Derivatives are financial tools that derive their value from the value of an underlying asset. These can include stocks, bonds, commodity futures, and currencies. The derivatives market is highly sensitive and extremely volatile. Some people even compare it to legalized gambling. It is a high-risk, high-reward market. Because the market is complex and ever-changing, there are many ways financial advisors take advantage of others. The Commodities Futures Trading Commission ("CFTC" or "the Commission") is an independent government agency. The CFTC is responsible for regulating the U.S. derivatives market. Formed by the Commodities Exchange Act, the CFTC is there to protect the public from fraudulent and abusive practices. The Division of Enforcement of the CFTC oversees actions related to futures, options, swaps, and the contract of sale of any commodity. They preserve market integrity by detecting, investigating, and prosecuting violations. The most common violations include:
Fraud: making false or misleading statements of material facts to the Commission. These could include false statements made in registration applications or reports.
Market manipulation: communicating false or misleading market information that affects the price of a commodity in interstate commerce. This includes antitrust practices, where an authorized person colludes with another market participant to affect the price of a commodity or unlawfully restrain competition.
Trade practices violations: intentional or reckless disregard of orderly execution of transactions during closing periods. This includes a practice known as “spoofing” which happens when someone produces an offer or a bid with the intent to cancel it before execution.
Wash sales: buying or selling a product with the sole purpose of avoiding a bona fide market risk. A common example would be to sell a product in a way that qualifies as a tax-deductible loss, only to buy an equal product shortly thereafter, usually within 30 days.
Other violations of the Commodities Exchange Act include offering bribes to Commission officials, obtaining unauthorized access to the Commission, interfering with a Commission proceeding, and failing to establish supervisory procedures that ensure compliance with CFTC rules.
The CFTC can investigate and bring forth a civil lawsuit against people and companies that break these rules. However, as a government agency, it is limited in the amount of information they get. That’s why whistleblowers are important. Through the CFTC’s whistleblower program, individuals can report violations. They can even earn a reward for helping the Commission. Although individuals who become whistleblowers are usually insiders, this is not necessary. Market participants who witness misconduct can become whistleblowers under the program. Even fraud victims can become whistleblowers.
To become a whistleblower, you must have original, non-public information. Also, the information must be about a Commodities Exchange Act violation. The individual must report it to the CFTC through what is called a Form TCR, which stands for Tips, Complaints, and Referrals. Information about the misconduct must be credible and specific. In other words, it can’t be based on assumptions. It also cannot be information protected by the attorney-client privilege. Lastly, the whistleblower must be as detailed as possible when it comes to misconduct. The details must connect the allegations to the rules being broken and any possible effect that they might have on the market. When a TCR is submitted, the CFTC will start an investigation on the alleged wrongdoing. This investigation can become a civil lawsuit. If successful, this will result in monetary sanctions to the defendants. These sanctions are usually based on some factors. This includes the number of violations committed, violation duration, market impact, and the amount of money the defendant illegally gained. The CFTC has the discretion to double or even triple this amount, depending on how egregious the violations were. If the whistleblower information leads to a successful lawsuit that results in $1 million or more in sanctions, they will be entitled to a reward that can range from 10% to 30% of those sanctions recovered by the Commission. This percentage is determined by how vital the information provided by the whistleblower was in the success of the lawsuit.
The idea of becoming a whistleblower can be scary, especially if you’re an insider that works for the company you want to report. Fear of retaliation is very common in potential whistleblowers. Luckily, the CFTC has ways of protecting these good Samaritans that just want to do the right thing. The first line of protection is anonymity. If a whistleblower is represented by an attorney when submitting a TCR, their identity remains a secret. This is regardless of whether the information leads to a successful lawsuit or not. If the whistleblower becomes eligible for an award, they must then reveal their identity to the Commission. Even then, the CFTC does not reveal the identity of the whistleblower or what amount was awarded to them. However, this protection is not absolute. There are a few circumstances under which the CFTC might release the identity of the whistleblower to the defendant or third parties. It might happen if the whistleblower consents to have their identity revealed. It’s also possible that disclosure might be required in connection to a public proceeding with a different government entity. The Commission only discloses this information necessary to enforce the Commodities Exchange Act.
Even if the whistleblower’s identity is revealed, there is still a second line of protection: the anti-retaliation clause. Employers are prohibited from firing, demoting, harassing, suspending, or discriminating against a whistleblower who has reported a violation. Employers are not even allowed to restrict the communication a potential whistleblower can have with the CFTC, including the enforcement of a confidentiality agreement or an arbitration clause in the employment contract. Whistleblowers who have been victims of retaliation have up to two years to bring a private action against their employers. They may be entitled to reinstatement, back pay, and litigation costs. This can be done in federal court or through the CFTC itself.
If you believe someone you know or work for has violated the Commission Exchange Act in any way, you must come forward with this information. Rewards are taken from the monetary sanctions. As such, the only people affected by the whistleblower program are the ones committing misconduct. You would not only be doing a great service to the government and the public but yourself as well.