In the United States, commodities trading is a highly regulated industry. While there is plenty of opportunity in these markets to make sizable revenues, there is plenty of room for fraudulent, unethical, and predatory practices.
The Commodity Futures Trading Commission (CFTC) exists to prevent these practices and protect market participants from financial harm.
They are responsible for regulating the derivatives market, including futures, swaps, and options contacts. This federal agency routinely conducts investigations to identify violations of the Commodity Exchange Act and Commission regulations.
The CFTC investigates individual people and firms registered with the Commission and can pursue administrative proceedings and lawsuits in federal court.
At the same time, the CFTC acts as a watchdog. As a result, any of several "red flags" it detects could trigger an investigation by the CFTC's Division of Enforcement, leading to possible criminal charges.
If you are accused of a CFTC-related offense, you're looking at possible prosecution under federal law, and if you're convicted, you could face significant prison time.
It is essential to hire a law firm with experience in federal criminal cases and representing clients in CFTC investigations and enforcement proceedings. In this article by our federal criminal defense lawyers, we will examine this topic in greater detail below.
What Is the CFTC?
The Commodity Futures Trading Commission (CFTC) is an independent agency of the United States federal government.
The CFTC was created in 1974 to regulate and enforce the Commodity Exchange Act and is responsible for regulating commodity futures and options markets. The CFTC oversees trillions of dollars worth of transactions each year.
The CFTC's mission is to "protect market users and the public from fraud, manipulation, and abusive practices connected to the sale of commodity and financial futures and options and foster open, competitive, and financially sound futures and options markets."
The CFTC accomplishes this mission by investigating potential commodities law violations, prosecuting offenders, and working with self-regulatory organizations to comply with commodities regulations.
In 2010, in response to the financial crisis in 2007-2008 triggered in part by financial system abuses, the Dodd-Frank Act gave the CFTC more regulative authority. It tasked it with conducting studies into issues that affect the derivatives market.
In the wake of Dodd-Frank, the CFTC has become more aggressive in its investigations into possible offenses. The CFTC may also work with the Department of Justice, federal prosecutors, and other law enforcement agencies to achieve its goals within these investigations.
The CFTC can bring civil and criminal charges against individuals and companies who violate commodities laws. Civil penalties can include fines, cease and desist orders, and trading bans. Criminal penalties can include imprisonment and fines.
What Categories of Commodities Are Regulated by the CFTC?
The CFTC has regulatory authority over virtually any type of commodity that can be traded via derivatives (e.g., futures, swaps, and options). These include:
- Agricultural commodities, e.g., wheat, corn, soybeans, livestock, coffee, and sugar;
- Energy commodities, e.g., natural gas, electricity, heating oil, and crude oil;
- Metal/mineral commodities, e.g., gold, silver, platinum, gems;
- Financial commodities, e.g., interest rates, FOREX.
The CFTC has also classified fintech products, e.g., Bitcoin and other cryptocurrencies, as commodities under the Commodities Exchange Act within the past several years. In light of the volatility of the crypto market, the CFTC has turned more of its attention toward investigating possible abuses in this market.
What is the CFTC Investigation Process?
A CFTC investigation starts when the Commission receives information about alleged violations of the Commodity Exchange Act, handled by the Division of Enforcement.
They frequently receive information about possible violations from self-regulatory organizations, alleged victims, government officials, whistleblowers, and cooperating witnesses.
When they receive a referral to start an investigation, they will begin with a preliminary inquiry, which is a close review of the information to decide the validity of the referral and whether it's worthy of committing time and resources.
If the CFTC decides an investigation is warranted, the Commission has broad authority to investigate under federal law. Their investigators will depend on various sources to collect information, such as statements from the initial referral, relevant documents, and administrative subpoenas.
After the investigation has been completed, the CFTC could start administrative proceedings or pursue injunctive relief in a federal court, including monetary penalties, suspension of trading privileges, and cease-and-desist orders.
If the Commission determines that someone or a firm might have engaged in criminal violations, they will typically refer the case to the United States Department of Justice. Often, these accusations will claim someone involved in wire fraud or mail fraud.
How Does the CFTC Enforce Commodities Laws?
The CFTC has several different enforcement tools that are discussed below.
Investigations - The CFTC's Division of Enforcement is responsible for investigating potential commodities law violations. Investigations are often triggered by tips, complaints, or referrals from other agencies. During an investigation, the CFTC may subpoena individuals and companies for documents, take testimony from witnesses, etc.
Enforcement Actions - If the CFTC finds that a violation has occurred, it may bring an enforcement action against the individual or company involved. Enforcement actions can be either civil or criminal in nature.
- Civil actions are typically brought in federal court and aim to stop violative conduct and impose monetary penalties. In some cases, the CFTC may also seek "disgorgement" (i.e., repayment) of ill-gotten gains;
- Criminal actions are brought by federal prosecutors and can result in jail time and fines for the individuals or companies involved.
Self-Regulatory Organizations - The CFTC also works with several self-regulatory organizations (SROs) to help ensure compliance with commodities regulations. SROs are private, industry-funded organizations that the CFTC has granted certain regulatory powers.
Examples of SROs include the National Futures Association and the Chicago Mercantile Exchange. The CFTC relies on SROs to help monitor their members' activities and take disciplinary action when necessary.
CFTC investigators review trading firm practices for violations, such as disruptive trading practices, failing to comply with business conduct standards or maintaining required records, failure to make required reports or segregating customer funds, and false statements to the CFTC.
What to Do If You Are Under Investigation by the CFTC?
If you are under investigation by the CFTC, it is essential not to take it lightly but to seek experienced legal counsel immediately to develop a response strategy.
In many cases, it may be beneficial to cooperate with the government, while in other cases, it may be best to take a more defensive stance.
However, cooperation with CFTC investigators is not a guaranteed maneuver to avoid liability. If you decide to cooperate, you could face multiple requests over a long period. If you decide to stop cooperating, you could face legal action threats.
While, on the surface, cooperation seems like the best way to avoid liability, you should not make this type of agreement with investigators without first consulting with a defense lawyer.
A legal team experienced in CFTC matters can advise you on the best course of action for your situation. Early involvement by skilled attorneys may help you avoid prosecution—or, if your case goes to trial, help you achieve the most favorable resolution possible.
Eisner Gorin LLP is a criminal defense law firm in Los Angeles County. Contact us to discuss and develop a defense strategy for the best possible outcome. You can call us by phone at (877) 781-1570 or fill out the contact form.