For decades, most companies didn’t worry much about the U.S. 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 Wall Street Reform and Consumer Protection Act put the Commodity Futures Trading Commission on the map, and in the past year, enforcement efforts by agency lawyers have kicked into high gear.
CFTC lawyers in fiscal year 2012 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 do — protecting market participants and promoting market integrity,” says David Meister, head of the 130-lawyer Enforcement Division, in an interview. “It’s not just the number of cases — that’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.
In the past year, 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 in 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 important but smaller cases.”
Still, one targeted entity, Royal Bank of Canada, is pushing back, vigorously disputing CFTC charges of illegal futures trading, which it calls “absurd.” Some lawyers also fault the agency for failing — at least for now — to 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 at Covington & Burling.
However, she says, the agency may be biding its time. The New York Times in August reported that criminal prosecutors are close to wrapping up their inquiry into MF Global, and that charges are unlikely, leaving the field open for a potential civil action by the CFTC. “They do try to step out of the way of criminal enforcement,” Lurton says of agency lawyers.
Meister, a former white-collar partner in 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 cases — 102 in fiscal year 2012 and 99 a year earlier — than 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 early in his career worked at the U.S. Attorney’s Office for the Southern District of New York. Among his colleagues: Robert Khuzami, now head of the Enforcement Division at the U.S. Securities and Exchange Commission, and Denis McInerney, the chief of the Justice Department’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 late 2008. “His experience prosecuting and defending complex cases has given him a toolbox that has served him and the CFTC very well.”
At the CFTC, Meister has taken steps to reorganize the Enforcement Division. Lawyers were previously divided into several dozen small teams, and the teams were assigned cases. Now, he says, “the teams are formed around the cases,” allowing for greater efficiency and flexibility. He’s also created two squads, one focusing on manipulation and disruptive trading and the other on swaps, to “centralize our expertise in core areas.” 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,” he says.
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 opened — a feat topped in 2011, with 450 investigations. The number tapered off somewhat in 2012 to 350, still high by historical standards.
Meister says cases in the works will “absolutely” invoke the CFTC’s new anti-fraud and anti-manipulation authority under Dodd-Frank.
Before the law was passed in 2010, CFTC lawyers, for example, had to prove that someone specifically intended to create an artificial commodity price. Now, it’s enough to show the accused’s conduct was reckless. The new authority also covers the swaps markets, which were previously beyond the CFTC’s jurisdiction.
Meister says a key goal at the CFTC is to bring “high-impact cases,” which he defined as “cases 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 financial markets around the world.
Indeed, the agency is going after the most powerful players in the financial world as never before. For example, JPMorgan Chase in April shelled out $20 million to settle charges that it unlawfully handled Lehman Brothers Inc.’s customer segregated funds.
In a press release issued at the time, Meister chastised the financial services giant, 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. The firm was hit with another suit in September for exceeding speculative position limits in cotton futures and settled the matter for $600,000.
Goldman Sachs Execution and Clearing also faced CFTC enforcement efforts, paying $7 million in March to settle charges that it failed to diligently supervise accounts that it carried. And Morgan Stanley in June settled CFTC charges for $5 million for making unlawful, noncompetitive trades.
“They’re going after the big names, the global players,” says Felix Shipkevich of New York’s Shipkevich PLLC, who chronicles the agency on his website, CFTC Law.
Charles Mills, a partner in 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. Now, they’re paying attention,” he says. Any company whose business involves buying and selling commodities or the use of swaps and other derivatives, especially in the energy and financial arenas, is now “watching CFTC enforcement actions all the time, and with a very critical eye,” he says.
As the new Dodd-Frank authorities kick in, lawyers predict the CFTC will have its hands full. “The level of activity is really still in the ramp-up phase,” says Covington’s Lurton. “There could be big years on the horizon. I think they’ve got some real resource and funding challenges.”
President Obama’s 2013 budget request for the agency would add 48 more employees to the Enforcement Division and another $14 million to its current $38 million budget. Where the division has proposed deploying the new hires is one indication of its future focus. Nineteen are slated for manipulation and disruptive trading enforcement, which the agency said “reflects the complexity and time intensity of those investigations.” Thirteen would work on retail investor fraud, and nine on regulatory, supervision and trade-practice matters. Only seven are slated for enforcement matters related to swaps. “The smaller increase in staffing reflects the newness of the regulatory framework,” according to the budget summary.
As for Meister, he says it has been “a tremendous time to come to the CFTC under Chairman [Gary] Gensler’s leadership. I like to think I’ve made a contribution to the CFTC as it transitions to being a key financial regulator.”