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CFTC orders unregistered respondents to pay $2.6 million for fraudulent solicitations
On February 23, the CFTC announced a $2.6 million settlement with a North Carolina-based company and its president for allegedly acting as unregistered commodity trading advisors and commodity pool operators, and for advertising without making required disclosures. Among other things, the respondents allegedly engaged in binary options solicitation and trading fraud through the operation of two webpages and related social media channels. According to the CFTC, the respondents made numerous false statements to solicit business, which claimed that traders could choose from the company owner’s winning strategies to earn significant profits. However, the CFTC stated that the owner was not actually a successful trader and had an overall losing trading record. Additionally, the respondents distributed client testimonials and training videos without providing disclosures required under CFTC regulations. As a result, ten participants lost roughly $410,000 in a managed account trading pool, while approximately 1,600 customers lost at least $945,000 through fraudulent solicitations for binary options signals, trainings, and strategy course offerings. While the respondents did not admit or deny any of the allegations, they agreed to pay $409,965 in restitution, $896,673 in disgorgement, and a $1,306,638 civil monetary penalty. Additionally, the respondents must cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations. The order also permanently bans the respondents from trading on, or trading subject to, the rules of any CFTC-registered entity, and from engaging in any activities requiring CFTC registration. Respondents are also prohibited from, directly or indirectly, entering into any transactions involving commodity interests.
Five agencies launch effort to address romance scams
On February 7, the CFTC, FinCEN, CFPB, ICE, and U.S. Postal Inspection Service launched the nationwide awareness effort “Dating or Defrauding?” to remind the public about the ongoing dangers of romance scams that target individuals through dating apps or social media. The agencies draw attention to new types of scams that have costs victims millions of dollars, and highlight recent FTC studies showing that 2020 was a record year for romance scams with the number of these types of complaints continuing to increase in 2021. According to a January FTC blog post (covered by InfoBytes here), more than 95,000 people reported about $770 million in losses to fraud initiated on social media platforms in 2021, with investment scams and romance scams having the most reported dollars lost. A recent FTC data spotlight showed that consumers reported losing $547 million to romance scams in 2021 alone. The agencies’ initiative provides guidance on how to recognize scams before individuals give away any money or assets, as well as measures to take if they have been victimized.
Agencies file lawsuit in scheme targeting the elderly
On February 1, the California Department of Financial Protection and Innovation (DFPI), along with the CFTC and 26 other state regulators, announced a complaint against a precious metals dealer and its owner (collectively, “defendants”) for allegedly perpetrating a $68 million fraudulent scheme against more than 450 individuals nationwide, specifically against the elderly. According to the complaint, the defendants allegedly utilized false statements on its website regarding the risk and safety of their traditional retirement accounts and used fear tactics to convince senior citizens to purchase the precious metals. The complaint alleged that the company violated the federal Commodity Exchange Act by targeting the elderly and advising them to dissolve their savings and traditional retirement accounts in order to purchase their highly inflated and overpriced products, and that defendants had misrepresented their credentials and advised customers that the products were “a safe and conservative investment.” The complaint seeks disgorgement, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act, state regulatory laws, and CFTC regulations.
The same day, the SEC filed a complaint against the defendants in the U.S. District Court for the Central District of California for allegedly violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctions, disgorgement, plus interest, and civil penalties.
CFTC issues no-action letter on compliance date for swap data
On January 31, the CFTC issued a no-action letter on the compliance dates for the November 25, 2020 amendments to the swap data reporting rules. According to the letter, the CFTC’s Division of Data does not recommend that the Commission take enforcement action against market participants “for failure to comply with the Amendments before December 5, 2022, and for failure to comply with the Block and Cap Amendments before December 4, 2023, provided that the entity comply with the Parts 43, 45, 46, and 49 regulations that were in effect on January 1, 2021.” A statement released by CFTC Commissioner Dawn D. Stump noted that she “expect[s] market participants to work diligently toward resolving the operational and technological issues they have encountered in complying with the Amendments,” and that she hoped the efforts will “better align swap data reporting rules internationally [and] will at last permit much needed international deference among the various regulatory bodies who long ago committed to improving swap data for the benefit of these global markets.”
Agencies adjust civil penalties to account for inflation
Recently, the CFPB, CFTC, FDIC, FinCen, FHFA, and OCC provided notice in the Federal Register regarding adjustments to the maximum civil money penalties due to inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Each notice or final rule (see CFPB here, CFTC here, FDIC here, FinCen here, FHFA here, and OCC here) adjusts the maximum amounts of civil money penalties and provides a chart reflecting the inflation-adjusted maximum amounts associated with the penalty tiers for particular types of violations within each regulator’s jurisdiction. The OCC’s adjusted civil money penalty amounts are applicable to penalties assessed on or after January 12. The new CFPB, CFTC, FDIC, and FHFA civil money penalty amounts are applicable to penalties assessed on or after January 15. FinCEN's adjusted civil money penalty amounts are effective January 24.
CFTC revises LIBOR transition no-action letters
On December 22, the CFTC announced that the Division of Clearing and Risk (DCR), Division of Market Oversight (DMO), and Market Participants Division each issued revised no-action letters (see 21-26, 21-27, and 21-28) to swap dealers and other market participants associated with the transition from swaps that reference LIBOR and other interbank rates to swaps that reference alternative benchmarks. As previously covered by InfoBytes, the United Kingdom’s Financial Conduct Authority announced the dates that all LIBOR settings will cease to be provided by any administrator and will no longer be representative. All sterling, euro, Swiss franc and Japanese yen settings, and one-week and two-month U.S. dollar settings ceased immediately after December 31, 2021, while all remaining U.S. dollar settings will cease immediately after June 30, 2023. Therefore, according to the recent CFTC announcement, the DMO and the DCR letters are effective until June 30, 2023 “for swaps otherwise covered by such letters to the extent such swaps reference one of the 2023 USD LIBOR Settings.”
U.S.-UK financial regulators discuss bilateral issues
On December 17, the U.S. Treasury Department issued a joint statement covering the recently held fifth meeting of the U.S.-UK Financial Regulatory Working Group (Working Group). Participants included officials and senior staff from both countries’ treasury departments, as well as regulatory agencies including the Federal Reserve Board, CFTC, FDIC, OCC, SEC, the Bank of England, and the Financial Conduct Authority. The Working Group discussed, among other things, (i) international and bilateral cooperation; (ii) “emerging regulatory approaches and the need to promote multilateral cooperation and alignment given that a number of third-party providers operate cross-border to provide services to the financial sector and there are potential risks of regulatory fragmentation”; (iii) “risks associated with regulatory driven fragmentation in derivatives clearing and banking markets”; (iv) “efforts in relation to the LIBOR transition, market developments, the risks associated with newly created credit-sensitive rates, and transition implications for other jurisdictions;” and (v) the management of climate-related financial risks and other sustainable finance issues. According to the statement, Working Group participants will continue to engage bilaterally on these issues and others ahead of the next meeting planned for this spring.
SEC, CFTC settle with national bank’s subsidiary
On December 17, the SEC announced charges against a subsidiary limited liability company of a national bank for Securities Exchange Act violations because the firm and its employees allegedly failed to maintain recordkeeping requirements. According to the order, from at least January 2018 through at least November 2020, the company’s employees communicated about securities business matters on their personal devices, using text messaging applications and personal email accounts. These communications were not maintained or preserved by the company, and some were not able to be furnished promptly to a Commission representative when requested, allegedly in violation of Section 17(a) of the Exchange Act and Rules 17a4(b)(4) and 17a-4(j) thereunder. Additionally, the company’s “widespread failure to implement its policies and procedures which forbid such communications led to its failure to reasonably supervise its employees within the meaning of Section 15(b)(4)(E) of the Exchange Act.” The company received subpoenas for documents and records requests in numerous Commission investigations during the time that it failed to maintain required securities records relating to the business. In its response to the subpoena requests, the bank allegedly did not search for relevant records contained on the personal devices of its employees. The order further noted that because the company’s “recordkeeping failures impacted the Commission’s ability to carry out its regulatory functions and investigate potential violations of the federal securities laws across these investigations, the Commission was often deprived of timely access to evidence and potential sources of information for extended periods of time and, in some instances, permanently.” According to the SEC, the company admitted the facts set forth in the SEC’s order and acknowledged that its conduct violated the federal securities laws, and agreed to: (i) pay a $125 million penalty; (ii) implement robust improvements to its compliance policies and procedures, including retaining “a compliance consultant to, among other things, conduct a comprehensive review of its policies and procedures relating to the retention of electronic communications found on personal devices and [the company’s] framework for addressing non-compliance by its employees with those policies and procedures”; and (iii) cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-4 thereunder.
The same day, the CFTC announced a $75 million settlement with the company, the national bank, and its public limited company (collectively, “respondents”) for allegedly failing to maintain, preserve, and produce records that were required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters associated with its businesses as CFTC registrants. According to the CFTC order, from at least 2015, the respondents’ employees internally and externally communicated on unapproved channels, and had messages related to the respondents’ businesses as CFTC registrants that were required to be maintained under CFTC-mandated recordkeeping requirements. The order also noted that the written communications were not maintained and preserved by the respondents, and they were not able to be furnished promptly to a CFTC representative when requested. The order further alleged that the widespread use of unauthorized communication methods by the respondents’ employees to conduct firm business violated their own policies and procedures. The respondents also did not maintain adequate internal controls with respect to business-related communications on non-approved communication methods. The order requires the respondents to pay a $75 million civil monetary penalty, to cease and desist from further violations of recordkeeping and supervision requirements, and to engage in specified remedial undertakings.
CFTC awards $200 million to whistleblower
On October 21, the CFTC announced an approximately $200 million whistleblower award to a claimant who reported “specific, credible, and timely” information that contributed to an already open investigation, which led to a successful Commodity Exchange Act (CEA) enforcement action, as well as to the success of two related actions by a U.S. federal regulator and a foreign regulator. The associated order notes that the claimant voluntarily provided original information that led the CFTC to important, direct evidence of wrongdoing. According to the announcement, “to qualify for an award, a whistleblower who significantly contributed to the success of an enforcement action must demonstrate that there is a ‘meaningful nexus’ between the information provided and the CFTC’s ability to successfully complete its investigation, and to either obtain a settlement or prevail in a litigated proceeding.” The Commission determined the whistleblower met this standard. However, because the whistleblower’s information was never shared with the state regulator, the claim associated with a third related action by the state regulator was denied. In a statement released by CFTC Commissioner Dawn D. Stump, the Commissioner expressed her disagreement with the Commission’s award to the claimant with respect to the foreign regulator’s action. She concluded that there needs to be “an especially close look at cases where a whistleblower asks the Commission to tap its limited Customer Protection Fund for an award relating to an action by a foreign futures authority to address harm outside the United States.”
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.
CFTC announces a $500,000 fine for swap dealer
On October 14, the CFTC announced a $500,000 settlement with a non-U.S. provisionally registered swap dealer to resolve claims that it failed to comply with certain swap dealer recordkeeping requirements. Among other things, the institution allegedly failed to retain certain audio recordings for the time required under CFTC regulations. In addition to the civil monetary penalty, the institution must cease and desist from further violations of the CFTC regulations and must continue its remediation efforts.