The Bank of Nova Scotia’s recent $127 million settlement with the government for “spoofing” and other conduct set several records.
The BNS settlement announced Aug. 19 included a $42 million penalty for and attempted manipulation spoofing in the gold and silver markets, and an additional $17 million penalty for making false and misleading statements to CFTC staff during their initial spoofing investigation. Both are record penalty amounts for those charges.
The CFTC, which regulates the derivatives market in the U.S., has made spoofing an enforcement priority and is actively seeking whistleblowers with information about spoofing violations. The CFTC’s enforcement action against BNS shows how serious the CFTC is about rooting out spoofing and other fraud in the derivatives market.
Spoofing occurs when a trader places an order in a futures market that he or she intends to cancel before it is executed. Spoofing artificially misrepresents the supply and demand for the futures and is used to manipulate others’ behavior in ways that benefit the trader carrying out the spoofing.
The CFTC settled charges of spoofing in gold and silver futures contracts against BNS in 2018, which resulted in BNS paying $800,000 and agreeing to take measures to prevent future misconduct.
However, the CFTC later found that BNS had made false statements to the CFTC during its investigation, statements upon which the CFTC had relied when making its findings and determining the amount to sanction BNS.
Last week’s $77.4 million settlement with the CFTC included two orders. The CFTC’s False Statements Order levied $17 million in penalties to penalize BNS for its false statements, omissions, and misrepresentations to the CFTC—a record amount. The CFTC’s Spoofing Order levied $60.4 million in penalties, restitution, and disgorgement for BNS’s spoofing misconduct.
According to the CFTC’s Orders, BNS engaged in deceptive conduct for over eight years, with thousands of incidents of spoofing or attempted spoofing by traders seeking to manipulate the gold and silver futures market by placing orders and then cancelling them before the orders were executed.
This activity influenced the trades placed by other traders, allowing BNS traders to try and control the market to their advantage. The CFTC also found that BNS failed to uncover the conduct when it should have and as was required by the 2018 settlement—and that once BNS did discover it, the bank did nothing to stop the spoofing. BNS neither admitted nor denied the CFTC’s findings.
In a separate action settled the same day, the CFTC levied $50 million in penalties against BNS for failure to supervise its swap dealers and other compliance failures, as well as for making false and misleading statements to the CFTC during its investigation of the bank’s activities.
The Department of Justice contemporaneously announced the resolution of related criminal wire fraud and price manipulation charges against BNS. BNS admitted in a deferred prosecution agreement that its traders placed thousands of orders for gold and silver futures contracts for the purpose of moving the prices of those contracts in a way that benefitted BNS, and furthermore, that BNS’s compliance team had failed to prevent the fraudulent activity.
The Department of Justice imposed a $42 million penalty—near the top of the U.S. Sentencing Guidelines range. BNS also agreed to be monitored by an independent third-party supervisor. Disgorgement and restitution of $18.4 million were also imposed, for a total of $60.4 million in settlement.
However, the agreement allows BNS to offset up to $21 million by the amount of any payment it made to the CFTC for the same conduct.
One of the traders involved in the scheme also pled guilty to price manipulation charges last year and is awaiting sentencing.
These settlements show how regulators, in particular the CFTC, are making spoofing enforcement a priority. Whistleblowers who have credible information about spoofing frauds will find the CFTC and other agencies receptive to that information. Indeed, the CFTC has improved its data analysis capabilities, and the DOJ has recently created a subunit focused on commodities fraud, and has expanded its prosecution of market manipulation into new areas such as the derivatives markets.
The CFTC’s whistleblower program offers rewards and job protection to those who step forward. If monetary sanctions in a whistleblower case exceed $1 million, whistleblowers are entitled to rewards equivalent to 10% and 30% of the amount collected. The largest CFTC whistleblower award so far was $30 million paid to a whistleblower in 2018.
CFTC whistleblowers are entitled to protection against employer retaliation. The Dodd-Frank Act prohibits employers from firing, demoting, suspending, threatening, harassing, or discriminating against whistleblowers who provide information to or assist the CFTC. Whistleblowers who suffer from employment retaliation as a result of their whistleblowing may sue for reinstatement, back pay and any other damages that occurred.
The CFTC promises confidentiality to all whistleblowers, as required by the Dodd-Frank Act. Whistleblowers may file claims with the CFTC anonymously, but they must do so through an attorney. It is helpful for individuals who are considering whistleblowing to consult with an experienced whistleblower attorney before deciding what to do.