Last week, the CFTC filed civil charges against a rancher for multiple violations stemming from the use of fale hedge exemptions (among other things) to avoid major position limit violations. The fedeal case is here). This a a really egregious case but it holds a lot of points to consider.
First, the defendant was rampantly speculating in cattle futures (as a cattle rancher one can anticipate some degree of knowledge but would also expect some restraint) from 2016 to 2020. This firm built up over $200 million in trading losses. So, like all good traders he closed the book and took his loses, right? NOT.
Instead, this guy decided to creat fake cattle and send bills to a business partner to cover the losses - $233 million in fake cattle. That also gave him a reason to have a lot of futures hedging them, right? So, the rancher submitted:
"false cattle inventory, purchase, and sales figures to the Chicago Mercantile Exchange (“CME”) in two hedge exemption applications to seek permission to exceed the exchange’s speculative position limits and avoid disciplinary action."
Oops, you just took a fraud case into a futures market violation. The rancher did admit the false filings isometime near last month.
The CME and CFTC found that since the cattle didn't exist, the hedge exemptions were false. So now the rancher is not just on the hook for fraud but also for:
1. Filing false statements regarding a hedge exemption to the CME,
2. Fraud in a commodity transaction,
3. Position limit violations for all the underlying position no longer covered by the hedge exemption
Since the futures trades were linked to the defrauding of the rancher's partner, the futures trades were used in a manipulative device. Yes, the fraud was in presenting the false invoices to the partner but then the rancher employed that information used in the fraud in the hedge exemption. I will leave it to the lawyers to connect the dots but the consulting take away is simple - if you are commiting fraud and part of the way you are attempting to commit or monetize the fraud lands in you exhcange and CFTC territory. I am sure there is a civil case somewhere between the rancher and the partner but the case here is in addition.
It should also be noted that the CFTC charge reads:
" From at least October 2016 through November 2020, as set forth in Paragraphs 15–41 above, Defendants violated 7 U.S.C. § 9(1) and 17 C.F.R. § 180.l(a)(1)–(3) by, among other things, in connection with the sale of commodities in interstate commerce, submitting to the Producer fraudulent invoices for more than 200,000 head of cattle and receiving reimbursement for the purchase price and grow costs associated with them. "
Many people forget that the CFTC jurisdiction is over the commodity in interstate commerce. Committing the fraud by using beef is using a commodity. Foreign companies especially need to understand this as well as the fact that almost any commodity in the US will cross a state line before it is loaded for international shipment. So loading from a coastal port in the US may not exempt a firm from this jurisdiction - again, a point to raise with your lawyer.
So, to the penalities - the CFTC is lowering the boom. They want full restitution including disgrogement of:
"all benefits received including, but not limited to, salaries, commissions, loans, fees, revenues, real and personal property and trading profits derived, directly or indirectly, from acts or practices which constitute violations" Claw back of salaries is a pretty harsh ask.
Plus complete bar from anything to do with futures, swaps or other products relating to "any commodity interests" - which is one of the broadest definitions used by the CFTC in the commodity space.
Plus civil penalties as allowed, which is "in any case of manipulation or attempted manipulation in violation of section 9, 15, 13b, or 13(a)(2) of this title, a civil penalty in the amount of not more than the greater of $1,000,000 or triple the monetary gain to the person for each violation." This could be read to mean every invoice, every position limit violation, every filing with the CME is a separate violation. In the case of position limits, a violation occurs each time you go over the limit - so if you are over and go under and then back over again, it is a separate violation. Ther are likely at least a minimum of 24 violations for position limits alone (each spot month would likely have had a least one violation.
The potential penalty here would appear to be at least the $233 million of monies defrauded plus a sum that could easily equal that in civil penalties.
This CCTC case will, most likely, be in addition to CME fines and discpline for false statements and position limit violations - which could also run in the millions.