Enforcement Trends at the Commodity Futures Trading Commission


– Good evening, everyone, welcome. Thank you all for coming. I’m Allison Caffarone,
the Executive Director of NYU’s Program on Corporate
Compliance and Enforcement. Before we get started
tonight, just because so many of our PCC events in the
past are off the record and they are not taped,
I just wanna make clear that tonight’s event we’re
operating under different rules. Tonight’s event is on the
record, the press is here. Mr. McDonald’s speech will be recorded and while the questions and
answers after the speech will not be recorded, the
press is still going to be in the room for the
entirety of the event. – [Man] It’s all taped. – Yeah, thanks, thank you. So with that out of the
way, it is my great pleasure to welcome James McDonald,
the Director of Enforcement for the CFTC. Mr. McDonald joined the CFTC in April 2017 after serving as an Assistant
U.S. Attorney in the SDNY, most recently in the
public corruption unit. Earlier in his career, Mr.
McDonald served as a law clerk to Chief Justice Roberts on
the United State Supreme Court and before that as a law clerk to the Honorable Jeffrey Sutton, Junior on the U.S. Court of Appeals
for the Sixth Circuit. A graduate of Harvard College
and the University of Virginia School of Law, Mr.
McDonald previously served in the Office of White House Counsel as a Deputy Associate Counsel and worked at the law firm
of Williams & Connolly. He has also served as a
visiting assistant professor in his hometown at the University
of Tulsa College of Law where he taught constitutional law, federal courts, foreign relations law, and Supreme Court decision-making. Please join me in welcoming Mr. McDonald. (audience applauding) Thank you. – Thank you for that introduction. I’m happy to be back here at NYU today. Over the past few years,
this program in particular, the Program on Corporate
Compliance and Enforcement, has brought together
some of the best thinking in enforcement, business,
and the academic communities and it’s been a driver of
some of the most significant developments in
enforcement and compliance. We’ve followed these
developments closely at the CFTC. At every stage of our agency’s history, we’ve sought to bring
impactful enforcement actions in the markets that we regulate and to ensure that we stand
ready to meet the challenges presented by our ever-evolving markets. Our most recent challenge
has included responding to the dramatic expansion
of our jurisdiction under Dodd-Frank in the wake
of the financial crisis. Under David Meister, who’s here today, the first Director of
Enforcement after Dodd-Frank, the division literally wrote the rules that set out some of our new
enforcement jurisdiction. With the next director Aitan
Goelman, who’s also here today, the division brought
first-of-their-kind cases under these new rules, and under the leadership
of both directors, we began to define our major priorities and to develop some of the
initiatives that we rely on today, like the division’s
Cooperation Program. That’s one of the things
that I’ll talk about today. Thanks to their hard work,
and that of the dedicated career civil servants
that staff the division, we’re well-positioned today
to build on those priorities and those initiatives. As part of this effort,
we’re consistently serving the enforcement world, to
identify best practices, and to incorporate them into
our enforcement program. The work of the Program
on Corporate Compliance and Enforcement here at
NYU has been particularly helpful to us in that regard. In fact, it was a little
more than a year ago that I was here in this same
room with this same program and we were talking about
some of the same priorities at the CFTC, and we
emphasized in particular the development of the
division’s cooperation and self-reporting program. But a lot’s happened at
the CFTC in the last year, so my plan tonight is to do three things. First to give you an update
on what we in the division have been up to over the last year. Our more recent fiscal
year closed September 30th. Tonight in connection with this speech, we’re releasing an annual
report of the division which details our work
over the last fiscal year. To save you the suspense, the report shows that by any measure enforcement
during the last fiscal year has been among the most vigorous
in the history of the CFTC. The second thing I’ll do tonight, is I’ll outline some
of the major priorities and initiatives that have guided us over the last fiscal year and that will guide us going forward. And finally, I’ll offer an
update about some recent developments in our cooperation
and self-reporting program which was the subject
of my talk last year. So to start, I’ll offer an
overview of the last fiscal year. Before I begin, let me
just take a step back and talk for just a minute about the way that we measure success in the division. Any time we talk about year-end results, some of that discussion
necessarily includes numbers, but a strong enforcement program is about more than just numbers. It’s about preserving market integrity, protecting customers,
and deterring misconduct before it happens. It’s about being tough to be sure, but it’s also about being fair, and it’s about allocating
resources efficiently to ensure that our efforts target the most pernicious forms of
misconduct in our markets. These sorts of things cannot be measured by numbers alone, and that’s a good thing. Federal agencies shouldn’t be motivated to hit certain numbers
when enforcing the law. But at the same time, we
recognize that numbers do tell part of the story. They might help show the
direction an enforcement program is heading, they might
reflect the types of cases that stand as priorities,
or they might offer some perspective on a
program’s broader goals. So in our annual report and this evening, we seek to offer some quantitative but also qualitative measures
that tell the full story of our enforcement program. The annual report, which is
available to all of you tonight, walks you through all these numbers so I won’t belabor them here but I’ll share with you the headline. This was a year of incredibly
vigorous enforcement at the CFTC, that’s true
whether you measure it by the number of cases filed, by the amount of penalties imposed, by the number of large scale matters, the types of cases charged,
or the percentage of cases that include individual charges. For more details on these numbers, I refer you to the annual report and I encourage you to read it. But what I’m gonna do for
the rest of the evening is take you behind the numbers. To walk you through how these numbers reflect our priorities and how we’ve begun or continued initiatives to
advance these priorities. So let’s start with the priorities. Our enforcement program over the last year largely centered around four priorities. Preserving market integrity,
protecting customers, promoting individual accountability, and enhancing coordination
with other regulators and criminal authorities. Let’s say a few words about each of those. First, preserving market integrity. When our markets are functioning well, producers are able to hedge the risk that this year’s crop output might not be as good as the last,
which protects them and consumers against
unexpected price movements. And entities and individuals can allocate capital more
efficiently which contributes to the growth of the
broader American economy. But these markets won’t function well if participants don’t have confidence in the integrity of the market. That’s why at the division we’ve focused on detecting, investigating,
and prosecuting misconduct that has the potential to
undermine this integrity. Misconduct like manipulation, spoofing, and disruptive trading. The work of the division
over the last fiscal year reflects this priority. During that fiscal year, fiscal year 2018, we brought more cases involving
this type of misconduct than ever before. From 2009 to 2017, the CFTC on average brought about six of these cases each year and the last fiscal year we filed 26. Many of these cases required us to address particularly complex or novel
patterns of manipulation, including those that cross
markets, cross exchanges, even cross international borders. Others have required us to
adapt to relatively new forms of manipulative conduct like
those that abuse technology or that seek to manipulate the structure of the electronic order book. But we’ve made acting against
this type of misconduct a priority regardless of
how complex or difficult. So the second priority I
mentioned, protecting customers. Since its inception, the CFTC has focused on protecting customers in our markets from fraud or other forms of abuse. That focus remained a
priority this last fiscal year and it will remain a top
priority going forward. The division aggressively prosecuted fraud in some of these traditional areas like precious metals,
forex binary options, but this last fiscal year we
also saw fraudsters evolve as they sought to use new
products or new technologies to target unsuspecting customers in markets like virtual currencies. We’ve worked hard to
ensure that we’re evolving with these bad actors and
indeed staying one step ahead. We saw success in this area as well. In one of the largest
binary options frauds ever charged by the CFTC, we
charged a massive national and international binary options ring which allegedly harmed
approximately 75,000 victims. We charged numerous cases involving fraud in connection with virtual currencies. We charged one case that started out as a binary options fraud and then morphed into a virtual currency
fraud during the lifetime of the scheme and we’ve taken these cases to trial when necessary, winning significant trial
victories during this past fiscal year including
a precedent-setting victory in a trial involving bitcoin fraud here in the Eastern District of New York. So that’s preserving market integrity and protecting customers. What about our effort to promote
individual accountability? A consensus has now
developed in the enforcement and business communities that
individual accountability must sit at the center of any
effective enforcement program. Some of this was developed right here at the PCCE here at NYU. Just a few years ago the
Deputy Attorney General Sally Yates released her,
released what’s now known as the Yates Memo at a talk
here as part of this program. We at the CFTC share in this consensus. It’s not enough simply to hold responsible companies accountable,
though that’s part of it. The responsible individuals
must be held accountable too. Individual accountability
ensures that the person committing the illegal act is
held responsible and punished. It deters others. Fearful of facing individual punishment from breaking the law in the future, it incentivizes companies to
develop cultures of compliance and to report to regulators
when they find bad actors in their entity, and it
promotes the public’s confidence that we are achieving justice. In pursuing individual accountability, we must look even beyond the employee who actually committed the wrongful act. We must also seek to hold
accountable the supervisors and others in control who
may be culpable as well. We prioritized individual accountability during this last year
with 2/3, more than 2/3 of our cases involving
charges against individuals. We charged individuals at
financial institutions, proprietary trading
firms, and managed funds. We charged primary
wrongdoers and also those who facilitated or aided
and abetted that misconduct. And we used all available
theories of liability to help us reach up the chain, like supervisory and
control person liability which led to charges against supervisors, desk heads, CEOs, and a
chairman of the board. Finally during the last year, we prioritized coordination
and enhancing our coordination with other regulators
and criminal authorities. We can most effectively
protect our markets when we’re working closely
with our colleagues in the enforcement and
regulatory community both domestic and international. That’s particularly true
as our markets evolve and as they become more interconnected. Bad actors, it turns out,
don’t conform their misconduct to the technical boundaries
of different jurisdictions or international borders. So regulators here in the
United States and abroad have to work together to
ensure that the misconduct is identified, is
investigated, and prosecuted. This approach yielded
results for us last year as we investigated and
filed a number of actions in parallel with our regulatory and enforcement counterparts, some of which are detailed
in the annual report. Particularly noteworthy, I think, is our expanded effort to
charge cases in parallel with our criminal law
enforcement partners. During the last fiscal
year, we filed more cases in parallel with our criminal
counterparts than ever before. These include cases
that range from spoofing to retail fraud to virtual currency fraud to manipulation of global benchmarks, to efforts to obstruct
our CFTC’s investigation, and that’s just to name a few. This means that wrongdoers in our markets now face the reality, not
just of substantial fines, but also in appropriate
cases of the prospect of criminal prosecution. This marks a trend that we
expect to continue going forward and we believe will
significantly deter wrongdoers from committing misconduct
in our markets going forward. So those are, that’s four major priorities that have guided our enforcement
program going forward. How have we advanced them? We’ve advanced them by
beginning or continuing several key initiatives
during the last fiscal year. Gonna talk about a few of them. The first is data analytics. Anyone in our markets
knows that these markets are going through a revolution. A revolution from analog to digital, from pit trading to
electronic order books, from human trading to algorithmic, from standalone trading centers to interconnected trading webs. Emerging digital technologies
are impacting trading markets in the entire financial landscape with far-ranging implications for capital formation and risk transfer. We’ve worked hard to keep pace with this technological change and to ensure we stand at the cutting edge of the data analytics world. We’ve primarily done this in three ways, by increasing the amount
of data that’s available to the division, by ensuring
that we in the division have the tools necessary
to assess, evaluate, and analyze this data, and
by developing human capital in the division so that
we can marshal this data to uncover and prosecute
illegal conduct in our markets. Perhaps the most notable
development in this area is the realignment within the commission to move the market surveillance
unit into enforcement from the division of market oversight where it previously sat. Another of our initiatives
involves the creation of specialized task forces. During the last fiscal year
we expanded the foundation of our enforcement program into new areas where we saw or suspect misconduct, areas like spoofing virtual
currency and insider trading. Developing our program in
these new areas, though, presented us with a new challenge. How do we move as quickly as required while ensuring that each of our teams across each of our offices
approaches the matter in a smart and consistent way? Our answer was to develop a
set of specialized task forces within the division. This is designed to ensure consistency, identify best practices,
develop new approaches and ideas based on lessons learned. Each task force includes
members from each of our offices in Chicago, Kansas City, New
York, and Washington, D.C. And these task forces focus
on four substantive areas. The first is spoofing
and manipulative trading or manipulative conduct. A little more than a decade
ago, our markets moved from in-person trading to the pit, in-person trading in the
pit to electronic trading in an electronic order book. The advent of the electronic
order book brought with it significant benefits. It increased information available, reduced friction in trading,
and significantly enhanced the price discovery process
but at the same time that technological development has presented new
opportunities for bad actors. Just as the electronic order
book increases the information available to traders, it
creates the possibility that false information
injected into the order book could trick those
traders to trade in a way that benefits the bad actor. The Spoofing Task Force works
to preserve the integrity of these markets from
that type of misconduct. The second task force that we created relates to virtual currencies. The story of virtual currency
is also about technology. And it’s a story about the
need for robust enforcement to ensure technological
development isn’t undermined by the few who might seek to capitalize on this development for unlawful gain. New and potentially market
enhancing technologies like virtual currency and the
distributed ledger technology need breathing space to
survive and through the work of the CFTC, the agency has
shown that it’s committed to facilitating
market-enhancing innovation in the FinTech space, but part
of that commitment includes acting aggressively to root
out fraud and manipulation where we see it in these markets. The Virtual Currency
Task Force is dedicated to identifying misconduct in these areas and to holding the bad actors accountable. The third task force
focuses on insider trading and protection of
confidential information. Illegal use of confidential information can significantly
undermine market integrity and harm customers in our markets. This type of misconduct could include misappropriating confidential information, disclosing a client’s trading position, front running or using
confidential information to unlawfully prearrange trades. As we continue to build the foundation of our enforcement program,
we’ll continue to work to ensure that our market participants are not misappropriating
client information or confidential information
for their own benefit. Finally, the Bank Secrecy Act Task Force works to ensure that
our registrants comply with their Bank Secrecy Act obligations and their Anti-Money
Laundering obligations. These include things like filing required suspicious activity
reports, and following the Know Your Customer program rules and other requirements that are associated with those programs. Each of these task forces I expect will play a significant role in our enforcement program going forward. So that’s the priorities,
those are the initiatives, there’s one more thing I
wanna talk about tonight and that’s what I talked about last year. Our cooperation and
self-reporting program. And I wanna talk to you about some recent developments in this area. Last year we explained
our view that this program would serve as a powerful tool to hold wrongdoers in
our markets accountable. We explained that the program is designed to get companies and individuals who know about the misconduct to tell us about it, to enable us to identify
all those involved in the wrongdoing and
to allow us to prosecute the most culpable
individuals and companies. It’s a tool that originated
in organized crime and gang prosecutions and has
been employed aggressively and with success in white
collar prosecutions as well. We’ve now incorporated
this tool as part of our enforcement efforts at the CFTC. We’re still just getting started, but the early returns look good. Through the end of the last fiscal year, we had issued three significant orders that involved self-reporting. Each included a civil monetary penalty that reflected a significant reduction on account of the self-report
cooperation and remediation. We also employed our
individual cooperation program to sign up individuals
to cooperation agreements which also led to
significantly reduced penalties for those individuals,
some of which even included no civil monetary penalty. When we announced the
program, we made clear that it shouldn’t be viewed
as giving anybody a pass. That’s been borne out over the last year. This past year we filed cases against more financial institutions than
all prior years but one. We brought charges against
several individuals who work at those institutions,
and through our cooperation and self-reporting program, we were able, we’ve been able to charge
companies and individuals including supervisors
and senior management that we otherwise might not
have been able to charge but for our cooperation and
self-reporting programs. What’s more, this program
is continuing to grow. We’ve just started the new fiscal year, yet already we’ve had two
significant new developments. The first involved spoofing
and manipulation charges against a defendant
named Kamaldeep Gandhi, formerly a trader at several
proprietary trading firms. As part of our investigation, Gandhi agreed to cooperate with the CFTC and entered into a cooperation
agreement with the division. Under the terms of the agreement, Gandhi admitted to his own conduct and told the CFTC about
others who were involved. Among other things, Gandhi’s
cooperation agreement binds him to continue to cooperate
throughout the course of the CFTC’s broader investigation. Because Gandhi’s
cooperation was not complete at the time of the
resolution with the CFTC, the agency, the commission,
bifurcated Gandhi’s case. The commission decided
liability in an order issued in October, but
left the amount of penalty to be determined at a later date once Gandhi’s cooperation is complete. This bifurcation mirrors
the criminal process where the guilty plea comes first and the sentencing comes later, typically after cooperation is complete, at least in most jurisdictions. And bifurcation allows the CFTC
to consider the entire range of cooperation when it’s
determining his penalty. Gandhi’s case stands as an
example of the sorts of tools that we’ll employ to
ensure that we can use our cooperation program in the
most effective way possible. That’s the first time
that we bifurcated a case at the commission level on account of an individual’s cooperation, but I expect that you’ll see more of that in these types of cases going forward. The second major development
on the cooperation and self-reporting front involved a case that we announced last week involving a former managing
director at Deutsche Bank named Jacob Bourne. During the summer of 2017,
Bourne mismarked the valuations of swaps in an attempt to cover up more than $10 million in trading losses. The mismarked swaps were then
reported to counterparties and to the CFTC. Deutsche Bank’s internal
controls identified the discrepancies in
Bourne’s swap valuations and having caught these discrepancies the bank conducted an
internal investigation, which determined that Bourne
had mismarked the swaps in question and then altered
documents to cover it up. The bank moved quickly
to reach this conclusion. It identified the
discrepancies less than a week after Bourne began mismarking the swaps and it reach its conclusion
that they were in fact mismarked less than a month later. Three days after that,
the bank self-reported Bourne’s conduct to the
Division of Enforcement and to the CFTC. The bank then proactively
cooperated with the CFTC and remediated to make sure the
conduct didn’t happen again. Bourne was placed on administrative leave and then ultimately terminated. The CFTC brought an action against Bourne for fraud arising out of his mismarking. But the division declined
to prosecute the bank on account of its self-reporting, cooperation, and remediation. The declination letter is
available on the CFTC’s website. It includes more detail
than I’ve just provided. I recommend that you read it. But stepping back just a bit, the take away here is this is how the self-reporting
program is supposed to work. We want companies to have
sufficient internal controls in place to catch
wrongdoing when it happens. When they find misconduct,
we want them to take appropriate remedial
steps to fix the problem to make sure it won’t happen again. And yes, we want them to tell us about it and we want them to cooperate proactively in our investigation. If they do that, the individuals involved who are ultimately
responsible can be prosecuted as Bourne was here, but
the company will gain a substantial benefit as a
result of its self-report, cooperation, and remediation,
and in extraordinary cases the company may receive a declination of prosecution altogether. Stepping back even further, though, this really goes to the
heart of what we’re trying to achieve with our enforcement
program more generally. The end goal for us in enforcement, it extends well beyond
the number of cases filed or the amount of penalties imposed. We intend for an enhanced emphasis on individual accountability, cooperation, and self-reporting together
with the other priorities I’ve discussed tonight to have
a far broader social impact. Our end goal is to foster a
true culture of compliance among our market participants. When we talk about a culture
of compliance, what do we mean? Think about it this way. Imagine a CEO standing in front
of the company’s new hires on their first day on the job. Imagine the CEO telling the new staff about the various trainings to come as part of the onboarding process. Compliance, ethics, human
resources, and the like. And imagine the CEO telling the new staff that notwithstanding
these various internal company regimes, if they break the law their problems won’t stop
with the compliance, ethics, or human resources department. Their problems will come from the CFTC and perhaps even the Department
of Justice or the FBI. That’s because, the CEO tells staff, the company is committed to
identifying any misconduct and to reporting it to
the relevant authorities when they find it. That’s the sort of commitment
we’re trying to foster here, that’s the sort of commitment that creates the culture of compliance
that we wanna see in our market participants
and that’s the end goal for our enforcement actions. We believe this past
fiscal year particularly when viewed in light of the
robust enforcement program we’ve built over the years, we think that that shows that
we’ve taken significant steps towards achieving this culture
of compliance in our markets and we’ll work hard during
the next fiscal year to help ensure that that trend continues. Thank you. (audience applauding)

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