CFTC Orders FCM to Pay $1.5 Million for Supervision Failures; Commissioner Chilton Wants Bigger Fine (with Lofchie Comment)

Goldman Sachs has been ordered to pay a $1.5 million civil monetary penalty to settle CFTC charges that it failed to diligently supervise one of its employees trading securities futures indexes for several months in late 2007. According to the Order, a former Goldman employee hid an $8.3 billion trading position, resulting in a loss in excess of $100 million for Goldman.

Lofchie Comment: One of the persistent themes of Commissioner Chilton has been that the CFTC is not able to impose fines that are high enough, and in particular that the CFTC is not permitted to count each instance of a repeated problem as a separate instance of a violation. While I think that the question as to the authority of the regulators to impose sanctions is an important one, I worry instead that the regulatory agencies have too great a power to impose too-severe sanctions that firms are reluctant to challenge in light of the bad publicity and the danger of angering a primary regulator. In the present instance, I don't see a case for increased sanctions. Here, one has an instance where the firm itself was the victim of an employee's misconduct and as a result lost a significant amount of money (over $100 million). In fact, the CFTC's order specifically notes that the firm has acted to correct the issue, which one thinks it would be motivated to do by reason of the loss without any fine at all). In contrast to the view that fines are too low, I would suggest that unless the regulators exercise restraint with respect to their authority to impose sanctions for any mishap that a firm experiences, the sanctions themselves may become as a much of a threat to the viability of the financial system as the mishaps. As a general matter, one of the complaints I have against the current operation of our regulatory system is that it over-emphasizes enforcement as opposed to regulation. (See, e.g., an article that I wrote several years ago, before Dodd-Frank was adopted.)

See: CFTC Press Release; Order; Commissioner Chilton's Statement.