Nov. 30, 2017 – Washington D.C. — The U.S. Commodity Futures Trading Commission (CFTC) expects to pay whistleblowers $45.5 million in rewards in the fiscal year 2017. The amount is more than four times what the CFTC has paid whistleblowers since the program was implemented, according to a recent auditor’s report.
The CFTC regulates derivatives markets, which includes futures, swaps, and options. The mission of the CFTC is to “foster open, transparent, competitive, and financially sound markets; detect and reduce systemic risk; promote market integrity, and protect the market users, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act (CEA).”
The CFTC whistleblower program was created by the Dodd-Frank Act to help carry out the agency’s anti-fraud mission. It provides monetary awards to those who voluntarily report violations of the Commodity Exchange Act if the provided information leads the Commission to bring a successful enforcement action or if the information significantly contributes to the success of Commission action, and the resulting monetary sanctions exceed $1 million.
If these criteria are met, a CFTC whistleblower is eligible to receive between 10 and 30 percent of the amount collected from enforcement action. If multiple CFTC whistleblowers submit reports leading to enforcement action, the award amount is still between 10 and 30 percent divided amongst the parties.
“Huge” Year for CFTC Whistleblower Program
Since the CFTC whistleblower program was created, it has widely been viewed as the stepchild to the Securities and Exchange Commission’s (SEC) whistleblower program, which has yielded greater results. By in large, this viewpoint was shaped by the program’s slow start. During the last fiscal year, the program did not pay out a single dollar in whistleblower awards, and prior to this year, the program had only paid out $11 million in total awards.
The fiscal year 2017 is shaping up to be much different, however.
“This year for us is going to be huge,” said CFTC Whistleblower Office Director Christopher Ehrman at a conference earlier this month. According to Ehrman, CFTC received more than 465 whistleblower reports during the past fiscal year, representing a 70 percent increase from the previous year.
While the amount of whistleblower reports the CFTC received in 2017 pales in comparison to reports received by the SEC, the sharp uptick is encouraging because it is a clear indication that more and more people are willing to come forward to report wrongdoing.
And with recently enacted rules designed to protect CFTC whistleblowers from retaliation by their employer, increased reporting to the agency should continue into 2018. In May, the CFTC announced that the agency or whistleblowers who bring allegations to the agency’s attention may now bring an action against a retaliatory employer. The new rules also prohibit employers from impeding prospective whistleblowers from communicating directly with the CFTC about possible CEA violations through the use of confidentiality, pre-dispute arbitration, or similar agreement.
What Do Whistleblowers Report to CFTC?
Generally speaking, violations of CFTC regulations or the CEA include the following:
- Fraud – Some examples include Ponzi schemes, fraudulent solicitation, misappropriating of or mishandling customer funds, or issuing false customer account statements.
- Market Manipulation (including disruptive trading practices or attempted market manipulation) – Some examples include trading strategies designed to manipulate prices, spoofing (placing an order with the intention of canceling it before consummating a completed trade), and fictitious non-competitive transactions.
- Trade Practice Violations – Some examples include wash sales (or wash trading), fictitious sales, inadequate oversight of traders, violation of position limits, non-competitive transactions, unauthorized swap transactions, undercapitalization, improper controls and supervision, improper handling and/or segregation of customer funds and failing to comply with applicable rules for record-keeping.
While fraud, market manipulation and trade practice violations involving derivatives can seem perplexing, this area of the financial world truly needs whistleblowers and proper oversight. As this piece from Seeking Alpha points out, the derivatives market was a huge factor in the Great Financial Crisis.
Whistleblowers at the Front Lines Protecting the Government and Taxpayers from Fraud
Whistleblowers have long been a vital weapon in the fight against financial fraud. Scandals ranging from Enron to tax fraud in Swiss banks were exposed and prosecuted because whistleblowers felt compelled to come forward and report wrongdoing.
Creating incentives for whistleblowers to come forward and report fraud is one of the most efficient ways to ensure that taxpayers are protected from corporations and individuals that are willing to bend or break laws in the name of greed. Let us hope that the latest surge of claims in the CFTC whistleblower program continues and that the CFTC continues to empower and protect whistleblowers who decide to bring fraud allegations to the government’s attention.