The Order demonstrates the CFTC’s continued focus on bringing cases for violating Section 4c(a)(5)(C) of the Commodity Exchange Act, which Dodd-Frank added to the statute and which outlaws “spoofing” on any CFTC-regulated trading facility.3
Most worthy of note, however, is that the Order and, more clearly, the accompanying press release draw attention to the relatively modest sanctions imposed, which the Director of Enforcement expressly attributes to the company’s self-reporting and cooperation, including self-initiated remediation.
The Order and the press release note that the company, once aware of the conduct in question, “promptly suspended” the trader and reported the conduct to the CFTC’s enforcement division. The company also started “an expansive internal review,” as well as “assisted” in the division’s investigation. Moreover, the company also, “at the same time,” started “an overhaul of its systems and controls and implemented a variety of enhancements to detect and prevent similar misconduct,” as well as “revis[ing] its policies, updat[ing] its training, and implement[ing] electronic systems to identify spoofing.”
The CFTC’s Enforcement Director, James McDonald, states that the direct result of these steps is that the company “benefitted . . . in the form of a substantially reduced penalty.” The company was penalized $600,000. To put this in context, less than two weeks earlier, the CFTC entered a settlement with an individual, who traded from home and for himself, for spoofing over about three and a half years, in which the CFTC fined him $635,000 and imposed permanent trading and registration bans. Moreover, back in January, the CFTC settled with a major financial institution by fining it $25 million for spoofing that occurred over about 18 months, despite saying there was cooperation credit there was well.
Since the settlement in January, however, there is a new President, a new Chairman of the CFTC and a new Director of Enforcement. That Director stated in the press release in this matter that, “This case shows the benefits of self-reporting and cooperation, which I anticipate being an important part of our enforcement program going forward.” While one should not read too much into a single settlement, this case could be a harbinger of a clearer benefit to be gained by self-reporting and proactive remediation than has been discernable in the past. It will be important to watch to see if this harbinger becomes a trend; if it does, companies will need to look carefully at the value of embracing more willingly opportunities to self-report misconduct and actively engaging in substantial remediation of policies and practices, rather than waiting for the CFTC to come knocking.
Section 4c(a)(5)(C) prohibits any trading, practice or conduct on a CFTC-regulated trading facility 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).” A violation of this provision is a civil violation subject to the CFTC’s jurisdiction and is also a crime. Michael Coscia, the first person criminally indicted under the new spoofing provision, was convicted and sentenced to three years imprisonment. Mr. Coscia had previously settled civil actions related to the same spoofing allegations with the CFTC, the UK’s Financial Conduct Authority and various futures exchanges, agreeing to the payment of monetary penalties and a trading suspension. On August 7, 2017, a federal court of appeals upheld his conviction, finding that the Commodity Exchange Act’s spoofing prohibition is not unconstitutionally vague. United States v. Coscia
, No. 16-3017 (7th Cir. Aug. 7, 2017).