Too much misconduct goes
undetected: ex-CFTC enforcement chief
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[March 24, 2017]
By Karen Freifeld
YORK (Reuters) - A "massive amount of misconduct" in futures, options
and swaps markets goes undetected because of insufficient data mining,
Aitan Goelman, who until last month was enforcement chief for the top
U.S. derivatives regulator, said in an interview.
Goelman said a lack of resources meant the U.S. Commodity Futures
Trading Commission (CFTC) did not have the sophisticated software and
staff necessary to uncover many of the suspicious trading patterns
within the 325 million records filed each day.
Goelman said there is much more manipulation, insider trading,
front-running and Ponzi scheming in the markets than is being
prosecuted, even though the CFTC receives the data from industry
participants and exchanges and gained enhanced enforcement authority
under a 2010 financial reform law.
A handful of cases were brought under Goelman over spoofing, the illegal
practice of placing orders without intending to execute them. Goelman,
who believes the practice is widespread, is credited with bringing
groundbreaking cases utilizing the anti-spoofing provision and other
powers provided by the Dodd-Frank Act.
"One of my regrets is there's such a massive amount of misconduct in the
market we're just not pursuing,” said Goelman, who left the CFTC after
the change to a Republican administration and nearly three years as
"We could do a lot more manipulation cases. We have all these new
enforcement tools and this vastly expanded jurisdiction and data,"
Goelman said in the interview. "But you have to be acutely conscious
about the limited resources."
Derivatives played a central role in the 2008 financial crisis. In the
aftermath, through Dodd-Frank, the CFTC went from regulating the now $50
trillion futures and options markets to gaining primary oversight for
the over-the-counter U.S. swaps market, now estimated at $300 trillion.
CFTC Commissioner Sharon Bowen, a Democrat, said in an emailed statement
that the market data the agency receives is "of little use if we lack
the resources to fully analyze it."
Tyson Slocum, a staffer with the consumer advocacy group Public Citizen
who serves on an advisory committee to the CFTC, said the regulator does
what it can with the resources it is provided.
But Slocum and Dennis Kelleher, chief executive of government watchdog
Better Markets, said Wall Street lobbying left the CFTC chronically
Kelleher described that as "one of the biggest scandals in this town."
The CFTC's annual budget of $250 million is more than double the $111
million it was allotted in 2008, with just over 20 percent designated
The U.S. Securities and Exchange Commission, by contrast, had a $1.6
billion budget in fiscal 2016, with one-third slotted for enforcement.
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Former CFTC Enforcement Director Aitan Goelman poses in New York
City, U.S., March 23, 2017. Picture taken March 23, 2017.
CFTC chairman J. Christopher Giancarlo said in a speech last week there would be
aggressive enforcement by the CFTC under the administration of President Donald
Giancarlo, a Republican nominated by Trump to serve as permanent chair, has
tapped James McDonald, who just left the U.S. Attorney's office in Manhattan, to
oversee the enforcement unit, sources have told Reuters.
Adamske, a spokesman for the CFTC, declined to comment on how much misconduct
might be going undetected.
Adamske said the CFTC's surveillance unit looks at anomalies on a daily basis,
spikes and drops in the market that may not be easily explained, and refers
questionable activity to the enforcement division.
"Now and always, the CFTC works diligently within the budget set by Congress and
the administration to foster open, transparent, competitive and financially
sound markets," he said.
The commission's budget is funded solely through congressional appropriations,
with fines it collects returned to the U.S. Treasury.
U.S. Senate and U.S. House of Representatives appropriations committees either
declined comment or did not respond to a request for comment on whether
lobbyists influenced the outcome for the commission.
Two-thirds of leads on misconduct that come into the "triage unit" of the CFTC’s
enforcement division are not pursued, in part because of a lack of resources,
Goelman said. A lack of jurisdiction and lack of evidence also play a role, he
"It's really an untenable situation," Goelman said. He cited two cases that, if
they had gone to trial, he said would have used up more than half his operating
budget for 2017.
They were the case of former New Jersey governor Jon Corzine who agreed to a $5
million settlement over his role in MF Global Holdings Ltd's unlawful use of
nearly $1 billion in customer funds and Igor Oystacher and his Chicago firm,
3Red Trading LLC, agreeing to pay $2.5 million to settle spoofing allegations in
more than 50 trades between 2011 and 2014.
(Reporting By Karen Freifeld; editing by Carmel Crimmins and Grant McCool)
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