The CFTC Whistleblower Program
The Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) was created as an independent agency of the federal government in 1974 and operates under the statutory framework of the Commodity Exchange Act of 1936. The CFTC has exclusive jurisdiction over futures trading in all commodities.
Since the creation of the CFTC, futures markets have expanded to encompass a wide array of commodities beyond the agricultural sector, including items such as gold, oil and certain financial instruments. The Commodity Exchange Act also defines “commodity” to includes “all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”
Following the financial crisis of 2008, the CFTC’s authority was expanded to include regulation of the swaps market, which involves privately traded contracts in the over-the-counter market.
The CFTC Whistleblower Program
The CFTC Whistleblower Program was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Since that time, the Commission has recovered more than $3 billion and awarded nearly $300 million to whistleblowers.
The CFTC and SEC whistleblower programs share many of the same rules and procedures for evaluating information received from whistleblowers. For example, both agencies have claims review staff who are responsible for issuing preliminary determinations and performing initial assessments for the grant or denial of an award. The SEC and CFTC programs also both allow whistleblowers to review the record in their case and contest the denial of an award at the preliminary determination stage.
The CFTC Whistleblower Program offers rewards of between 10% and 30% to eligible whistleblowers who provide original information or analysis that leads to a recovery of monetary sanctions exceeding $1 million. Whistleblowers are also eligible for a monetary award if their information results in the successful enforcement of a “related action” brought by certain other governmental entities. A related action does not, however, include an award issued by the SEC’s whistleblower program.
In Fiscal Year 2021, the CFTC issued whistleblower awards totaling more than $3 million. The Commission issued 65 Final Orders that involved 74 whistleblower award applications during the same period. Of the 74 applications to the CFTC, monetary awards were issued to 6 whistleblowers while the remaining 68 applications were denied.
CFTC Whistleblower Investigations and Enforcement Actions
CFTC investigations are typically complex and often involve multiple companies within a specific industry. The investigations sometimes take several years before a final decision is made to pursue an enforcement action or close an investigation. Because of the length of its investigations, the CFTC will accept information from a whistleblower even after an investigation has commenced.
A whistleblower’s identity, as well as any information provided by that whistleblower, is kept confidential unless disclosure is required as part of a judicial or administrative action. Unlike the False Claims Act where the Department of Justice can decline to intervene in a qui tam action, the CFTC must prosecute an enforcement action once it files charges against an individual or company.
The CFTC Whistleblower Office created an outreach campaign to educate and encourage potential whistleblowers to report suspected fraud in commodities markets. One aspect of the campaign involves publication of “CFTC Whistleblower Alerts” which focus on issues of current concern, recent investigations, and enforcement actions. The Whistleblower Alerts have covered topics such as anti-money laundering, foreign corrupt practices, insider trading, virtual currencies, and fraudulent practices in the commodities and derivatives markets.
The CFTC posts Notices of Covered Actions on its website for each case where more than $1 million in sanctions is recovered. The Covered Actions often include violations related to the Commission’s recent enforcement actions. A number of the CFTC’s enforcement actions in FY 2021 involved cryptocurrencies and digital assets, such as:
- A private limited U.K. company, that never registered with the CFTC, solicited customers to deposit their Bitcoin with the company for the purpose of trading. The company misappropriated the Bitcoin while falsely representing to customers that they were earning profits through the company’s trades.
- A company fraudulently solicited funds from members of the public to participate in schemes involving trading commodity interests in binary options. The company made material misrepresentations and omissions, and fabricated financial statements to attract clients, to further its fraudulent schemes, and hide its misappropriation of clients’ funds.
- A digital asset exchange operator that allegedly delivered false, misleading and inaccurate reports concerning digital asset transactions, as well as wash trading by a former employee.
The CFTC also initiated enforcement actions involving more traditional commodities-related violations in 2021, including:
- An individual solicited and accepted funds from friends and acquaintances for the purpose of trading their funds in commodity futures contracts. The individual, who never registered with the CFTC, sent fraudulent account statements to clients that showed fake trading profits as well as management fees charged on those fake profits. For a period of more than 20 years, the fraudster misappropriated more than $5.1 million in client funds, including funds he used to pay other clients and bogus management fees that he charged on fake trading profits.
- A company owned by a married couple fraudulently solicited and accepted funds from the general public to trade commodities. The defendants, who never registered with the CFTC, made numerous misrepresentations, omissions and false statements in their solicitations to participants. The defendants misappropriated clients’ funds for their own personal use as well as to pay participants in a Ponzi-like scheme.
Cryptocurrency and DeFi Scams
The CFTC has broad authority to regulate futures markets, including promulgating rules for commodities exchanges, intermediaries and participants in the market. While the CFTC has taken the position that Bitcoin and other digital currencies fit within the legal definition of a “commodity” under the Commodity Exchange Act, the Commission has limited authority to regulate the spot market where those commodities are traded for immediate delivery.
Despite its limited authority in the spot market, the CFTC generally has broader powers of enforcement. For example, the CFTC has jurisdiction to regulate exchanges or other markets involving cash commodity transactions, such as gold, corn or digital assets. Even though it does not regulate the underlying cash markets, the Commission can investigate and prosecute civil enforcement actions in cases involving fraud or manipulation in cash commodity markets, including the virtual currency cash markets.
In general, the CFTC’s jurisdiction is implicated whenever a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce. The CFTC considers digital currencies to be a commodity, and it is the underlying asset in cryptocurrency futures contracts. Futures contracts involving digital currencies are regulated by the CFTC and must be traded on CFTC-regulated exchanges.
While Bitcoin is the original and largest cryptocurrency, new digital currencies are regularly launched to investors and often enter the market through an Initial Coin Offering. Based on market capitalization in Q1 2022, the largest cryptocurrencies were Bitcoin, Ethereum, Tether, BNB and USD Coin. At the end of Q1 2022, the estimated global market capitalization of all cryptocurrencies was $2.245 trillion.
On June 7, 2021, a bipartisan bill, titled the Responsible Financial Innovation Act, was introduced in the Senate. The bill would classify digital assets as commodities and create a framework that would apply to all digital assets in the U.S. It would also define the regulatory boundaries between the SEC and CFTC for the promulgation and enforcement of rules relating to digital assets. Among other things, the bill would give the CFTC authority over digital asset spot markets that are not considered to be securities.
Enforcement Actions Involving Digital Assets
May 2022 – the CFTC filed a civil enforcement action against two individuals and their company alleging that they fraudulently solicited at least $44 million for participation in a purported income fund that invested in digital assets. According to the complaint, the defendants used a website, YouTube videos and other methods to solicit funds from at least 170 participants to purchase and trade digital assets, commodities, derivatives, swaps and commodity futures contracts.
Instead of investing the pooled funds as they had represented, the defendants allegedly distributed the funds to other investors, similar to a Ponzi scheme. The CTFC also alleged that the defendants misappropriated millions of dollars by transferring the funds to an offshore entity that may have conveyed the funds to a foreign cryptocurrency exchange. The relief sought by the Commission includes restitution to defrauded investors; disgorgement; civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations the Commodity Exchange Act and CFTC regulations.
March 2021 – the CFTC filed a complaint alleging that two defendants engaged in fraud involving digital assets. The CFTC charged John McAfee, creator of McAfee antivirus software, and his former employee with engaging in a pump and dump scheme involving digital currencies. According to the complaint, the defendants engaged in a multi-stage scheme by first surreptitiously accumulating positions in a variety of cryptocurrencies. The defendants then allegedly used McAfee’s reputation to promote the digital assets on social media as valuable long-term investments, which caused their value to increase. The CFTC alleged that the two sold their assets at falsely inflated values to earn profits of more than $2 million. The CFTC sought 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.
Commodity Market Manipulation
The CFTC actively investigates price manipulation in the commodities markets. Market manipulation is the deliberate use of deceptive techniques to create a false or misleading appearance of the price or market demand for a commodity. The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the CFTC’s ability to rein in this type of fraud in the commodities markets by removing certain evidentiary burdens and lowering the standard for proving fraud in connection with market manipulation.
The CFTC typically charges the defendants with violations of Rules 180.1 and 180.2 in enforcement actions involving market manipulation. Rule 180.1 broadly prohibits the use of manipulative and deceptive devices to create an artificial price, regardless of whether the conduct was intended to, or did in fact, create an artificial price. Rule 180.2 prohibits manipulating the price of a swap or commodity in interstate commerce.
In May 2022, a Swiss-based energy and commodities trading firm agreed to pay $1.186 billion, consisting of a $865.6 million civil monetary penalty and disgorgement of $320.7 million to settle charges that the company engaged in manipulation and foreign corruption in the U.S. and global oil markets from 2007 to 2018. According to the CFTC’s order, the company manipulated four U.S.-based S&P Global Platts physical oil benchmarks and related futures and swaps which defrauded the company’s counterparties, harmed other market participants, and undermined the integrity of domestic and international physical and derivatives oil markets. To date, this case represents the largest civil monetary penalty and highest disgorgement amount in the history of the CFTC.
In another action in 2021, the CFTC filed a complaint against the managing director of a global investment bank alleging that he engaged in a scheme to deceive and manipulate the price of U.S. dollar interest rate swap spreads in violation of CFTC Rules 180.1 and 180.2. The relief sought by the CFTC included a permanent injunction prohibiting the Defendant from entering into any transactions involving “commodity interests,” and engaging in any activity that requires registration with the CFTC. The Commission also sought an order (i) requiring the Defendant to pay civil monetary penalties; (ii) disgorgement of all benefits derived from violations of CFTC regulations; and (ii) making full restitution.
Commodity Pool Fraud
A commodity pool is a private investment vehicle that combines contributions from multiple investors into a large “pool” used for trading in commodity futures and options. By combining all of the contributions into a single fund, pool operators gain leverage in trading to maximize profit potential. Commodity pools are regulated by the CFTC and the National Futures Association.
The CFTC actively investigates whistleblower claims involving commodity pool fraud. A fraud advisory issued by the CFTC warned consumers about unregistered individuals and firms that offer investments in commodity pools. Unscrupulous pool operators typically make fraudulent claims of high profits and low risk, and often misappropriate customer funds for improper purposes.
In February 2022, the CFTC announced that it had settled with the president, CEO, and sole employee of a company that operated two websites and various social media channels that solicited customers to invest in a managed account commodity trading pool. The charges brought by the CFTC included allegations that the company and its owner made false statements and solicited funds for a managed account trading pool in which ten participants lost about $410,000. It was also alleged that another 1,600 customers were cheated out of at least $945,000 through fraudulent solicitations for binary options and strategy course offerings. The settlement included an order of restitution in the amount of $409,965; a civil monetary penalty of $1.3 million; and disgorgement in the amount of $896,673. The settlement also permanently prohibited the company and its owner from ever directly or indirectly entering into any transactions involving commodity interests.
Commodity Off-Exchange Precious Metals
Most over the counter retail contracts involving the sale of gold, silver, and other precious metals were effectively banned following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Absent an exemption, all commodities transactions with a retail customer on a leveraged or margin basis must be conducted on a regulated futures exchange. In other words, commercial entities are prohibited from entering into off-exchange commodity transactions that use loans or margin.
Fraud in the Precious Metals Market
The CFTC has issued fraud advisories warning of scams involving the sale of precious metals and related commodities. Disreputable salespeople make misrepresentations and use deceptive techniques that promise large returns with low risk. Even some otherwise legitimate firms have imposed various fees, which were not initially disclosed to customers, including commissions on purchase transactions, loan origination fees, interest charges, and storage/delivery fees.
The CFTC has also warned that it often cannot protect against illegal conduct of foreign firms that operate in the United States. It is often difficult or impossible to recover funds that have been transferred overseas, and some foreign countries have enacted financial privacy laws that make it difficult to verify that the metals are, in fact, stored in those countries.
In March 2022, the CFTC announced the entry of consent orders against two defendants for monetary sanctions, permanent injunctions, and equitable relief. The two men and their company allegedly solicited customers by telephone, and through a website, to engage in leveraged precious metals transactions. The defendants reportedly accepted more than $890,000 from at least 19 customers. According to the consent orders, no precious metals were ever purchased in the names of those customers. Instead, the defendants allegedly misappropriated the customers’ funds by speculating in leveraged precious metals for their own accounts. The proceeds from these transactions were allegedly used to make Ponzi-style payments to customers; pay for the company’s business expenses; and pay for the personal expenses of the defendants.
Under the terms of the consent orders, the court imposed fines and penalties totaling more than $1.6 million, including civil monetary penalties of $835,141 and customer restitution in the same amount. The orders also imposed permanent trading and registration bans, and a permanent injunction prohibiting the defendants from further violations of the Commodity Exchange Act and CFTC regulations.
Seniors Targeted by Fraudsters
The Special Committee on Aging for the United States Senate published a report titled, “Exploring the Perils of the Precious Metals Market,” which found that precious metals investment firms overwhelmingly targeted seniors. The report warns about telemarketing firms that engage in deceptive sales practices, such as using corrupt suppliers to defraud consumers; creating questionable financial arrangements with high-interest charges; and using high-pressure sales tactics. At the time of the report, it was estimated that 10,000 Americans suffered losses of $300 million due to fraud in the precious metals market.
Position Limit Violations
The Commodity Exchange Act authorizes the CFTC to impose limits on the size of speculative positions in futures markets to prevent excessive speculation that can cause unreasonable or unwarranted fluctuations in the price of commodities. Section 4a(b) of the Commodity Exchange Act makes it unlawful to “directly or indirectly to hold or control a net long or a net short position in any commodity for future delivery . . . in excess of any position limit fixed by the Commission for or with respect to such commodity . . . .”
Absent any applicable exemptions, position limits apply to an individual spot month, non-spot individual month, and all months-combined basis. The limits for other non-regulated markets are determined by the commodities exchanges. The CFTC has adopted “acceptable practices” for limits set by the exchanges, and any violation of the CFTC-approved exchange speculative limit rules can result in an enforcement action. In bringing such an action, the CFTC is not required to prove that the person or entity intended to exceed the applicable position limit.
The CFTC, as well as the commodities exchanges, treat multiple positions subject to common ownership or control as if they were a single trader. All positions in accounts for which a person controls the trading or a 10% or greater ownership or equity interest must be aggregated with the positions held, and the trading performed, by that person.
There are narrow exceptions to the aggregation rules for limited partners and pool participants that have no knowledge of, or control over, the positions held by the pool. Commodity pool operators or commodity trading advisors with commonly owned, but independently controlled market positions, are also exempt. If the CFTC makes a request, an entity claiming this exemption must provide information to prove that the account controllers acted independently with respect to the positions in question.
The Rationale for Position Limits
Position limits were first introduced in 1938, and applied to specific agricultural commodities: wheat, corn, oats, barley, flaxseed, sorghum, and rye. Since 1938, other products have been added, and sometimes removed, from the list of commodities subject to position limits.
Since its inception in 1974, the CFTC has enforced speculative position limits for futures contracts, and options on futures contracts, on nine agricultural commodities, including corn, oats, soybeans and wheat. In 1981, the Commission required exchanges to establish speculative position limits for all commodities not subject to federal limits.
In 2021, Tyson Foods agreed to pay a $1.5 million civil monetary penalty for holding positions in soybean meal futures contracts between 2016 and 2021 that exceeded the all-months position limit in effect at the time. According to the CFTC’s order, Tyson, without having a hedge exemption, held positions in soybean meal futures that exceeded the position limit on more than 590 separate dates during a five-year period. In recognition of Tyson’s substantial cooperation with the investigation, the CFTC reduced the amount of the civil monetary penalty.
CFTC Extends Speculative Position Limits for 16 New Commodities and Associated Commodity Derivatives Contracts
On March 15, 2021, the CFTC’s Final Rule went into effect and established new and/or amended federal speculative position limits for 16 additional physically settled commodity derivative contracts and certain linked instruments. These additional commodities include live cattle, gold, silver, platinum, cocoa, coffee and light sweet crude oil.
News and Media Commentary
CFTC charges Michigan commodity pool operator with sales solicitation fraud, InsuranceNewsNet, August 22, 2022
CFTC Charges Nevada Metals Trader With Spoofing in Gold and Silver Markets, CoinWeek, August 5, 2022
Federal Court Orders Texas Man to Pay Over $290,000 for Manipulative and Deceptive Digital Asset Pump-and-Dump Scheme, CFTC Release No. 8558-22, July 18, 2022
CFTC Orders Swap Dealer to Pay $6 Million for Swap Reporting and Daily Mark Disclosure Violations, CFTC Release No. 8552-22, July 5, 2022
CFTC Orders Starberry Limited to Pay Over $1.37 Million for Failing to Register as a Futures Commission Merchant, CFTC Release No. 8547-22, June 24, 2022
Federal Court Orders California Man to Pay Over $600,000 for Commodity Pool Fraud, CFTC Release No. 8546-22, June 15, 2022
CFTC Charges Gemini Trust Company for Making Material False or Misleading Statements and Omissions to the Commission, CFTC Release No. 8540-22, June 2, 2022
CFTC Charges Recidivist Fraudster for Fooling 14 Clients into Commodity Futures Scam, FinanceFeeds, June 2, 2022
Glencore to Pay $1.5B, Pleads Guilty to Corruption Charges, E&E News, May 26, 2022
Federal Court Orders BitMEX’s Three Co-Founders to Pay a Total of $30 Million for Illegally Operating a Cryptocurrency Derivatives Trading Platform and Anti-Money Laundering Violations, CFTC Release No. 8522-22, May 5, 2022
Kraft, Mondelez Agree to $16 Million Penalty Over Wheat Trading, Chicago Sun-Times, May 19, 2022
CFTC Charges 2 Men with Running $44 Million Crypto Ponzi Scheme, CoinDesk, May 19, 2022
New York Man Charged with Running Cryptocurrency Ponzi Scheme that Collected $59 million, Washington Post, May 18, 2022
CFTC Catches another Ponzi FX Scam, Worth Over $543,000, FinanceFeeds, May 11, 2022