US District Court Chastises CFTC for Willful Misrepresentations

A Special Master appointed by the US District Court for the District of New Jersey recommended dismissal of the CFTC's enforcement action against a proprietary trading business. The Court found that the agency engaged in a pattern of willful and bad-faith misrepresentations to the Court.

According to the Report and Recommendation of the Special Master, the CFTC filed an ex parte Complaint and Application for a Statutory Restraining Order ("SRO") to prevent the transfer of certain assets held in the United States to Canada. The SRO was based, in part, on a sworn declaration from a CFTC investigator. The declaration stated that CAD $31.5 million had been transferred to an "unidentified [] account," raising red flags as to potential asset dissipation by the defendant.

The Special Master found that the Ontario Securities Commission ("OSC") had informed the CFTC, prior to the filing, that the funds in question were corporate tax payments to the Canadian tax authority. The Special Master found that the CFTC failed to correct the misstatement in the declaration and continued to rely on the erroneous information in court filings opposing efforts to lift the asset freeze. Further, the Special Master found that at a preliminary injunction hearing, the CFTC's investigator testified that he only became aware of the tax payments after the complaint was filed. Later, the CFTC disclosed the OSC email confirming the tax payments - not through a standalone letter - but in a footnote to a filing related to receiver fees.

The Special Master concluded that the CFTC's conduct violated its duty of candor, particularly in an ex parte setting, and was aimed at securing a tactical advantage in litigation. The Special Master emphasized that "at almost every stage in this case, the CFTC failed" in its legal and ethical obligations and noted that the agency's actions likely influenced the Court's initial grant of the SRO and preliminary injunction.

The Special Master recommended dismissal of the Complaint with prejudice and an award of attorneys' fees and costs to the Defendants. 

In a statement, CFTC Acting Chair Caroline D. Pham described the case as "a wakeup call to those of us who hold and serve the public's trust," revealing that she had raised concerns about the misconduct "nearly two years ago," before the complaint was filed. She accused CFTC management of trying to "conceal the false statements from the Court" and retaliating against her for speaking out. She condemned the culture within the Division of Enforcement, saying it reflected a belief that "the CFTC is above the law" and that this mentality "normalizes wrongdoing."

Ms. Pham also said that, since becoming Acting Chair, she has implemented reforms to correct this course, including (i) overhauling the Division of Enforcement; (ii) adopting DOJ-aligned policies; (iii) enhancing ethics and trial advocacy training; and (iv) appointing new leadership. She praised new Director of Enforcement Brian Young for taking "immediate and proactive steps to promote an ethical culture."