CFTC Reached New Heights in Enforcement in FY2020 Using Data Analytics to Bring a Record-Breaking Spoofing Case
Unlike the year most of us have had, FY2020 was a banner year for the Commodities Futures Trading Commission’s (“CFTC” or the “Commission”) Division of Enforcement. According to the Division of Enforcement’s Annual Report, which was released on December 1, 2020, the CFTC broke multiple records this fiscal year. The Commission regulates the U.S. derivatives market and enforces the Commodity Exchange Act, which prohibits fraud in the trading of futures, swaps, and other derivatives. The CFTC raked in approximately $1.3 billion in civil monetary relief during FY2020, the fourth highest amount of relief in the Commission’s history. This represents a $7 million increase from FY2019 and is the third straight year-over-year increase in civil monetary relief for the Commission. The CFTC also took technological strides in FY2020, especially in the world of data analytics, helping the Commission bring and settle the largest spoofing case in its history.
In addition, the Commission brought a whopping 113 enforcement actions in FY2020, a new record. This is nearly double the CFTC’s 69 enforcement actions in FY2019. Of the 113 enforcement actions this fiscal year, 56 were retail fraud actions, the most brought in a single year. More impressively, 28 of the 56 were filed since March 13, 2020, when the COVID-19 pandemic national emergency was declared.
The Commission also took great effort to work collaboratively with its federal colleagues and state counterparts. Sixteen of the 113 enforcement actions brought by the CFTC had parallel criminal actions. Additionally, the CFTC had its largest joint filing with 30 state financial regulators this fiscal year.
Perhaps most importantly, the CFTC brought and settled the largest spoofing case in its history in September 2020 against JPMorgan Chase & Company and its subsidiaries JPMorgan Chase Bank, N.A. and JPMorgan Securities LLC. The CFTC alleged that over the course of eight years, JPMorgan Chase had used deceptive and manipulative spoof orders in the precious metals and U.S. treasury futures markets. From approximately 2008 to 2016, JPMorgan Chase employees allegedly placed hundreds of thousands of orders to buy and sell precious metals, treasury notes, and treasury bond futures contracts with the intent to cancel the orders prior to execution. Using these false orders, traders purportedly sent false signals to the market with the intent to manipulate and create artificial prices. The CFTC stated that, despite numerous inquiries from the Commission and commodities trading marketplaces and internal reports of suspicious conduct from a JPMorgan Chase trader, the company failed to investigate, detect, and stop the misconduct. According to the CFTC’s press release, JPMorgan Chase’s trades significantly benefitted the company while harming other market participants. In the settlement, JPMorgan Chase agreed to pay a record-breaking $920.2 million monetary penalty, including $311,737,008 in restitution, $172,034,790 in disgorgement, and $436,431,811 in civil monetary penalty. These figures top each of their respective categories.
In addition to the CFTC’s record-breaking statistics, it made efforts to increase its transparency with the business community and public in FY2020. In September 2020, the CFTC released new guidance regarding how it evaluates compliance programs in enforcement matters. The CFTC also issued guidance in June 2020 regarding the factors it considers in recommending civil monetary penalties. Both of these pieces of guidance are intended to help the business community better understand the CFTC’s expectations when under investigation.
The CFTC put a great deal of emphasis on its use of data analytics and market surveillance technology in FY2020, which will likely continue in the future. The CFTC highlighted in the Annual Report its multi-year project to bolster its data analytics capability to more easily identify misconduct in trading data. In addition, the CFTC indicated that its new technological capabilities helped it bring the three largest spoofing cases in its history, including the JPMorgan Chase case discussed above. The business community should be aware that the CFTC continues to strengthen its data analytics and market surveillance technological capabilities and expects companies to do the same.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.