SEC Chair Offers Advice on Bitcoin and Its Ilk

This week, the chair of the U.S. Securities and Exchange Commission weighed in on crypto-currencies as well as ICOs or initial coin offerings. With the price of bitcoin nearing $20,000, it probably comes at the right time. You may have been wondering yourself: What are the rules for this stuff? Are they being followed? And what are the risks in these markets?

Here is a summary of his advice for both Main Street and Wall Street.

For Main Street

These are the folks at home who may be tempted to jump on the bandwagon.

  1. Understand that, for now, it’s the Wild West out there. The SEC hasn’t approved any crypto-currency-related funds or products for listing and trading, and no one has registered an ICO with the Commission. Don’t let anyone today tell you otherwise.
  2. Do your homework. If you choose to invest in these things, ask plenty of questions and demand clear answers. The Chair’s statement includes a list of sample questions to consider. Be especially careful if a pitch sounds too good to be true or you’re pressured to act quickly.
  3. Understand that these markets cross borders, so your money may travel overseas even without your knowledge. Once there, you may not ever be able to get it back.

For Wall Street

These are market professionals like brokers, dealers, lawyers, advisers, accountants, and exchanges.

  1. Although ICOs can be effective ways to raise money, you have to follow the securities laws if it constitutes an offering of securities. So ask yourself: Is this offering a security? Is it an investment contract? Is it, in other words, an investment of money in a pooled venture that expects to derive profit from the efforts of others? If you’re not clear on this then you need a lawyer because the Commission will look past the form of a transaction to its substance. So just calling it a currency doesn’t settle the question. We blogged recently about this fact-intensive inquiry here.
  2. If you handle transactions in crypto-currency, you should treat them as if cash were being handed from one party to the other. You should know your customer and mind anti-money-laundering laws whenever you allow payments in crypto-currencies, allow their purchase on margin, or otherwise use them to facilitate securities transactions.

CFTC Launches New Website for Whistleblowers

Another thing about the Commodity Futures Trading Commission: Last month, the agency unveiled the new website for its whistleblower program at It looks pretty good, and it’s easy to navigate. It tells you what you need to know about the program, including how to submit a tip and how to apply for an award.

The CFTC’s whistleblower program was created by the Dodd-Frank Act of 2010, and it provides monetary awards to people who voluntarily report violations of the Commodity Exchange Act. If your tip translates into an enforcement action that results in more than $1 million in sanctions, you stand to receive 10-30 percent of the money collected. The pay out may even include money collected by other agencies that piggyback off your successful tip.

Here’s the CFTC’s press release.

Meanwhile, the agency has apparently caught flak for the way it’s been accounting for its office leases, though after a year-long audit by the Government Accountability Office, it seems like much ado about little.

You can read a couple stories about it here and here, but after reviewing the GAO’s report, it’s hard for me to see the point of the whole exercise unless it was to fuel congressional squabbles over the CFTC’s budget.

And for my money, an agency that we’ve called on to regulate the multi-trillion-dollar derivatives markets needs a lot more than $250 million per year to do its job.

The CFTC’s First Ever Case of Insider Trading

Two months ago, for the first time, the Commodity Futures Trading Commission flexed its new anti-fraud powers under the Dodd-Frank Act to punish insider trading in the futures markets.

How so? The agency filed and settled an enforcement action against an employee whose job was to trade energy futures for a large corporation. Allegedly, the employee used access to confidential information about the timing, volume, and prices of the company’s trades to profit his own personal accounts at his employer’s expense. He allegedly executed trades between the company’s account and his personal accounts, thus playing both sides of the deal, and he allegedly placed other personal orders just ahead of orders he placed for the company, thus benefiting from price movements caused by the company’s much larger trades. These actions violated the Commodity Exchange Act and its regulations.

Under the terms of the settlement, the employee did not admit or deny the agency’s findings and conclusions, but he agreed to pay restitution in the amount of $217,000, a monetary penalty of $100,000, and post-judgment interest on both. He also consented to a permanent bar from trading in commodities directly or indirectly.

For more details, here’s a copy of the Commission’s press release, and here’s a copy of the order itself. For more in-depth analyses on what this may mean for the agency’s enforcement efforts going forward, see here and here.

JPMorgan Agrees to Pay $100 Million to Settle CFTC Charges Over Market Manipulation

The Commodity Futures Trading Commission has settled its case against JPMorgan Chase, the nation’s largest bank, over the latter’s alleged attempt to manipulate a financial-derivatives market amid massive trading losses at one its units.

The background is that, from 2007 to 2011, the bank amassed a net $51 billion portfolio of credit-default swaps, a type of derivative that is like an insurance contract used to hedge against, or just plain bet on, the risks of default in the bond markets.

Here’s how it works. The buyer of the credit-default swap (or CDS) pays the seller for the contract sort of like the way we pay insurance premiums. In return, the seller guarantees the credit risk by agreeing to pay off the debt in the event of a default. If the underlying debt performs, the seller profits, but if there’s a default, the buyer is protected.

As one can imagine, the value of these contracts can rise precipitously if there’s a wave of defaults in a given market. In 2006, for example, one money manager, John Paulson, began buying CDS contracts tied to the mortgage-backed-securities market. In effect, he began shorting, or betting against, the U.S. housing market. When he started, most of Wall Street was still bullish on housing, and these contracts weren’t worth much. But before long, as the risk of default began rising, and as banks and investors scrambled to buy protection, their prices went up. And how. In 2007, Paulson made nearly $4 billion from these investments. That’s right: $4 billion in one year. His move has been dubbed, “the greatest trade ever.”

In the JPMorgan case, the bank’s $51 billion portfolio began suffering heavy losses in January 2012. As daily losses grew into February, the trading unit acted to defend its position. Specifically, because the portfolio stood to benefit from a drop in the price of one particular type of CDS, traders began unloading that CDS copiously, including by selling it to another branch of the bank. On one day, for example, the bank sold over $7 billion worth of the CDS, an amount which dwarfed the average daily trading volume of the bank and other market participants. According to the CFTC, this constituted a “manipulative device” employed in reckless disregard of its consequences to legitimate market forces.

The case was a test of the Dodd-Frank law’s new prohibition against manipulative market practices. Whereas the law previously required proof that a trader have “intended” to manipulate the market and was actually successful in doing so, the Dodd-Frank amendments enable the Commission to prosecute the use of any manipulative device under a “recklessness” standard of liability. See the Commodity Exchange Act, 7 U.S.C. § 9, and the Commission’s Regulation 180.1, which is codified at 17 C.F.R. § 180.1.

JPMorgan admitted the factual findings set out in the Commission’s order, including that its traders acted recklessly, and agreed to pay a $100 million civil monetary penalty. Although the bank admitted certain findings of fact, it did not consent to the use of the settlement order against it in other civil lawsuits. In the meantime, separate investigations by the U.S. Justice Department and the Massachusetts Securities Division will continue.

Ratings and Reviews

10.0Mani Dabiri
Mani DabiriReviewsout of 7 reviews
The National Trial Lawyers
The National Trial Lawyers
Mani Dabiri American Bar Foundation Emblem