CFCT LAWYERS

Created by the Commodity Exchange Act, the Commodity Futures Trading Commission (CFTC or “Commission”) is an independent government agency that regulates the U.S. derivatives market. Derivatives are financial instruments that derive value from an underlying asset or interest. These underlying assets include stocks, bonds, commodity futures, and currencies. 

The derivatives market is susceptible and highly volatile; some people even compare it to a form of gambling. It is a high-risk, high-reward market. Because of this market’s intricate and volatile nature, there are many ways that financial advisors and others can take advantage of unwitting customers and investors. But fear not! The CFTC is there to protect the public from fraudulent and abusive practices.

HOW THE CFTC WHISTLEBLOWER PROGRAM WORKS

The CFTC Whistleblower Program provides monetary incentives to individuals who report possible violations of the Commodity Exchange Act that lead to a successful enforcement action, as well as privacy, confidentiality, and anti-retaliation protections for whistleblowers. The Program treats information learned during the course of an investigation, including the identity of sources, as non-public and confidential. The law prohibits retaliation by employers against whistleblowers. The CFTC also has authority under the Commodities Exchange Act to bring an enforcement action against your employer for any retaliatory acts, which include any steps taken to impede a whistleblower from taking action.

COMMODITIES EXCHANGE ACT VIOLATIONS

The Division of Enforcement of the CFTC oversees any action connected with futures, options, swaps, and the contract of sale of any commodity. They preserve market integrity by detecting, investigating, and prosecuting Commodities Exchange Act 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: Communication of 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 to avoid a bona fide market risk. A typical example of this would be selling a product in a way that qualifies as a tax-deductible loss, only to buy a similar product shortly after that, usually within 30 days.

Other violations of the Commodity Exchange Act include:

• Offering bribes to Commission officials.
• Obtaining unauthorized access to the Commission.
• Interfering with a Commission proceeding.
• Failing to establish supervisory procedures that ensure compliance with CFTC rules.

The CFTC has the power to investigate and bring forth a civil lawsuit against people and companies that break these rules. Still, as a government agency, it is limited in the amount of information they get. That is why they have a whistleblower program through which individuals can report violations and even potentially earn a reward for helping the Commission. Although individuals who become whistleblowers are usually insiders, this is not strictly necessary. Market participants who witness the misconduct happening, or even victims of the fraud itself, have been able to become whistleblowers under the CFTC’s whistleblower program. Someone can even qualify if they perform an independent analysis and uncover fraud involving derivatives. 

BECOMING A WHISTLEBLOWER 

To become a whistleblower, one must have original, non-public information about a violation of the Commodities Exchange Act (or information about fraud derived from an independent analysis). 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 cannot be based on assumptions. It also cannot be information protected by the attorney-client privilege. Lastly, the whistleblower must be as detailed as possible regarding the misconduct, connecting the allegations to the rules being broken and any potential effect that they might have on the market.

When a TCR is submitted, the CFTC will start investigating the alleged wrongdoing. This investigation can evolve into a civil lawsuit that will result in monetary sanctions to the defendants if successful. The amount of the sanctions is based on the violations, their duration and impact on the market, and the amount of money the defendant gained. The CFTC has the discretion to double or even triple these amounts, depending on how egregious the violations were. If the information provided by the whistleblower leads to a successful enforcement action that results in $1 million or more in sanctions, the whistleblower could be entitled to a reward that can range from 10% to 30% of those sanctions. The percentage is determined by how vital the information provided by the whistleblower was.

The idea of becoming a whistleblower can be scary, especially if you’re an insider who works for the company you want to report. Fear of retaliation is common in potential whistleblowers. Luckily, the CFTC has ways to protect good Samaritans who want to do the right thing. 

ANONYMITY 

The first line of protection is anonymity. If a whistleblower is represented by an attorney when submitting a TCR, their identity can remain a secret. If the whistleblower becomes eligible for an award, they must reveal their identity to the Commission. Even then, the CFTC does not disclose the identity of the whistleblower or what amount was awarded to them. However, this protection is not absolute.

EXCEPTIONS TO ANONYMITY 

There are a few circumstances under which the CFTC might release the whistleblower’s identity 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 in situations where it is necessary to accomplish the purposes of the Commodities Exchange Act.

THE ANTI-RETALIATION CLAUSE 

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 has with the CFTC, including enforcing a confidentiality agreement or an arbitration clause in the employment contract. 

The Dodd-Frank Act prohibits retaliation by employers against whistleblowers. Employers may not take any action to impede would-be whistleblowers from communicating directly with the Commission’s staff about possible violations of the Commodity Exchange Act (CEA), including by enforcing, or threatening to enforce, a confidentiality agreement or predispute arbitration agreement with respect to such communications. Nor may employers discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against a whistleblower in the terms and conditions of employment for coming forward with information about possible violations of the CEA. The CFTC and the whistleblower may separately bring actions against an employer for retaliation against the whistleblower.