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CFTC - U.S. Commodity Futures Trading Commission

10/21/2021 | Press release | Distributed by Public on 10/21/2021 09:50

Statement of Commissioner Dawn D. Stump Regarding Claim for Award by Claimant 1 in Connection with Whistleblower Award Determination No. 21-WB-07

Statement of Commissioner Dawn D. Stump Regarding Claim for Award by Claimant 1 in Connection with Whistleblower Award Determination No. 21-WB-07

October 21, 2021

The Commission today issues a Whistleblower Award Determination based on an enforcement action that led to an Order of the Commission making findings of liability and imposing a civil monetary penalty, among other sanctions. Parallel actions were brought, based on the same misconduct, by: 1) a Federal Regulator; and 2) a foreign futures authority (Foreign Regulator). The Commission is approving the Proposed Final Determination of its Claims Review Staff (CRS) that would make an award to Claimant 1 based on the monetary sanctions collected in the Commission's enforcement action, the Federal Regulator's action, and the Foreign Regulator's action.

I am writing separately to express my disagreement with the Commission's award to Claimant 1 relating to the Foreign Regulator's action. I would disapprove the portion of the Proposed Final Determination that is attributable to the collection of sanctions by the Foreign Regulator.

Whistleblower Awards for Related Actions

Let me start by saying that I support the Commission's whistleblower program. The program effectively serves its intended purpose of incentivizing people with knowledge of potential violations of the Commodity Exchange Act (CEA) or the Commission's rules to report that information to the Commission to investigate as appropriate. The Commission received 1,030 whistleblower tips and complaints during fiscal year 2020, an increase of 36% over the previous high-water mark set in fiscal year 2018.[1]When the Commission imposes more than $1 million in monetary sanctions in an enforcement action, those sanctions, when collected, may be deposited into or credited to the Commission's Customer Protection Fund (which is used to pay whistleblower awards, fund the operation of the Whistleblower Office and the Office of Customer Education and Outreach, and fund Commission customer education initiatives); if the Customer Protection Fund has reached its $100 million ceiling, collected sanctions remain with the U.S. Treasury.[2] In the CEA, Congress determined that the funds in the Customer Protection Fund can be used not only for awards to whistleblowers based on sanctions collected in the Commission's enforcement actions, but also for awards to whistleblowers based on sanctions collected by certain other regulators in what the CEA calls "Related Actions."[3]

With respect to domestic regulators, this allowance is trying to incentivize whistleblowers to come forward and share information even if they are unsure of the jurisdictional boundaries of various agencies with respect to the activity in question. If the Commission and another U.S. regulator both collect monetary sanctions based on a whistleblower's information, it may be appropriate to award the whistleblower a percentage of both recoveries from the Commission's Customer Protection Fund.

But the CEA also provides that funds in the Customer Protection Fund can be used to make awards to whistleblowers based on sanctions collected by foreign futures authorities.[4] Though the Commission has never before made such an award, the authority to do so seems a recognition of the global nature of today's derivatives markets, and the need for cooperation among regulators given that manipulative and fraudulent schemes (and other misconduct) often cross international borders.

However, it seems to me that we should be particularly careful in making whistleblower awards based on monetary sanctions collected by a foreign futures authority, because such awards come from funds that would otherwise be available to whistleblowers to the Commission or other U.S. regulators, or to the U.S. Treasury. While the Commission supports the efforts of foreign futures authorities to hold violators accountable, I believe we must undertake close scrutiny to assure ourselves that, in a given case, it is appropriate to take money from the Customer Protection Fund for an award to a whistleblower who provided information to a foreign futures authority about a violation of foreign laws.

The sanctions imposed by the foreign futures authority are based on harm caused in the foreign country, not in the United States. Of course, a foreign governmental authority may make whistleblower awards available based on collected sanctions in actions relating to violations of its laws. But it is incumbent upon us to make a careful and comprehensive review of the record in a particular whistleblower matter before placing that burden on the Commission's Customer Protection Fund. The Commission must protect both the integrity and the long-term solvency of the program Congress has entrusted us to oversee.

This Record is Insufficient to Justify an Award for the Foreign Regulator's Related Action

This is the first whistleblower award the Commission has ever made relating to an action brought by a foreign futures authority. In my view, the record before the Commission does not establish that the Foreign Regulator's action was based on the information that Claimant 1 voluntarily submitted to the Commission, and thus is insufficient to justify a whistleblower award on top of the awards the Commission is approving based on the monetary sanctions collected in the Commission's enforcement action plus the Federal Regulator's action.[5]To qualify for a whistleblower award, a Related Action must be "based on" the original information that the whistleblower voluntarily submitted to the Commission and led to a successful resolution of the Commission's enforcement action.[6] The Commission Order's determination that the Foreign Regulator's action was based on Claimant 1's information rests entirely on just three facts: 1) the Foreign Regulator obtained information that Claimant 1 previously had provided to the Commission; 2) a year-and-a-half later, representatives of the Foreign Regulator attended an interview of a key witness (not Claimant 1) taken by the Federal Regulator; and 3) information from that witness interview appeared in the Order ultimately entered by the Foreign Regulator approximately a year after that.[7]The fact that the Foreign Regulator obtained the information that Claimant 1 had initially provided to the Commission doesn't tell us much since, as recognized in the Commission Order, that information did not include any direct evidence of violations. Rather, the rationale underlying the awards with respect to the Commission's enforcement action and the Federal Regulator's action is that this information caused the Federal Regulator to interview Claimant 1 three times (which interviews were attended by Commission staff), and to initiate interviews of current and former employees of the company under investigation (Company X), some of which were attended by Commission staff. These interviews increased the agencies' understanding of the relevant trading. Although staff of the Commission and the Federal Regulator knew about that trading from documents provided by Company X prior to interviewing Claimant 1, Claimant 1's detailed description of the trading and explanation of how it related to the violations was not known at that time, nor was the frequency of the violations that was learned as a result of the ensuing interviews.[8]

Yet, the record is devoid of any evidence that any representative of the Foreign Regulator attended any of the Federal Regulator's interviews with Claimant 1 - or indeed, that Claimant 1 ever spoke to any representative of the Foreign Regulator. In contrast to the Federal Regulator, which detailed the importance of Claimant 1's information to the course of its investigation, the record does not contain any affirmative evidence from the Foreign Regulator corroborating that Claimant 1 played any role in its action - let alone that its action was based on Claimant 1's information.

To be sure, the Foreign Regulator attended the Federal Regulator's interview of a key witness, during which the witness made admissions about the frequency of the violations and the trading. But the record contains scant information as to: 1) what investigative steps the Foreign Regulator took during the course of its investigation, particularly the year-and-a-half between its receipt of Claimant 1's information and the Federal Regulator's interview of the key witness; or 2) the Foreign Regulator's understanding of the trading (or when, and how, it came to that understanding).[9]

Given the absence of the foregoing information about the Foreign Regulator's investigation, the fact that the Foreign Regulator's Order includes admissions by the key witness also fails to establish that its action was based on Claimant 1's information. It is hardly surprising that regulators filing parallel actions against the same company for the same misconduct would coordinate the terms of their respective Orders; that does not establish that the Foreign Regulator's action was based on information from a whistleblower that it never spoke to. It cannot be assumed simply from the terms of the Foreign Regulator's Order that its action was based on Claimant 1's information absent some affirmative statement by the Foreign Regulator or other evidence making that case.

The dearth of evidence in the record regarding the basis for the Foreign Regulator's action stands in stark contrast to the extensive and voluminous evidence in the record demonstrating the impact that Claimant 1's information had on the Federal Regulator's investigation and subsequent action against Company X. In short: Given the state of the record before the Commission concerning the Foreign Regulator's investigation, I cannot conclude that its action resulting from that investigation was based on Claimant 1's information.[10]

The Commission Should Exercise its Discretion to Disapprove an Award Relating to the Foreign Regulator's Action

Even if the record before us were sufficient to conclude that the Foreign Regulator's action was based on Claimant 1's information, I believe it would be appropriate for the Commission to exercise its discretion to disapprove an award to Claimant 1 relating to the Foreign Regulator's action. In my view, the Commission's rules have provided such discretion ever since Congress created the Commission's whistleblower program in the Dodd-Frank Act.

In its original rulemaking implementing the whistleblower program, the Commission's Rule 165.11(a) provided that the Commission "may grant an award based on the amount of monetary sanctions collected in a 'related action' or 'related actions' rather than on the amount collected in a covered judicial or administrative action [brought by the Commission] . . ."[11] In 2017, the Commission amended Rule 165.11(a) to "permit" (not require) claimants who are eligible to receive a whistleblower award in a Commission enforcement action "to also receive an award based on the monetary sanctions that are collected . . . in a Related Action."[12] Rule 165.11(a), as amended in 2017, currently provides that the Commission "may grant an award based on the amount of monetary sanctions collected in a 'Related Action' or 'Related Actions' . . ."[13]

Thus: 1) the Commission can no longer make an award to a whistleblower based on the sanctions collected in either a Commission enforcement action or a Related Action; but 2) where the Commission has determined to make an award based on the sanctions collected in a Commission enforcement action, it may or may not make an additional award based on a qualifying Related Action. To conclude otherwise would mean that a whistleblower, having already received an award based on the Commission's action, could receive an unlimited number of additional awards bounded only by the number of domestic regulators and foreign futures authorities that received the whistleblower's information from the Commission.

I am not suggesting that the Commission should never grant a whistleblower award based on monetary sanctions collected by a foreign futures authority. But in this particular case, I am very comfortable concluding that, where Claimant 1 is receiving an award based on a close call relating to the Commission's enforcement action, plus an additional award relating to the Federal Regulator's action, then in light of the policy considerations discussed above with respect to whistleblower awards for actions by foreign futures authorities, the Commission should exercise its discretion to disapprove yet a third award relating to the Foreign Regulator's action.[14]

Conclusion

While the whistleblower program has yielded several worthwhile outcomes to date, I do not believe human nature is such that multiple awards are required to incentivize those with relevant knowledge to come to the Commission and "blow the whistle" on wrongdoing. For the reasons set out above, I believe we need to take an especially close look at cases where a whistleblower asks the Commission to tap its limited Customer Protection Fund for an award relating to an action by a foreign futures authority to address harm outside the United States. Certainly Congress, in entrusting us to administer the Fund, intends such attentiveness. In this case, I would disapprove the Proposed Final Determination to make a third award (on top of the award for the Commission's enforcement action and a second award for the Federal Regulator's action) relating to the Foreign Regulator's action.

[1]Whistleblower Program & Customer Education Initiatives 2020 Annual Report at 7 (October 2020), available at https://www.whistleblower.gov/reports.

[2]CEA Section 23(g), 7 U.S.C. § 26(g).

[3]CEA Section 23(a)(5), 7 U.S.C. § 26(a)(5) (definition of a related action).

[4]Id. See also CEA Section 23(h)(2)(C)(i)(VI), 7 U.S.C. § 26(h)(2)(C)(i)(VI) (encompassing a "foreign futures authority," as defined in CEA Section 1a(26), 7 U.S.C. § 1a(26), as a permissible related action); 17 C.F.R. § 165.11(a)(1)(v) (accord).

[5]Based on the record before the Commission, I find the question of whether Claimant 1 significantly contributed to the success of the Commission's enforcement action (and is therefore entitled to a whistleblower award based on the sanctions collected in that action) to be a very close call. Most significantly, the three senior attorneys in the Commission's Division of Enforcement who worked on the underlying enforcement action and whose views are reflected in the record of this matter all expressed reservations as to whether Claimant 1 satisfied the requirements to qualify for a whistleblower award. But in my view, the record, when read as a whole, does not sufficiently establish that the CRS erred in concluding that Claimant 1's information led directly to evidence that provided important support for the Commission's claims, and that there was a meaningful nexus between the information provided by Claimant 1 and the Commission's ability to successfully complete its investigation and obtain the result achieved in the underlying enforcement action. By the same token, though, I do not believe the record, when read as a whole, sufficiently establishes that the Foreign Regulator's action was based on Claimant 1's information such that an award relating to that action is justified.

[6]17 C.F.R. § 165.11(a)(2); see also CEA Section 23(a)(5), 7 U.S.C. § 26(a)(5) (defining a related action).

[7]See Order Determining Whistleblower Award Claims at 5-6 (the Commission Order).

[8]See Commission Order at 2, 4-6.

[9]The record does include evidence, submitted by Claimant 1's counsel, that at one point the Foreign Regulator took testimony from a trader at Company X who was subsequently convicted in a criminal case. It certainly seems possible that the Foreign Regulator's action may have been based on that testimony.

[10]The Commission Order notes that the related action requirements of the Securities and Exchange Commission require that a whistleblower's information "led to the successful enforcement of the related action." See Commission Order at 6 n.17, citing 17 C.F.R. § 240.21F-11(c). For the reasons discussed in text, on this record, I also cannot conclude that Claimant 1's information led to the successful enforcement of the Foreign Regulator's action.

[11]See Whistleblower Incentives and Protection; Final Rule, 76 Fed. Reg. 53172, 53206 (August 25, 2011) (emphasis added).

[12]See Whistleblower Awards Process, 82 Fed. Reg. 24487, 24491 (May 30, 2017).

[13]17 C.F.R. § 165.11(a) (emphasis added). The plainly permissive language in Rule 165.11(a) is consistent with Commission Rule 165.5(a), 17 C.F.R. § 165.5(a), which provides that the Commission will pay an award to one or more whistleblowers who provide a voluntary submission to the Commission that contains original information and that "leads to the successful resolution of a covered judicial or administrative action [by the Commission] or successful enforcement of a Related Action or both." (Emphasis added.) It also is consistent with CEA Section 23(b)(1), 7 U.S.C. § 26(b)(1), and implementing Commission Rule 165.8(a), 17 C.F.R. § 165.8(a), which provide that the Commission shall pay qualifying whistleblower awards "in an aggregate amount equal to (A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the [Commission] action or related actions; and (B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the [Commission] action or related actions." (Emphasis added.) The use of the disjunctive "or" rather than the conjunctive "and" makes clear that there may be some Related Actions that are not included within the 10-30% award calculation. IF the Commission exercises its discretion to grant an award based on sanctions collected in a Related Action, then the amount of monetary sanctions collected in that Related Action shall be included in the Commission's aggregate award based on the 10-30% award calculation.

[14]As noted, this discretionary determination only comes into play if it is concluded that Claimant 1 qualifies for a whistleblower award relating to the Foreign Regulator's action because that action was based on Claimant 1's information. I do not believe that has been established, for the reasons discussed above.

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