CFTC Expanding Anti-Manipulation Powers To Punish Misrepresentations To Futures Exchanges And FCMs

• Published date: 11 October 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Commodities/Derivatives/Stock Exchanges, Securities
• Law Firm: Katten Muchin Rosenman LLP
• Author: Gary DeWaal, J Matthew W. Haws, Christian T. Kemnitz and Carl E. Kennedy

Recent Commodity Futures Trading Commission (CFTC) enforcement actions rely on the anti-manipulation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to punish misstatements made to futures exchanges and futures commission merchants (FCMs) that merely permit a trader to trade futures for his own benefit. These actions rely on a fairly expansive understanding of Section 6(c)(1) of the Commodities Exchange Act (CEA) and CFTC Regulation 180.1, which forbid the use of manipulative or deceptive devices "in connection with any swap, or contract of sale of any commodity . . . or contract for future delivery on or subject to the rules of any registered entity." As a result, futures market participants may face enhanced liability under the CEA for a wider range of misconduct.

Novel Applications of Dodd-Frank Manipulation Provisions in CFTC Enforcement Actions

In March 2021, the CFTC filed a civil complaint against Easterday Farms for (among other misdeeds) making false statements in hedging exemption applications to the Chicago Mercantile Exchange (CME).¹ The enforcement action came on the heels of a parallel criminal indictment against Easterday for falsely invoicing a large agribusiness partner of Easterday.² According to the complaint, Easterday allegedly submitted false invoices for "ghost cattle" and used the proceeds to cover margin calls on his futures positions.³ In addition, Easterday submitted false cattle inventory to the CME in order to exceed speculative trading limits in the feeder cattle and live cattle futures markets.⁴Although the latter misrepresentations likely violated Section 9(a)(4) of the CEA - which already prohibits making false statements to futures exchanges - the CFTC additionally sought relief under Rule 180.1 based on the misstatements to the CME, alleging that they permitted Easterday to exceed speculative position limits and avoid discipline. The CFTC did not allege that the cattle inventory statements misled anyone about the nature of the futures contracts Easterday traded, induced anyone to trade with him, or injected false information into the futures market or the physical cattle markets.⁵

Somewhat similarly, in 2019, the CFTC entered into a settlement with Aaron Seidenfeld for making false representations to FCMs about the true ownership of certain accounts controlled by Seidenfeld.⁶ Using funds in a trust, Seidenfeld would open an account under a relative's name to trade futures and options. He sustained significant losses while trading on margin and failed to cover the debt owed to the FCM. He repeated this maneuver twice, incurring losses of over $500,000. Each time, he lied to the FCM about...