016), https://www.justice.gov/usao-ndil/pr/high-frequency-trader-sentenced-three-years-prison-disrupting-futures-market-first.

[11] See United States v. Coscia, 866 F.3d 782 (7th Cir. 2017).

[12] See Pet. for Writ of Cert., Coscia v. United States, No. 17A527 (S. Ct. Feb. 2, 2018).

[13] See CFTC Charges Nicholas Gelfman and Gelfman Blueprint, Inc. with Fraudulent Solicitation, Misappropriation, and Issuing False Account Statements in Bitcoin Ponzi Scheme (Sept. 21, 2017), http://www.cftc.gov/PressRoom/PressReleases/pr7614-17.

[14] See supra note 5.

[15] See supra note 5.

[16] See CFTC v. McDonnell, et al., No. 1:18-cv-00361 (E.D.N.Y. Mar. 6, 2018).

[17] Written Testimony of J. Christopher Giancarlo Chairman, Commodity Futures Trading Commission Before the U.S. Senate Agriculture, Nutrition, and Forestry Committee (Feb. 15, 2018), https://www.agriculture.senate.gov/imo/media/doc/Testimony_Giancarlo_02.15.18.pdf.