Has The Law Of Manipulation Lost Its Moorings?
Law360, New York (April 7, 2017, 3:50 PM EDT) -- As regulations have multiplied and Congress has conferred additional authority on the U.S. Commodity Futures Trading Commission, the power of the CFTC's Division of Enforcement (DOE) has grown significantly. For many years, CFTC enforcement focused on intent-based wrongdoing, such as fraud and trade practice violations. However, new authority to pursue disruptive trading practices, nonscienter-based fraud for swap dealers, reporting violations and that old favorite, failure to supervise, have empowered the DOE and enhanced its ability to influence policy as well as punish for violations of the Commodity Exchange Act, even when the violators lack wrongful intent. With these new powers comes a responsibility to act with restraint and sensitivity to the potential adverse impact that the DOE's conduct has on the market and market participants — a restraint that sometimes seems at odds with the hyperaggressiveness that the DOE has exhibited in recent years.
Nowhere have these trends been more evident than in the developing law of manipulation. Combating market manipulation has been at the core of derivatives regulation since its origins.1 It has long been a felony under the Commodity Exchange Act for "any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce or for future delivery."2While the Commodity Exchange Act and its regulations do not contain a definition of manipulation, the courts have traditionally identified two essential elements: a specific intent to manipulate and some act or conduct by the manipulator that actually causes an artificial price, i.e. a price that does not reflect the legitimate forces of supply and demand.3
Intent had always been viewed as key to defining manipulation, since, absent conduct that is fraudulent or by its very nature price-distorting, "it is the intent of the parties which separates otherwise lawful business conduct from unlawful manipulative activity," as the CFTC itself has recognized.4 Likewise, the creation of an artificial price is an essential element of a crime that by its terms seeks to prevent price manipulation and to protect market users and society from the impact of prices that do not reflect the fundamental forces of supply and demand.
While specific intent and the existence of artificial prices formed the bedrock of any manipulation case, the DOE and commentators often complained about the difficulty of proving these two elements. The DOE complained that absent a defendant's admission, direct evidence of intent was rarely available. In addition, establishing that market prices did not reflect the legitimate forces of supply and demand often required detailed economic analysis that was expensive and rarely uncontested. These complaints about the difficulty of proving manipulation were hardly surprising given the central role that the detection and punishment of manipulation played at the CFTC.
However, a healthy skepticism toward these complaints is also appropriate. Most crime in the U.S. requires proof of intent. Prosecutors, plaintiffs, judges and juries are hardly unfamiliar with the burden of proving intent or the myriad of ways that wrongful intent can be established with either direct or circumstantial evidence. Indeed, with the emergence of email, texting, tape recording and social media, gathering evidence of intent has never been easier. Nor should it come as a great shock that a crime that involves whether market price has been distorted will require some economic analysis...
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