Bridging the Week by Gary DeWaal


Bridging the Week by Gary DeWaal: September 8 to 12 and 15, 2014 (Exorbitant Fines; Lawyer Sued by CFTC; New CFTC Chairman’s Early Views; AML)

AML and Bribery    Bridging the Week    Managed Money    My View    Totally Irrelevant (But Is It?)    Uncleared Swaps   
Published Date: September 14, 2014

Bad facts may make bad law. As a result, many lawyers are eagerly awaiting the outcome of a federal lawsuit by the Commodity Futures Trading Commission against a lawyer for purportedly aiding and abetting his clients’ unlawful off-exchange metals transactions. The CFTC also took the spotlight this week when its new chairman testified before the Senate Banking Committee, providing some initial views on what he thinks should be the agency’s priorities, as well as when its enforcement division brought and settled an administrative action against an introducing broker for not following its own anti-money laundering procedures.

As a result, the following matters are covered in this week’s Bridging the Week:

  • CFTC Sues Lawyer in Federal Court for Aiding and Abetting Clients’ Legal Violations (includes My View);
  • CFTC and SEC Chairs Testify Before Senate Banking Committee on Dodd-Frank Progress;
  • Introducing Broker Sued by CFTC for Failing to Follow AML Procedures;
  • CFTC Harmonizes Marketing Requirements for Certain Private Funds With SEC Rules;
  • SEC Sues Bank Holding Company for Inaccurately Reporting True Volume of Delinquent Loans;
  • IOSCO Updates Survey Regarding the Regulation and Supervision of Commodity Derivatives Markets;
  • OTC Derivatives Regulator Group Issues Status Update;
  • HK SFC Brings Action Against CITIC Limited and Former Chairman and Executive Directors Related to 2008 Financial Disclosure; and more.

Also—in the category of Totally Irrelevant (But Is It?)—if you have not come across it yet, I recommend that you review both an editorial and article in the August 30–September 5, 2014 edition of The Economist regarding the increasingly high (if not exorbitant) fines being paid by US corporations as sanctions for regulatory infractions. Both writings explore the appropriate balance between punishing corporations when they commit wrongful acts and devising meaningful sanctions. Food for thought. (Click here to access the editorial, “The criminalisation of American business,” and here to access the article, “A mammoth guilt trip.” Unfortunately, access may require a subscription.)

Video Version:

Article Version:

CFTC Sues Lawyer in Federal Court for Aiding and Abetting Clients’ Legal Violations

Jay Grossman, a Florida-based attorney, was sued by the Commodity Futures Trading Commission in a federal court in Florida for allegedly aiding and abetting violations of law by his clients in connection with their precious metals transactions for retail persons.

Although the CFTC alleged that Mr. Grossman engaged in wrongful conduct since at least 2009, the agency charged him with violations of law solely between July 16, 2011, and February 25, 2013. This is because on July 16, 2013, the Dodd-Frank Act became effective, making the relevant transactions subject to the CFTC’s enforcement authority.

Specifically, the CFTC alleged that, during the relevant time, Mr. Grossman helped four of his clients—who allegedly held themselves out to the public as metals clearing firms—to engage in unlawful off-exchange retail commodity transactions and fraud. These firms included Hunter Wise Commodities, LLC and related entities. The CFTC also charged Mr. Grossman with assisting similar violations by other clients of his.

Each of the firms assisted by Mr. Grossman previously has been subject to orders by federal courts finding that their precious metals transactions violated applicable law.

In general, firms selling physical metal on leverage to retail clients and providing ancillary services (including financing) must comply with strict requirements regarding handling the physical metal and customer funds. Instead, the referenced firms in this action typically held customer funds improperly and never owned or processed physical metal, as required.

According to the CFTC’s complaint in this matter, Mr. Grossman’s “role went well beyond the provision of legal advice” in connection with assistance to Hunter Wise and other companies.

Among other matters, charged the CFTC, Mr. Grossman, “helped defraud retail customers by preparing documents, including account agreements … that he knew would deceive customers throughout the lifecycle of their retail commodity transactions.” The agency claims that Mr. Grossman was aware that relevant transactions were typically “book entries” and did not involve physical metals. Mr. Grossman is also alleged to have purposely misled courts in connection with lawsuits involving the CFTC and brought by purportedly defrauded retail clients.

In its complaint, the CFTC quotes from statements made by Mr. Grossman, captured in conversations tape-recorded by a principal of one of Mr. Grossman’s clients, to help support its charges.

According to a statement issued by Aitan Goelman, the CFTC’s new Division of Enforcement Director,

[t]his action shows that the Commission will not hesitate to bring cases against gatekeepers, including attorneys, who are complicit in violating the CEA. Lawyers and accountants have the professional responsibility to avoid participating in unlawful conduct that is perpetrated by their clients.

In addition to charging Mr. Grossman with aiding and abetting his clients’ prohibited off-exchange futures transactions and fraud, Mr. Grossman was also charged with aiding and abetting his clients’ violations of the new fraud-based manipulation provisions under Dodd-Frank and the CFTC rule that prohibits the intentional or reckless use of “any manipulative device, scheme or artifice to defraud.” (Click here to see my views regarding this new statutory authority and CFTC rule in the article “CFTC Sues IB Employee for Unauthorized Trading and Concealment; Charges Violation of New Anti-Manipulation Law and Rule) in the March 17 to 21 and 24, 2014 edition of Bridging the Week.)

My View: This is an important case well worth watching. Although the facts of this case may be particularly unsavory, many will dispute that counsel—whether outside or in house—are gatekeepers. Insisting that lawyers must avoid participating in unlawful conduct is different than suggesting that they perform any function other than to serve as advocates, confidants or advisors.

CFTC and SEC Chairs Testify Before Senate Banking Committee on Dodd-Frank Progress

Six senior regulators of US agencies appeared before the US Senate Committee on Banking, Housing, and Urban Affairs to provide their insights on the resiliency of the US financial system since the enactment of the Dodd-Frank Act.

The regulators included Mary Jo White, Chair of the Securities and Exchange Commission, Timothy Massad, Chairman of the Commodity Futures Trading Commission and Daniel Tarullo, Governor from the Board of Governors of the Federal Reserve System, among others. This was Mr. Massad’s first public appearance since becoming head of the CFTC where his presentation was included on the CFTC’s website.

In his presentation, Mr. Massad mostly discussed the CFTC’s agenda going forward. Among other things, he indicated that he anticipates some unspecified “adjustments and changes” being made to previously adopted regulations, but that no “wholesale changes are needed.”

Mr. Massad indicated that, in connection with some proposed rules—related to margin for uncleared swaps and position limits—the CFTC will endeavor to “make sure that commercial businesses like farmers, ranchers, manufacturers, and other companies can continue to use these markets effectively.”

The new CFTC chairman also stressed the need for the CFTC to work with other international regulators “to build a strong global regulatory framework,” but stressed his appreciation for the challenges of this objective. This is because, according to Mr. Massad, “regulation occurs through individual jurisdictions, each informed by its own legal traditions and regulatory philosophies.” He gave no insight, however, into continuing discussions with European regulators over the recognition of US clearinghouses as so-called “Qualified CCPs,” which is necessary to avoid extra costs for European banks clearing transactions through them as of December 15.

Finally, Mr. Massad stated uncategorically that the “CFTC does not have the resources to fulfill” all the responsibilities it had prior to, let alone subsequent to, the adoption of Dodd-Frank. He indicated that he will work with Congress to address the agency’s finances.

In her testimony, Ms. White indicated that the SEC has focused principally on eight areas dealt with in Dodd-Frank since she became chair, including asset-backed securities, regulation of private fund advisors, proprietary activities of financial entities and over-the-counter derivatives. She cited newly adopted rules related to money market funds, the Volker rule related to proprietary activities, and the fact that “approximately 90%” of all rules mandated by Dodd-Frank are now proposed or finalized as among the SEC’s most significant accomplishments. These rules, she claimed, address issues that “were highlighted as a systemic vulnerability in the financial crisis.”

As Mr. Massad did, Ms. White also argued that, without additional resources, “the agency will be unable to fully build out its technology and hire the industry experts and other staff needed to oversee and police our areas of responsibility, especially in light of the expanding size and complexity of our overall regulatory space.”

And briefly:

Introducing Broker Sued by CFTC for Failing to Follow AML Procedures: The Commodity Futures Trading Commission filed and settled an administrative action against Zulutrade, Inc., a Greece-based registered introducing broker, for not following the firm’s own anti-money laundering procedures related to screening accounts. According to the CFTC, from October 2010 to at least October 2013, Zulutrade maintained procedures requiring it to review potential accounts against a list of targeted countries publicized by the US Department of Treasury’s Office of Foreign Asset Control. If a country appeared on this list, Zulutrade was generally prohibited from doing business with persons and entities from that country. During the relevant time, the firm apparently relied on third parties to carry out its procedures—as permitted—but failed to have a written agreement with such entities and Zulutrade’s required screening was not undertaken. As a result, Zulutrade introduced 400 persons from targeted countries—mostly from Iran, Sudan and Syria. According to the CFTC, prior to agreeing to its settlement, Zulutrade began following its procedures in connection with every proposed account. As part of its settlement, Zulutrade agreed to pay a fine of US $150,000. The CFTC had charged that the firm’s failure to follow its own procedures in screening accounts was a failure to adequately supervise activities in violation of a CFTC rule (166.3). None of the future commission merchants to whom the relevant accounts were introduced were named by the CFTC.

CFTC Harmonizes Marketing Requirements for Certain Private Funds With SEC Rules: The Commodity Futures Trading Commission’s Division of Intermediary Oversight has provided exemptive relief to permit certain commodity pool operators that engage in limited commodity interest activities to market their offerings to the public, consistent with new rules that the Securities and Exchange Commission adopted in response to the so-called “Jobs Act” (Jumpstart Our Business Startups Act). These CPOs either are exempt from CFTC registration or certain CPO disclosure, reporting and recordkeeping requirements. CPOs relying on this relief must be engaging in an offering or resale of securities subject to certain SEC exemptions and file a notice with the CFTC. (Click here to see more details regarding this and other relief granted last week affecting CPOs in the article “CFTC Aligns CPO Regulation With JOBS Act, Provides Other Guidance for CPOs” in the September 12 edition of Corporate and Financial Weekly Digest by Katten Muchin Rosenman LLP.)

SEC Sues Bank Holding Company for Inaccurately Reporting True Volume of Delinquent Loans: The Securities and Exchange Commission brought an administrative action against Wilmington Trust Corporation claiming that Wilmington Trust Company, its retail bank and commercial subsidiary, failed in 2009 and 2010 to accurately keep track of loans it granted to finance construction projects that were not repaid timely when the underlying projects experienced difficulties. These were typically matured loans that were 90 or more days past due. As a result, Wilmington Trust filed financial statements with the SEC that the agency claims were not accurate for multiple quarters in 2009 and 2010 and therefore were false and misleading. Financial statements filed with the SEC during 2009 were incorporated by reference into offering materials used by Wilmington Trust in connection with a 2010 public offering. Without admitting or denying any of the SEC’s findings, Wilmington Trust agreed to pay US $18.5 million in disgorgement and interest to settle this matter.

IOSCO Updates Survey Regarding the Regulation and Supervision of Commodity Derivatives Markets: The International Organization of Securities Commissions updated its survey of its member states’ compliance with the principles for the regulation and supervision of commodity derivatives markets adopted by IOSCO in November 2010. The principles—which effectively are a best practice for regulation—address the need for jurisdictions to, among other matters, have (1) rules to make information regarding physical commodity derivatives contracts available to regulators; (2) requirements to conduct surveillance of both on exchange and OTC commodity derivatives markets and large trader positions; (3) the ability to intervene in “disorderly” commodity derivatives markets, including to set position limits; (4) rules defining and prohibiting manipulation; and (5) enforcement authority to prosecute and sanction market abuses. In general, claims the survey, “the majority of respondents were broadly compliant with the Principles.” The survey sets out the assessment of each of the 34 responding jurisdictions to its compliance with the principles. The survey was last updated in October 2012.

OTC Derivatives Regulators Group Issues Status Update: The OTC Derivatives Regulators Group on Cross-Border Implementation Issues (ODRG) issued a status report claiming that members continue to address “potential gaps and duplications” in connection with the treatment of branches and affiliates internationally, and issues emanating from the G20’s commitment that the trading of standardized OTC derivatives occur on exchanges or electronic trading platforms, including the treatment of organized trading facilities. The regulator group is also continuing to implement prior agreements related to equivalence and substituted compliance, clearing mandates, risk mitigation for non-cleared transactions, and data in trade repositories and barriers to reporting. The ODRG includes representatives from 12 worldwide regulatory organizations including the Commodity Futures Trading Commission, the Securities and Exchange Commission, the European Commission and the European Securities and Markets Authority. (Click here to see more details regarding this matter in the article “OTC Derivatives Regulators Issue Report Regarding Cross-Border Issues” in the September 12 edition of Corporate and Financial Weekly Digest by Katten Muchin Rosenman LLP.)

HK SFC Brings Action Against CITIC Limited and Former Chairman and Executive Directors Related to 2008 Financial Disclosure: The Hong Kong Securities and Futures Commission filed lawsuits against CITIC Limited, its former chairman and four of its other former executive directors related to the company’s alleged publication of “false and misleading” information regarding its finances on September 12, 2008. According to SFC, the company failed in its publication to disclose that it had incurred “massive losses” from leveraged foreign exchange trading. Shortly afterwards, on October 20, 2008, the company in fact disclosed such losses which it claimed were incurred in connection with managing the risk of its exposure to an Australian iron ore mining project. SFC charges that the five directors were aware of the losses on September 7, prior to the September 12 publication. SFC seeks as a penalty an amount to reimburse investors who purchased CITIC shares after the September 12 publication and lost money when CITIC’s share price later collapsed after the October 20 announcement.

And even more briefly:

End Users Say Derivatives Important in ISDA Survey But Fragmentation a Concern: Fifty-six percent of end users responding to a market survey conducted by the International Swaps and Derivatives Association claimed that new regulatory requirements are increasing market fragmentation along geographic lines. Most responders believe that the costs of OTC derivatives will increase as a result.

Japan SESC Recommends FSA to Fine Unnamed Singapore Entity for Manipulation of JGB Futures: The Japan Securities and Exchange Surveillance Commission has recommended to the Japan Financial Services Agency that an administrative monetary penalty of JY 330,000 (approximately US $3,075) be issued against an unnamed Singapore-based person for manipulating the 10-year Japanese government bond futures contract on June 26, 2013. The alleged violations would appear to have constituted the violation of best bids and offers under equivalent provisions of the Dodd-Frank Act.

FINRA Changes Ways to Process and Approve Subordination Agreements: FINRA announced it had created a new central unit to process and approve all subordination agreements. The new process will be phased in over three months.

SEC Updates Volker Rule FAQs; First CEO Attestation Due by No Later Than March 31, 2016: The Securities and Exchange Commission has updated its frequently asked questions regarding the Volcker Rule. In its latest amendment to the FAQs, the SEC states that since impacted banking entities must meet the compliance requirements of the rule by no later than July 21, 2015, chief executive officers must provide their first required annual attestation regarding the adequacy of their firm’s compliance program by no later than March 31, 2016.

CFTC Schedules Open Meeting on Uncleared Swaps Margin Requirements and Utility Special Entities: The Commodity Futures Trading Commission will host a public meeting in Washington, DC, on September 17 to discuss a proposed rule related to margin requirements for uncleared swaps and a final rule regarding utility operations-related swaps. The Federal Reserve Bank and four other federal agencies proposed margin rules for uncleared swaps two weeks ago. (Click here to see the article “FRB and Four Other Federal Agencies Propose Minimum Margin Rules for Uncleared Swaps” in the September 1 to 5 and 8, 2014 edition of Bridging the Week.)

ESMA to Host Open Hearing on Market Abuse: The European Securities and Markets Authority will have a public hearing on October 8 in Paris regarding issues raised in response to its two recently published consultation papers regarding its market abuse directive.

For more information, see:

CFTC and SEC Chairs Testify Before Senate Banking Committee on Dodd-Frank Progress

Testimony of Timothy Massad:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomassad-1
Testimony of Mary Jo White:
http://www.sec.gov/News/Testimony/Detail/Testimony/1370542893146#.VBH_SkvqdiE

CFTC Harmonizes Marketing Requirements for Certain Private Funds With SEC Rules:
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-116.pdf

See also MFA Statement:
https://www.managedfunds.org/wp-content/uploads/2014/09/MFAStatement_CFTC_JOBS_ACT_RELIEF_09-10-2014.pdf

CFTC Schedules Open Meeting on Uncleared Swaps Margin Requirements and Utility Special Entities:
http://www.cftc.gov/PressRoom/PressReleases/pr6994-14

CFTC Sues Lawyer in Federal Court for Aiding and Abetting Clients’ Legal Violations
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfgrossmancomplaint090914.pdf

See also CFTC Press Release:
http://www.cftc.gov/PressRoom/PressReleases/pr6990-14

End Users Say Derivatives Important in ISDA Survey But Fragmentation a Concern:
/ckfinder/userfiles/files/ISDA%20End%20User%20Survey%20Press%20Release%20FINAL.pdf
/ckfinder/userfiles/files/ISDA%20August%202014%20Insight%20Survey%20Results%20.pdf

ESMA to Host Open Hearing on Market Abuse:
http://www.esma.europa.eu/news/ESMA-announces-open-hearing-Market-Abuse

FINRA Changes Ways to Process and Approve Subordination Agreements:

See excerpt from September 10, 2014 FINRA Weekly Update:
/ckfinder/userfiles/files/FINRA%20September%2010%2c%202014.pdf

HK SFC Brings Action Against CITIC Limited and Former Chairman and Executive Directors Related to 2008 Financial Disclosure:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR108

Introducing Broker Sued by CFTC for Failing to Follow AML Procedures:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfzulutorder090914.pdf

IOSCO Updates Survey Regarding the Regulation and Supervision of Commodity Derivatives Markets:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD449.pdf

Japan SESC Recommends FSA Fine Unnamed Entity for Manipulation of JGB Futures:
http://www.fsa.go.jp/sesc/english/news/reco/20140905-1.htm

OTC Derivatives Regulators Group Issues Status Update:
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/oia_odrgreportg20_0914.pdf

SEC Sues Bank Holding Company for Inaccurately Reporting True Volume of Delinquent Loans:
http://www.sec.gov/litigation/admin/2014/33-9646.pdf

SEC Updates Volker Rule FAQs; First CEO Attestation Due by No Later Than March 31, 2016:
http://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of September 13, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. 

Quotations attributable to speeches are from published remarks and may not reflect statements actually made.


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