Blowing the Whistle (Part 3): A Primer on the CFTCJanuary 7, 2020 – Articles The Legal Intelligencer
This article is the third in a series of four primers on the key legal regimes incentivizing and protecting whistleblowers who report fraud: the False Claims Act (FCA), the Securities Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS) whistleblower programs. Both the FCA and IRS whistleblower program have been in place since the mid-1800s, but have recently experienced a resurgence after undergoing significant amendments. The SEC and CFTC whistleblower programs, on the other hand, were recently created through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
On balance, the FCA and three core whistleblower programs provide avenues through which individuals can report fraud occurring across a wide swath of industries. Owing largely to increased public awareness, the number of whistleblower-initiated cases and tips submitted to the whistleblower programs have reached unprecedented heights in recent years. It has therefore become imperative for attorneys, potential whistleblowers, and potential defendants to become familiar with the applicable laws, their backgrounds, causes of action, available damages and protections against retaliation. This four-part series combines perspectives from whistleblower and defense counsel to provide measured insight into each of the four main whistleblower regimes. In this third part, we discuss the CFTC whistleblower program.
Background and Legislative History
In response to a series of frauds exposed during the 2008 financial crises, the U.S. government moved to increase oversight on the financial industry through the July 21, 2010 enactment of the Dodd-Frank Act. Both the SEC and CFTC whistleblower programs were created as part of this Act.
On Aug. 4, 2011, the CFTC adopted final rules for the implementation of the whistleblower program, which became effective on Oct. 24, 2011. Given their shared origins, it should come as little surprise that the CFTC rules are largely identical to the rules adopted by the SEC. Indeed, the CFTC acknowledged that some companies would be subject to both whistleblower programs and therefore sought to “ensure consistency and promote harmonization” among the two regimes.
The primary difference among the two programs thus lies in the markets they regulate. From a broad perspective, the SEC regulates investments in businesses such as stocks, bonds and other securities. The CFTC regulates “commodities or things,” such as agricultural products (wheat, livestock, etc.) and natural resources (gold) for which contracts for future delivery are traded. For example, a commodity is at-play when a farmer agrees to sell a certain product at a set price at some point in the future. The commodity markets originated as a way for farmers and other producers to hedge against the risk that the price of a given commodity would decline before it was harvested. Since then, new and complex types of commodities have been created. As a result, it is oftentimes unclear whether a given investment vehicle is a security or commodity. For example, the CFTC and SEC both recently claimed jurisdiction over cryptocurrencies.
But like the SEC, the CFTC whistleblower program has been quite successful. In 2014, the CFTC issued its first whistleblower award. Since then, it has issued more than $90 million in whistleblower payouts based upon enforcement actions that have brought more than $730 million in fines and penalties. In recent years, the CFTC has ramped up its enforcement activity, particularly in the whistleblower arena. In the last few months alone, the CFTC issued a series of four whistleblower alerts aimed at seeking information from whistleblowers in the areas of virtual currency fraud, foreign corrupt practices, insider trading and violations of the Bank Secrecy Act. These alerts were particularly notable for wading into areas traditionally dominated by the SEC, the Financial Crimes Enforcement Network (FinCEN), and the Department of Justice. In short, the CFTC’s whistleblower program is expanding.
Becoming a CFTC Whistleblower
A CFTC whistleblower is “any individual, or two or more individuals acting jointly, who provides information relating to a violation of” the Commodities Exchange Act, see 7 U.S.C. Section 26(a)(7). A whistleblower must be an individual; companies do not qualify.
The CFTC program sets forth a detailed procedure for submitting whistleblower information. As with the SEC, and unlike the FCA, a CFTC whistleblower does not file a complaint in federal court. Instead, information is submitted directly to the CFTC through a tip, complaint or referral (TCR) form. A whistleblower may not participate as a named party in an enforcement action resulting from their information, nor may they bring an independent action if the CFTC decides not to pursue an action. As such, many whistleblowers utilize the CFTC’s mechanism for anonymous reporting by hiring experienced whistleblower attorneys to submit TCR forms and coordinate with the CFTC on their behalf.
To be eligible for an award, the CFTC must bring a successful enforcement action that results in monetary penalties of at least $1 million resulting from original information—meaning information that is not known to the government or publicly available. A whistleblower can collect an award even if a CFTC action already exists so long as the additional information significantly contributes to the CFTC’s prosecution of that action.
An award can range from 10% to 30% to the amount the CFTC collects. Exactly where the award falls between this range is determined by the CFTC itself by reference to factors such as the significance of the information to the investigation and the extent of the whistleblower’s assistance. The rewards come from the CFTC customer protection fund rather than from the actual sanctions award. Therefore, the CFTC—not the courts—determines the amount of the award and it is not appealable so long as it falls within the aforementioned 10% to 30% range. Based on the $1 million limit, the minimum award for a whistleblower is $100,000. There is no maximum.
Protections Against Retaliation
As with the FCA and SEC, the CFTC specifically prohibits retaliation against whistleblowers. Therefore, employers of whistleblowers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of their employment as a result of whistleblowing activities. Unlike whistleblowing itself—which does not permit a whistleblower to participate as a party in the enforcement action—the CFTC program does allow those who have been retaliated against to bring a private action. Any such action must be brought within two years from the date of the alleged violation.
Unlike the SEC, the CFTC originally interpreted its authority under the Dodd-Frank Act narrowly so as to preclude it from bringing actions directly against entities that retaliated against whistleblowers. That changed in 2017 when the CFTC “reinterpreted” its authority and adopted new rules so that it may now bring direct actions for violation of anti-retaliation provisions. Currently, both the CFTC and alleged victims may bring actions for violations of the relation on provision.
Damages for violations of the anti-retaliation provisions include reinstatement “with the same seniority status that the individual would have had, but for the discrimination,” back pay, and reimbursement of costs, expert witness fees and reasonable attorney fees.
The commodities markets have historically been an overlooked sector for those not operating directly in the finance industries. However, the CFTC’s recent effort to expand its authority to target wide-ranging conduct, such as foreign bribery and insider trading, bring with it an enhanced reliance on whistleblowers. With an increased number of potential whistleblowers, both whistleblowers and employers must fully understand the CFTC’s authority and regulations.
Reprinted with permission from the January 7 issue of The Legal Intelligencer. (c) 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
This article also appeared on HR.com.