Strategies for Responding to Target Letters From the CFTC

Strategies for Responding to Target Letters From the CFTC

Receiving a target letter from the Commodity Futures Trading Commission marks a serious turn in an investigation. The CFTC sends these letters to notify individuals or companies that they face likely civil or criminal charges. Responding requires strategic thinking and experienced counsel.

The CFTC’s Enforcement Process

The CFTC polices futures, swaps, and commodities markets under the Commodity Exchange Act. If violations occur, the Enforcement Division conducts investigations through subpoenas, witness interviews, and document reviews. Target letters arrive when evidence suggests specific parties committed infractions. Further probing aims to confirm whether charges are warranted.

Potential CFTC charges include manipulation, false reporting, fraud, and registration violations. Cases often involve complex trading strategies like spoofing or wash sales. Penalties can range from fines to bans to criminal referrals to DOJ.

Hallmarks of Target Letters

CFTC target letters have standard features that convey the seriousness of the situation:

• Addressed from senior CFTC Division of Enforcement staff.
• Note indications the recipient committed violations.
• Invite response regarding allegations and evidence.
• Mention possible Wells submissions to contest charges.
• Caution that silence or false statements risk liability.

In essence, the letter says the CFTC intends to file charges absent exonerating evidence. This makes a persuasive response critical.

Strategic Considerations Upon Receiving a Letter

Key initial response steps include:

• Carefully evaluating the letter’s allegations and support.
• Assessing liability risks under the Commodity Exchange Act.
• Identifying favorable and unfavorable facts.
• Reviewing trading records, emails, texts, and call transcripts.
• Researching potential defenses.
• Crafting an overall narrative and timeline.

This groundwork positions recipients to rebut the CFTC’s contentions knowledgeably and convincingly.

Conducting an Internal Investigation

Target companies often launch internal probes examining:

• Compliance policies and training.
• Oversight of trading desks.
• Employee communications about trading.
• Trade monitoring and controls.
• Past violations or complaints.

The goal is uncovering facts to contextualize the CFTC’s allegations. However, counsel must safeguard privilege and confidentiality during these sensitive inquiries.

Asserting Legal and Factual Defenses

Viable defenses against CFTC charges include:

• No manipulative intent behind trading.
• Actions did not actually affect market prices.
• Trades complied with exchange rules and norms.
• No false statements or material omissions occurred.
• Reasonable good faith reliance on professionals’ advice.
• Lack of knowledge regarding misconduct by rogue employees.

Presenting sound legal counter-arguments paired with exonerating facts can undermine allegations of wrongdoing.

Considering Cooperation and Settlement

Some recipients may opt to cooperate and settle, especially if liability risks seem high. Potential benefits include:

• More favorable settlement terms.
• Avoiding litigation costs.
• Preventing referral for criminal prosecution.
• Removing cloud of uncertainty.

However, settlements still entail admissions, penalties, and compliance requirements. The decision requires weighing many factors.

Drafting the Wells Submission

The “Wells process” lets recipients contest charges before filing. The Wells submission details defenses and counterarguments. Key principles for drafting effective submissions include:

• Organizing content clearly.
• Sticking to factual evidence.
• Avoiding emotional appeals.
• Focusing on weaknesses in the CFTC’s position.
• Introducing exculpatory materials.
• Rebutting inferences point-by-point.

Submissions should also argue for dropping the investigation altogether or pursuing lesser charges or remedies.

Requesting a Wells Meeting

Recipients can also request a meeting with senior CFTC officials after submitting Wells materials. These meetings provide opportunities to:

• Personally explain trading practices.
• Answer questions face-to-face.
• Propose alternative theories of events.
• Assess litigation risks.
• Explore early resolution.

Even if charges remain likely, meetings create dialogue and insight into the CFTC’s perspective.

Preparing for Potential Enforcement Action

If the Wells process fails to dissuade the CFTC, recipients must prepare for enforcement actions through steps like:

• Anticipating legal claims in the complaint.
• Developing litigation strategy.
• Preserving documents needed for defense.
• Assembling a seasoned legal team.
• Bracing stakeholders for formal charges.

Advance planning helps mount a vigorous defense against contested allegations.

Conclusion

CFTC target letters mark a crossroads potentially leading to enforcement actions. With experienced counsel, recipients can evaluate liability risks and craft persuasive Wells submissions. Even without avoiding charges altogether, thoughtful responses lay groundwork for principled defenses in litigation or settlement negotiations.