CFTC Spoofing and How to Report

• Commodity swaps trading opens the door for fraudsters whose goal it is to manipulate the market to their advantage.
• Spoofing is a common form of marketplace fraud that occurs when a bid on a financial asset is canceled before the execution of the transaction, leading other members of the market to believe there is demand for a certain asset.
• CFTC whistleblowers can earn financial rewards by reporting spoofing or other commodities and trading frauds to the CFTC Whistleblower Office.

Swaps trading is a contract in which parties agree to exchange the cash flow of one commodity for the cash flow of another commodity for a specified period of time. The value of one commodity is fixed in that it is specified in the contract (the “fixed leg”) while the value of the other commodity is variable in that it is based on the commodity’s future value (the “floating leg”).

Usually, a commodity swap is sought by a producer to lock in a fixed price for a given commodity (the “fixed leg”) for a set period of time.

Most often, commodity swaps are based on the price of oil. Other times, manufacturers will trade commodity swaps to hedge against price swings in the market for a commodity it needs in order to produce a certain product, such as the metal needed to manufacture a vehicle. The manufacturer can thereby ensure that it will be able to provide that product, at that price, for the period of time specified in the contract.

With the rise of high-frequency trading (HFT) and the increased public accessibility to day trading in recent years, spoofing has become a prominent form of marketplace fraud.

Spoofing is defined as the bidding or offering of a financial instrument or asset with the intent to cancel the bid before the completion of the transaction. This creates a false narrative of demand in the market and allows for fraudsters to manipulate the actions of other members of the marketplace. Spoof orders are considered to be an illegal activity under the Dodd Frank Act. Below, you will learn how to file a spoofing or swaps trading market fraud case with the CFTC.

Under the Dodd Frank Act, CFTC whistleblowers who report original information of commodities fraud can become eligible for monetary rewards.

Rewards under the program are mandatory for qualified whistleblowers and are in the range of 10 to 30% of the collected proceeds. Employers cannot retaliate against whistleblowers or encumber potential whistleblowers from communicating with the CFTC. Considering the enormous value of trades in the swaps market, CFTC rewards for disclosures involving the swaps market can be quite substantial.

The Dodd-Frank Act enhanced the CFTC’s regulatory authority to oversee the more than $400 trillion swaps market and thereby brought swaps trading or spoofing violations within the scope of the CFTC’s Whistleblower Program.

The CFTC and SEC Whistleblower Programs are nearly identical in how they process whistleblower reward claims. To be eligible for a whistleblower award, an individual (or group of individuals) must first submit a Form TCR – Tip, Complaint, or Referral. The Form TCR may be submitted electronically via the website, or by fax or mail. Whistleblowers who live outside of the U.S. can also hire a CFTC whistleblower lawyer to assist in filing their Dodd-Frank Act or Commodity Exchange Act spoofing case.

A whistleblower eligible for an award can be any individual who sends the Commission a Form TCR containing information about a potential violation of the Commodity Exchange Act. Examples range from a corporate officer or insider, to a trader or market observer, to an investor or fraud victim. A company or another entity is not eligible to be a whistleblower.

Whistleblowers can appeal a Final Order of the Commission regarding their award claim to an appropriate federal court of appeals no later than 30 days after the Final Order is issued.

Unlike the publicly traded securities regulated by the Securities and Exchange Commission, swaps are not traded on exchanges. Rather, they are contracts created by financial services companies and are traded behind closed doors, away from public scrutiny. Whistleblowers with inside information are therefore invaluable to the detection of fraud in the exchange of swaps. Oftentimes, violations arise when traders fail to comply with the CFTC’s swaps reporting requirements.

If you have knowledge of a CFTC spoofing scheme, it is advised that you contact an experienced whistleblower attorney to help protect you. The attorneys at Kohn, Kohn & Colapinto can help you file anonymously and apply for monetary awards through the CFTC Whistleblower Office.