Our Lawyers Rely On Centuries of Combined Relevant Experience to Provide Effective CFTC Investigation Defense
The Commodity Futures Trading Commission (CFTC) regulates the U.S. derivatives market. Along with its supervisory authority, the CFTC has significant investigative and enforcement authority as well, and it routinely targets both entities and individuals for statutory and regulatory violations. For both registered and unregistered entities, facing CFTC scrutiny can have severe consequences—including the risk of facing prosecution by the U.S. Department of Justice (DOJ) in some cases.
With this in mind, firms and individuals who are facing CFTC scrutiny need to engage experienced defense counsel promptly. We are a CFTC investigation defense firm with a team of lawyers who have centuries of combined experience on both sides of high-stakes federal investigations. As former DOJ prosecutors, many of our attorneys previously handled financial crime and other white-collar criminal matters for the federal government; and, as defense counsel, our attorneys have a proven record of success protecting clients during the investigative process.
What Should You Expect During a CFTC Investigation?
The CFTC’s Division of Enforcement handles all external investigations. If you have been contacted by the Division of Enforcement, this means that the CFTC has already received credible information suggesting that your firm, or you personally, have violated federal law.
This is crucial to keep in mind. The CFTC’s Division of Enforcement does not conduct investigations at random. While being targeted in a CFTC investigation does not necessarily mean that the allegations against you or your firm are valid, it does mean that you need to execute an effective and strategic defense.
The Investigation’s Trigger is Key
When facing a CFTC investigation, a key first step is to discern what triggered the Commission’s investigation. As the CFTC notes in its Enforcement Manual, it relies heavily on referrals from “industry self-regulatory organizations, other governmental authorities, whistleblowers, victims, cooperating witnesses, self-reports, customer complaints, and members of the general public.” However, the CFTC relies on its own “tools, means, and methods the Division [of Enforcement] has developed internally” as well, and defending against an investigation the CFTC has initiated on its own accord can be a very different matter from defending against an investigation launched in response to a referral.
The CFTC’s “Preliminary Inquiry”
When the CFTC receives a referral or the Division of Enforcement uncovers potential statutory or regulatory violations through its internal processes, the Commission will conduct a Preliminary Inquiry. This is an internal review of the information received or uncovered. The Preliminary Inquiry takes place without the subject firm’s or individual’s knowledge, and its purpose is to determine whether the devotion of additional Commission resources is warranted.
If, through its Preliminary Inquiry, the CFTC determines that the subject firm or individual may have violated laws or regulations falling within the Commission’s enforcement jurisdiction, the Division of Enforcement will initiate an investigation. At this stage, the inquiry may or may not be made public, and Division of Enforcement personnel may contact the target immediately, or they may begin by seeking to gather additional information through other means.
The CFTC’s Broad Investigative Powers
Similar to the U.S. Securities and Exchange Commission (SEC), the CFTC has broad administrative authority to conduct investigations targeting firms and individuals. When conducting an investigation, the Division of Enforcement may seek to gather evidence through a variety of means, including (but not limited to):
- Analyzing market data
- Analyzing registration documents and other public records
- Obtaining voluntary statements for targets, their personnel, and third parties
- Obtaining compelled testimony through the issuance of administrative subpoenas
- Reviewing documents provided voluntarily by self-regulatory organizations, swaps execution facilities, and other third parties
- Reviewing documents obtained from targets and third parties through the issuance of administrative subpoenas and civil investigative demands (CIDs)
- Collaborating with the DOJ, SEC, and other federal authorities
Relying on these sources of information (among others), CFTC personnel will assess not only the allegations underlying the investigation, but any other allegations that may warrant administrative, civil, or criminal enforcement action as well. CFTC personnel may also recommend enforcement action based on targets’ mistakes during the investigative process (i.e., ignoring an administrative subpoena or failing to duly comply with a CID). As a result, targeted firms and individuals need to take a comprehensive and informed approach to building and executing their defense strategies, and they must work with experienced CFTC investigation defense counsel every step of the way.
Potential Allegations Triggering (or Resulting From) CFTC Investigations
CFTC investigations can result from (and potentially result in) a broad range of allegations under the Commodity Exchange Act (CEA), CFTC regulations, and other pertinent sources of federal authority. When it comes to CFTC investigation defense, understanding the potential allegations at issue is crucial. Some examples of allegations that have the potential to lead to enforcement action following a CFTC investigation include:
- Disruptive and manipulative trading practices
- Failure to comply with business conduct standards
- Failure to comply with recordkeeping requirements
- Failure to segregate customer funds
- Failure to submit required reports and other registration violations
- Failure to supervise
- Fraudulent trade allocation
- Illegal off-exchange activity
- Making false or misleading statements to the CFTC (including during a CFTC investigation)
- Trading ahead, bucketing, wash sales, and other trade practice violations
When a CFTC investigation uncovers evidence of criminal misconduct, a referral to the DOJ may result in various other charges as well. For example, along with pursuing charges for commodities fraud and other related financial crimes, the DOJ frequently pursues charges for conspiracy, mail fraud, wire fraud, and money laundering as well. Each of these offenses carries the potential for substantial fines and federal incarceration, and avoiding substantial penalties requires highly experienced legal representation.
Understanding the Potential Outcomes of a CFTC Investigation
The potential outcomes of a CFTC investigation depend on whether the investigation is (or ultimately becomes) administrative, civil, or criminal in nature. As noted above, criminal inquiries present risks for fines and prison time. In administrative and civil cases, which are much more common, potential outcomes include:
- Registration-related sanctions (i.e., suspension or revocation of CFTC registration)
- Restriction or revocation of trading privileges
- Imposition of civil monetary penalties (CMP)
- Injunctive penalties (i.e., a prohibition on trading or serving as an executive or director in the commodities industry)
- A finding of no liability and termination of the investigation without charges being filed
FAQs: Successfully Defending Against a CFTC Investigation
Q: Do I Need to Comply with the CFTC's Requests for Interviews and Records?
The answer to this question depends on the nature of the request. Certain types of requests, such as administrative subpoenas and CIDs, are subject to judicial enforcement. This means that non-compliance can lead to sanctions and ultimately being held in contempt of court. However, the CFTC’s Division of Enforcement also relies heavily on informal requests for information—particularly during the early stages of its investigations. Compliance with these informal requests generally is not required, and investigation targets should make informed decisions about whether, and to what extent, they voluntarily comply.
Q: Should I Cooperate During a CFTC Investigation?
The CFTC encourages targeted firms and individuals to cooperate during its investigations, stating that it “has long given credit to individuals who cooperate in the Commission’s investigations and enforcement actions.” However, while cooperating can prove beneficial in some cases, it can also be risky if the circumstances do not favor a cooperative approach. Additionally, firms and individuals that cooperate in CFTC investigations will often find themselves facing increasingly burdensome requests—with failure to comply putting the benefits of their prior cooperation at risk. As a result, deciding whether to cooperate involves several strategic considerations, and it is a decision to be made case-by-case with the advice of CFTC investigation defense counsel.
Q: How Far Back Can the CFTC's Division of Enforcement Look During an Investigation?
Generally, CFTC enforcement proceedings are subject to a five-year statute of limitations under 28 U.S.C. Section 2462. However, there are exceptions. When facing a CFTC investigation, it is imperative to have a clear understanding of all potential allegations, and to formulate a defense strategy that adequately addresses each individual issue that has the potential to lead to enforcement action. This involves conducting a comprehensive internal compliance audit promptly (and with the oversight of outside counsel) upon learning of a CFTC inquiry.
Q: Do I Need To Engage Legal Counsel for CFTC Investigation Defense?
Due to the complexity of the substantive and procedural issues involved in CFTC investigations—as well as the penalties at stake—all targeted firms and individuals should engage outside counsel to represent them. Outside lawyers who have experience handling CFTC investigations will be able to provide key insights for building an effective defense strategy and steering the inquiry toward a favorable resolution that avoids unnecessary costs, risks, and publicity.
Speak with a CFTC Investigation Defense Lawyer at Oberheiden P.C.
If you need to speak with a lawyer about CFTC investigation defense, we encourage you to contact us promptly for more information. When you get in touch, we will arrange for you to speak with a senior defense lawyer in confidence as soon as possible. To arrange a complimentary initial consultation, call 866-603-4540 or tell us how we can reach you online now.