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Flexing New Muscles
For decades, most companies didn't worry much about the Commodity Futures Trading Commission, an obscure regulatory backwater whose lawyers brought a few dozen enforcement actions a year. Now, the mouse is starting to roar.
The Dodd-Frank Act put the CFTC on the map, and in the past year, enforcement efforts by agency lawyers have kicked into high gear. In fiscal year 2012 they filed a record number of new cases, going after some of Wall Street's biggest players including JPMorgan Chase & Co., Goldman Sachs Group Inc., and Morgan Stanley & Co. They also won the largest fine in agency history against Barclays Bank for attempting to manipulate the London Interbank Offered Rate, or Libor.
"I think we've done a good job in doing what we're supposed to doprotecting market participants and promoting market integrity," says David Meister, head of the 130-lawyer enforcement division. "It's not just the number of casesthat's just one metric. It's important to look at the type of cases we've filed. We've filed cases across the spectrum of our authority."
Dodd-Frank expanded the agency's jurisdiction to include the $300 trillion swaps market and gave the enforcement division new grounds to go after wrongdoers. The agency has begun using these broader powers, bringing charges against a commodity pool operator, Quiddity LLC, for making material false statements to the CFTC. (Previously, the agency had to rely on criminal authorities to prosecute liars.) The CFTC also brought charges against the operator of a $90 million Ponzi scheme involving sales of silver under a new Dodd-Frank provision banning fraud schemes in interstate commerce.
"They are doing a remarkable job with limited resources," says Geoffrey Aronow, a partner at Bingham McCutchen who served as head of the enforcement division from 1995 to 1999. "They've been bringing some significant cases . . . but doing a good job balancing them with smaller cases."
Still, one targeted entity, Royal Bank of Canada, is pushing back. It's vigorously disputing charges of illegal futures trading, which it calls "absurd."
Some lawyers also fault the agency for failingat least until nowto bring any charges related to the collapse of commodities brokerage MF Global Holdings Ltd. About $1.6 billion went missing from customer accounts when the company filed for bankruptcy in October 2011. "This was a year when there were some really big customer fund issues. I would have expected [the enforcement division] to be more active in this area," says Allison Lurton, a former senior counsel at the CFTC who is of counsel to Covington & Burling. However, she adds, the agency may be biding its time. The New York Times reported in August that criminal prosecutors were close to wrapping up their inquiry into MF Global, and that charges were unlikelyleaving the field open for a potential civil action by the CFTC.
Meister, a former white-collar partner at Skadden, Arps, Slate, Meagher & Flom in New York, was named head of the enforcement division in November 2010. On his watch, the CFTC has brought more cases102 in fiscal year 2012 and 99 a year earlierthan ever before. Division lawyers also won orders imposing a near-record $585 million in fines in the past 12 months.
A 1987 graduate of Columbia Law School, Meister worked at the U.S. Attorney's Office for the Southern District of New York early in his career. Among his colleagues: Robert Khuzami, head of the enforcement division at the Securities and Exchange Commission, and Denis McInerney, chief of the U.S. Department of Justice's fraud section.
"David is a gifted trial lawyer," says Skadden partner John Carroll, who worked with Meister in the U.S. attorney's office, then at Clifford Chance, and moved with him to Skadden in 2008. "His experience prosecuting and defending complex cases has given him a toolbox that has served him and the CFTC very well."
Meister has taken steps to reorganize the enforcement division. Lawyers were previously divided into several dozen small teams that were assigned cases. Now, he says, "the teams are formed around the cases," allowing greater efficiency and flexibility. He's also created two squads, one focusing on manipulation and disruptive trading and the other on swaps. And he's instituted a "case and policy committee" of the division's senior leaders that meets weekly to review all high-level decisions and "make sure we're being consistent."
It seems clear that agency lawyers have reaped the benefits of having so many cases in the pipeline. In 2010 a record 419 new investigations were openeda feat promptly topped by the 450 investigations opened the following year. The number tapered off in 2012 to 350, still high by historical standards.
Meister says cases in the works will "absolutely" invoke the CFTC's new antifraud and antimanipulation authority under Dodd-Frank. Before the law was passed in 2010, CFTC lawyers had to prove that someone specifically intended to create an artificial commodity price. Now, it's enough to show that the accused's conduct was reckless. The new authority also covers the swaps markets, which were previously beyond the commission's jurisdiction.
A key goal, Meister says, is to bring "high-impact casescases involving a large number of victims, like Ponzi cases . . . or cases that influence market behavior, like the Barclays case." The London-based bank in June agreed to pay a record $200 million to settle CFTC charges that it manipulated its submissions to the Libor and Euribor benchmark interest rates used in global financial markets.
Indeed, the agency is going after the most powerful players in the financial world as never before. For example, JPMorgan Chase shelled out $20 million in April to settle charges that it unlawfully handled Lehman Brothers Inc.'s customer funds. Meister chastised the financial services giant in a press release, stating that commodity laws "impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal . . . whether the markets are calm or in crisis."
JPMorgan was also dinged in March, paying a $140,000 fine for confirming the execution of a prearranged trade involving 10-year U.S. Treasury notes. It was hit with another suit in September for exceeding speculative position limits in cotton futures (it settled for $600,000).
Goldman Sachs Execution and Clearing also faced CFTC enforcement, paying $7 million in March to settle charges that it failed to diligently supervise accounts. And Morgan Stanley in June settled CFTC charges for $5 million for making unlawful, noncompetitive trades.
Charles Mills, a partner at K&L Gates whose practice focuses on derivatives and securities enforcement and compliance, agreed that the CFTC has become more high-profile. "A lot of companies 10 years ago didn't even know what the CFTC was," he says. "Now they're paying attention."
A version of this story appeared in The National Law Journal, a sibling publication of Corporate Counsel.