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Financial Services Law Insights and Observations

Bank settles spoofing charges with CFTC, SEC, and DOJ for nearly $1 billion

Federal Issues DOJ SEC CFTC Spoofing Enforcement

Federal Issues

On September 29, a global bank and several of its subsidiaries agreed to resolve investigations into allegations that their traders engaged in manipulative trading of metals futures and U.S. Treasury securities using a practice known as spoofing. The CFTC’s order settled charges that numerous bank traders violated federal commodities laws over a period of at least eight years by allegedly placing hundreds of thousands of spoof orders in precious metals and Treasury futures contracts. According to the CFTC announcement, a broker-dealer subsidiary of the bank—a registered futures commission merchant—also allegedly failed to identify, investigate, and stop the misconduct, despite numerous red flags. While neither admitting nor denying any wrongdoing in connection with the CFTC’s allegations, “except to the extent that Respondents admit those findings in any related action against Respondents by, or any agreement with, the [DOJ] or any other governmental agency or office,” the bank and its subsidiaries have agreed to pay a $920 million penalty.

In a parallel matter, the SEC announced the same day that it had reached a settlement with the broker-dealer subsidiary for fraudulently engaging in manipulative trading of Treasury securities. The SEC alleged that the subsidiary traders place non-bona fide orders to buy or sell a particular Treasury security in order “to create a false appearance of buy or sell interest” to “induce other market participants to trade against the bona fide orders at prices that were more favorable to [the broker-dealer subsidiary] than [the broker-dealer subsidiary] otherwise would have been able to obtain.” The broker-dealer subsidiary agreed to the entry of the SEC’s cease-and-desist order, in which it admitted to the SEC’s factual findings and agreed to pay disgorgement of $10 million and a civil penalty of $25 million, which will be offset by amounts paid by the bank and its subsidiaries in parallel DOJ and CFTC actions.

Additionally, the DOJ announced it had entered into a three-year deferred prosecution agreement with the bank to resolve criminal charges of two counts of wire fraud related to the aforementioned allegations. The agreement imposes a payment of more than $920 million, which consists of a criminal monetary penalty, criminal disgorgement, and victim compensation, with the criminal penalty credited towards the equal amount in penalties imposed by the CFTC. The bank and its subsidiaries must also continue to cooperate with any ongoing or future investigations and prosecutions, and it must report evidence or allegations of misconduct that could further violate federal anti-fraud, securities, or commodities statutes. Furthermore, the bank and its subsidiaries are required to enhance internal compliance programs as appropriate.