Record Fine for Tower Research as CFTC Hits Spoofers Again

The US Commodity Futures Trading Commission (CFTC) has again targeted spoofers in futures markets with two actions against firms, including a record fine for high frequency trading firm Tower Research.

Tower was hit with a $67.4 million fine for failing to halt a spoofing scheme that lasted over two years and led to criminal charges against three of its former traders, while Mitsubishi Corporation RtM Japan was fined $500,000 for failing to adequately train a trainee dealer who operated a spoofing scheme.

This Order against Tower finds that by and through the three former traders, the firm engaged in unlawful activity while placing orders for, and trading futures contracts through Tower accounts, which benefited Tower financially while causing $32,593,849 million in market losses.

The fine is comprised of $32,593,849 in restitution, $10,500,000 in disgorgement, and a $24,400,000 civil monetary penalty – the largest total monetary relief ever ordered in a spoofing case. It also requires Tower to cease and desist from violating the Commodity Exchange Act’s prohibition on spoofing and the use of manipulative and deceptive schemes, which took place on the CME and CBoT exchanges in a variety of products.

“I’ve been clear that the CFTC will be tough on those who break the rules,” says CFTC chairman Heath Tarbert. “This case reflects that commitment as well as the continued importance the agency is placing on parallel efforts with our law enforcement partners. A robust combination of criminal prosecution and regulatory enforcement is essential to preserving market integrity and protecting our market participants. I commend the Department of Justice for its work on this case and its commitment to the relationship between our two agencies.”

Meanwhile, James McDonald, the CFTC’s director of enforcement adds, “Today’s enforcement action shows that the CFTC will continue to aggressively pursue those who engage in manipulative and deceptive conduct in our markets. This misconduct undermines the integrity of the price discovery process and can result, as it did here, in harm to law-abiding market participants. The CFTC will continue to work closely with our law enforcement partners to root out this illegal activity and hold those responsible accountable.”

The order against Tower did come without drama at the CFTC with two commissioners taking the unusual step of issuing statements about the issue. In a statement of dissent, commissioner Dan Berkovitz said while he agreed with the “substantial remedial sanctions” the Commission placed upon Tower, he did not agree with the decision by the CFTC to grant Tower a waiver from the “Bad Actor” disqualification that would often come with such an order. “The CFTC has neither the legal authority nor the expertise to determine the appropriate procedures and qualifications for public and private securities offerings and how best to protect investors from fraud in the securities markets,” Berkowitz says in a statement. “These matters are the core responsibility of the SEC, not the CFTC.

“As a matter of policy, it is inappropriate for the CFTC – the federal derivatives regulator – to opine on, or determine, whether securities offerings should be exempt from registration under the securities laws,” he continues. “The CFTC does not possess the expertise to determine the appropriate procedures for securities offerings, or how to best protect investors from fraud in securities offerings.  Administering the securities laws is the responsibility of the SEC.

“The SEC’s process for waiving automatic disqualifications does not serve the interests of the CFTC, the SEC, or the public,” Brtovitz adds. “The rule complicates the CFTC’s ability to prosecute violations of the CEA because firms that are subject to disqualification will not resolve their actions unless the CFTC agrees to waive the disqualification. And the rule does not advance the SEC’s interests in protecting investors because decisions regarding waivers are being made by a derivatives regulator for a hodgepodge of reasons, not by the securities regulator according to the criteria it has established for those decisions.”

Separately, commissioner Rostin Benham, in a statement of general concurrence with the order, also warns over the Commission’s decision to recommend the waiver. “I write to express my extreme reservations with the Commission’s decision to issue a Consent Order which includes advice that automatic disqualification under Rule 506(d)(1) of the Securities and Exchange Commission’s (“SEC”) regulations should not arise as a consequence of the Consent Order. Under these unique circumstances involving such significant violations of the Commodity Exchange Act’s anti-fraud and anti-manipulation provisions, I do not believe that the Commission should provide a waiver to automatic disqualification from relying on certain exemptions from registration for private offerings under Rule 506(d)(1).

“Section 926 of the Dodd-Frank Act clearly states that disqualification from Regulation D offerings should result where there is a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct – like Tower’s actions here,” he adds.

Benham continues,”…Given the “gravity” of Tower’s actions, which involved unprecedented levels of spoofing, I am not comfortable advising the SEC that the automatic disqualification should not apply. In instances of this magnitude, where fraud and abuse harmed market integrity and market participants, the SEC should be the sole authority regarding whether or not a waiver should result. In much the same way that the SEC’s rule allows relevant authorities to determine the impact of their orders, allowing the SEC to determine whether automatic disqualification should apply here would insure that the relevant authority determines the impact of Regulation D.”

Benham also says in the statement, “In short, the SEC is best suited to issue waivers to its market participants from its rule; not the Commission. In this instance, where Tower has not previously been required to register with the CFTC or the SEC, there is ample time for the SEC to consider whether the CFTC’s action against Tower today should result in automatic disqualification.”

Colin Lambert

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