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Futures commission merchant fined $6M for communication failures
On August 8, the CFTC issued an order simultaneously filing and settling charges against a California-based futures commission merchant, requiring it to pay $6 million. The CFTC claims that the respondent violated the Commodity Exchange Act and Commission Regulations by “failing to maintain, preserve, or produce records required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters related to its business as a CFTC registrant.” According to the order, respondent’s employees allegedly communicated through personal text messages regarding information required to be maintained under the CFTC-mandated recordkeeping requirements. The CFTC stated that if the information were to be requested, respondent would not be able to furnish the communications promptly. The CFTC further alleged that the use of unauthorized communication was also in violation of the respondent’s own policies and procedures. In addition to the $6 million civil money penalty, the order requires the respondent to cease and desist any further violations of the commission’s regulations that were previously violated. The CFTC noted that the SEC also announced an order filing and settling charges against the merchant for “related recordkeeping and supervision violations.”
CFTC shuts down illegal trading platform
The U.S. District Court for the Northern District of California recently granted the CFTC’s motion for default judgment in an action accusing a decentralized autonomous organization of violating the Commodity Exchange Act (CEA) by operating an illegal trading platform and unlawfully acting as a futures commission merchant. (See also CFTC press release here.) The CFTC maintained that the organization’s platform and its blockchain-based software “protocol” enables users to engage in retail commodity transactions but does not provide protections or other requirements mandated under the statute. In addition to unlawfully offering leveraged and margined retail commodity transactions outside of a registered exchange, the organization is charged with failing to comply with Bank Secrecy Act obligations applicable to future commission merchants, including implementing a customer information program or conducting know your customer procedures. The default judgment requires the organization to shutter its website and remove its content from the internet, and orders permanent trading and registration bans. The organization also must pay a $643,542 civil money penalty and is enjoined from future violations of the CEA.
CFTC orders respondent to pay $6.5 million for CEA violations
On December 20, the CFTC announced a settlement with a registered futures commission merchant (respondent) for allegedly violating the Commodity Exchange Act, Commission regulations, and Bank Secrecy Act compliance requirements. According to the CFTC, the respondent allegedly “failed to implement an adequate anti-money laundering [] program, particularly as applied to a futures and options trading account controlled by [a customer],” and “failed to implement risk-based limits concerning trading by [a customer].” The CFTC also alleged supervisory and recordkeeping failures stemming from the inadequate anti-money laundering program. The respondent is ordered to pay a $6.5 million civil money penalty and undertake certain remedial measures relating to the violations.
CFTC, DOJ, SEC file charges in crypto fraud scheme
On December 13, the SEC filed a complaint against the former CEO/co-founder (defendant) of a collapsed crypto exchange for allegedly orchestrating a scheme to defraud equity investors. According to the SEC, from May 2019 to November 2022, the defendant raised over $1.8 billion from investors who bought an equity stake in his company in part because they believed his representations that the platform had “top-notch, sophisticated automated risk measures in place.” The complaint alleged, among other things, that the defendant orchestrated “a massive, years-long fraud” to conceal (i) the undisclosed diversion of customers’ funds to the defendant’s privately-held crypto hedge fund; (ii) the undisclosed special treatment afforded to the hedge fund on the company platform, including providing it with a virtually unlimited “line of credit” funded by the platform’s customers; and (iii) the undisclosed risk stemming from the company’s exposure to the hedge fund’s significant holdings of overvalued, illiquid assets, such as the platform-affiliated tokens. The complaint further alleged that the defendant used commingled funds at his hedge fund to make undisclosed venture investments, purchase lavish real estate purchases, and give large political donations. The SEC’s complaint charged the defendant with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking injunctions against future securities law violations; an injunction that prohibits the defendant from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar.
The defendant was also indicted by a grand jury in the U.S. District Court for the Southern District of New York on wire fraud, commodities fraud, securities fraud, money laundering, and campaign finance charges.
The CFTC also filed a complaint against the former CEO/co-founder, in addition to the collapsed crypto exchange and the hedge fund for making material misrepresentations in connection with the sale of digital commodities in interstate commerce. Specifically, the CFTC alleged that the exchange’s executives, at the former CEO’s direction, created a number of exceptions to benefit his hedge fund, including adding features in the underlying code to permit the hedge fund to “maintain an essentially unlimited line of credit” on the trading platform through an “allow negative flag,” which allowed the hedge fund to withdraw billions of dollars in customer assets from the company. The CFTC is seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations, as charged.
Later, on December 21, the SEC and CFTC filed charges (see here and here) against the former CEO of the hedge fund and the former chief technology officer of the collapsed crypto exchange for their roles in the scheme to defraud equity investors. The agencies stated that investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.
CFTC files charges against operators of unregistered digital asset exchange
On October 3, the CFTC filed a complaint against an individual and the four companies he controlled (collectively, “defendants”) in the U.S. District Court for the Southern District of Florida for allegedly operating a digital asset exchange that offered futures transactions on a platform other than a designated contract market. The defendants are also charged with attempting to manipulate the price of the exchange’s native token. According to the CFTC, the defendants used web-based solicitation to obtain customers even though the individual defendant was aware that such participation subjected the exchange to U.S. regulation. The CFTC also claimed that, in addition to allegedly violating certain registration and regulatory requirements, the defendants attempted to artificially inflate the price of the exchange’s “native currency.” Among other things, the defendants are also accused of failing to implement an effective AML program, know-your-customer procedures, or a customer information program to verify the identifies of the customers who purchased the digital assets. The complaint charges the defendants with violations of the Commodity Exchange Act (CEA), and seeks full restitution, disgorgement of ill-gotten gain, civil penalties, permanent trading and registration bans, and a permanent injunction against further CEA violations.
CFTC alleges crypto promoter’s digital asset trading scheme violates CEA
On August 12, the CFTC filed charges against an individual and his two Ohio-based cryptocurrency promotion companies for allegedly violating the Commodity Exchange Act and Commission regulations by soliciting more than $1 million in a digital asset trading scheme. The complaint alleged that the defendants made false and misleading statements in their solicitations to customers, including profit guarantees and claims concerning the individual defendant’s supposed success as a digital asset trader. According to the complaint, customers were guaranteed that they would not lose their initial investment and would be able to withdraw their initial investment and alleged profits at any time; however, defendants allegedly refused to allow existing customers to withdraw these funds, stopped communicating with customers, and manufactured excuses as to why funds were not returned. The complaint also contended, among other things, that the defendants omitted material facts, including that the defendants “misappropriated customer funds to pay purported profits to other customers in a manner akin to a Ponzi scheme,” misappropriated customer funds to pay for the individual defendant’s lifestyle, and commingled customer funds with personal bank and digital asset trading accounts. The CFTC seeks: (i) restitution for defrauded investors; (ii) disgorgement; (iii) civil monetary penalties; (iv) permanent registration and trading bans; and (v) a permanent injunction from future violations.
CFTC charges South African fund with CEA violations
On June 30, the CFTC filed charges against a South African investment fund and its CEO for an allegedly fraudulent scheme that raised over $1.7 billion worth of Bitcoin from the public in violation of the Commodity Exchange Act (CEA) and CFTC Regulations. The complaint alleged that the CEO used various websites and social media to fraudulently solicit bitcoin from public participants to participate in a commodity pool controlled by the company, and “purportedly traded off-exchange, retail foreign currency (‘forex’) on a leveraged, margined and/or financed basis with participants who were not eligible contract participants (‘ECPs’) through a proprietary ‘bot’ or software program.” The CFTC is seeking: (i) full restitution for defrauded investors; (ii) disgorgement; (iii) civil monetary penalties; (iv) permanent registration and trading bans; and (v) a permanent injunction from future violations.
CFTC awards $625,000 to whistleblowers
On March 28, the CFTC announced approximately $625,000 in awards to four whistleblowers whose information led the agency to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants “provided the Commission with original information,” and “each provided ongoing cooperation and assistance to Division staff, which significantly contributed to the success of the Covered Action.” One claimant received a higher award percentage to recognize that he or she provided the highest level of ongoing assistance and cooperation.
The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping prosecute enforcement actions leading to more than $3 billion in monetary sanctions.
CFTC awards $10 million to whistleblower
On March 18, the CFTC announced an approximately $10 million award to a whistleblower whose information led the agency to a successful Commodity Exchange Act enforcement action. According to the CFTC, the claimant voluntarily provided original, “useful information at the earliest stages of the investigation and later provided supplemental information.” The associated order also noted that because of the claimant’s allegations, CFTC staff were able to draft the earliest round of subpoenas.
The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping the CFTC prosecute enforcement actions leading to more than $3 billion in monetary sanctions.
CFTC awards $500,000 to whistleblowers
On March 10, the CFTC announced awards totaling approximately $500,000 to two whistleblowers who “separately provided significant information and substantial assistance” that led to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants voluntarily provided original information, which began an underlying investigation and “significantly contributed to the success” of the enforcement action.
The CFTC has awarded approximately $300 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, and whistleblower information has led to nearly $3 billion in monetary relief.