Massive Amount of Insider Trading Fraud, Front-Running and Ponzi Schemes, Says Former CFTC Enforcement Chief

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Insider Trading & Other Schemes Prevalent

The former head of enforcement at the U.S. Commodity Futures Trading Commission (CFTC) told Reuters that there is a “massive amount of misconduct” in futures, options and swaps markets. This fraud, which includes prohibited market manipulation, insider trading, front-running and Ponzi schemes, goes undetected because of insufficient data mining and exceeds the amount prosecuted currently by the CFTC. He also identified spoofing as a widespread, but illegal, practice.

The article doesn’t mention the CFTC whistleblower program, authorized by Dodd-Frank, which has made enormous strides in bringing more information to the last few years. Roughly a year ago, the CFTC issued its largest whistleblower award, paying a reward of more than $10 million to an individual for information about a violation of the Commodity Exchange Act and/or CFTC rules.

However, it does hint at one reason there have not been more rewards.  A lack of resources at the regulator is one of three reasons that the CFTC’s enforcement division declines to pursue two-thirds of the leads on misconduct that are brought to them. Approximately $50 million are set aside from the annual budget for enforcement. For 2017, about half of that operating budget would have been used up if it had brought two large cases to trial.

The limited enforcement budget obviously makes it tougher to resolve whistleblower tips successfully. The SEC has a budget of over 10 times as much – exceeding $500 million a year, and has issued more than $100 million to whistleblowers.

New Head of the CFTC

Last week, President Donald Trump announced he will nominate J. Christopher Giancarlo, the acting chairmen of the CFTC since President Trump took office, to head the CFTC. Giancarlo announced that he would conduct an agency-wide review of rules and regulations “to make them simpler, less burdensome and less costly” in line with the President’s agenda of reducing regulatory burdens. Giancarlo has announced that he supports the core Dodd-Frank reforms for derivatives, but that implementation of some of them has gone too far.

Giancarlo is one of two current commissioners. The other is Sharon Y. Bowen. The Commission typically has five appointed by the President, serving staggered five year terms. Giancarlo has acknowledged recently that there may be delays in rulemaking because of the shortage of Commissioners. Where Bowen, a Democrat, and Giancarlo, a Republican, disagree, the measure does not pass. President Trump has not yet nominated Commissioners for the other three positions.

However, this doesn’t mean that the President’s budget will set aside more funding for the CFTC.  Despite the testimony of Steven Mnuchin bemoaning the cuts to the Internal Revenue Service budget during his appointment hearing, President Trump plans to cut another 2 percent, or $239 million, from the IRS.  It is estimated that every dollar spent on the agency returns $4 in revenue.  Every dollar directed at enforcement returns $10 dollars for the federal government.

President Trump has also heavily criticized the Dodd-Frank Act, which is enforced in part by the CFTC.

Big CFTC Whistleblower Cases

The CFTC has awarded numerous whistleblowers for their assistance, but due to confidentiality provisions, the identities of these whistleblowers are not disclosed. However, some of the largest whistleblower awards from the CFTC and examples of insider trading cases include:

$30 Million Award (July 2018): The largest award by the CFTC as of 2021 was made in July 2018, when a whistleblower was awarded more than $30 million for providing key original information that led to a successful enforcement action.

$10 Million Award (March 2016): This was one of the first major awards by the CFTC. The whistleblower provided key original information that led to a successful CFTC enforcement action.

$2 Million Award (April 2020): The CFTC awarded around $2 million to two whistleblowers whose specific, credible, and timely tip led to a successful enforcement action. The whistleblowers also provided significant, ongoing assistance during the investigation.