stroock & stroock & lavan llp
STROOCK
SPECIAL BULLETIN
CFTC Issues Rules Covering Market
Manipulation and Fraud
September 8, 2011
On July 14, 2011, the Commodity Futures
Trading Commission (the “CFTC” or the
“Commission”) adopted two rules (the “Rules”)1
implementing the CFTC’s expanded antimanipulation and anti-fraud authority under Section
753 of Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “DoddFrank Act”). 2
Section 753 of the Dodd-Frank Act amends
Section 6(c) of the Commodity Exchange Act (the
“CEA”) to expand the CFTC’s authority to prohibit
fraudulent and manipulative behavior. The CFTC
set forth two new rules pursuant to CEA Section
6(c).3 The Rules fall within Part 180 of the CFTC’s
regulations.
This Stroock Special Bulletin highlights the
major provisions of the Rules and the CFTC’s
explanations and clarifications regarding certain issues
under the Rules.
Rule 180.1
Rule 180.1 is adopted pursuant to new CEA
Section 6(c)(1), which broadly prohibits fraud-based
manipulative schemes by prohibiting any person from
using or employing, or attempting to use or employ,
any “manipulative or deceptive device or
contrivance” in connection with any “swap,”4
contract of sale of any commodity in interstate
commerce or for future delivery, in contravention of
such rules and regulations as the CFTC shall
promulgate no later than one year after the date of
enactment of the Dodd-Frank Act.5 According to
the CFTC, Rule 180.1 implements the provisions of
new CEA Section 6(c)(1) by prohibiting, among
other things, manipulative and deceptive devices
“regardless of whether the conduct in question was
intended to or did create an artificial price.” This is a
key point. Now, proving a price or market effect is
not required.
Rule 180.1(a)(4), implemented pursuant to new
CEA Section 6(c)(1)(A), significantly extends the
CFTC’s reach to prohibit fraud-based manipulative
schemes. New CEA Section 6(c)(1)(A) provides that
unlawful manipulation includes “delivering, or
causing to be delivered for transmission through the
mails or interstate commerce, by any means of
communication whatsoever, a false or misleading or
inaccurate report concerning crop or market
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stroock special bulletin
(b) Nothing in this section shall be construed to
require any person to disclose to another person
nonpublic information that may be material to the
market price, rate, or level of the commodity
transaction, except as necessary to make any
statement made to the other person in or in
connection with the transaction not misleading in
any material respect.
(c) Nothing in this section shall affect, or be
construed to affect, the applicability of CEA
Section 9(a)(2).
The language of new CEA Section 6(c)(1),
particularly the operative phrase “manipulative or
deceptive device or contrivance,” is virtually identical
to the terms used in Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”).7 In
implementing new CEA Section 6(c)(1), the CFTC
found it “appropriate and in the public interest” to
model Rule 180.1 on Securities and Exchange
Commission (“SEC”) Rule 10b-5 and to look to
SEC Rule 10b-5 interpretation for guidance. The
CFTC explained, however, that because of “the
differences between the securities markets and the
derivatives markets, the Commission will be guided,
but not controlled, by the substantial body of judicial
precedent applying the comparable language of SEC
Rule 10b-5.”
Specifically, the CFTC pointed out that SEC Rule
10b-5 and Rule 180.1 differ significantly in two
ways. First, Rule 180.1 includes attempted fraud and
manipulation, whereas SEC Rule 10b-5 covers only
actual fraud and manipulation. Second, there is an
absence of a “purchase or sale” requirement in new
CEA Section 6(c)(1), whereas such requirement exists
in SEC Rule 10b-5. Nonetheless, the CFTC
explained that although there are differences between
the two rules, both focus on general conduct
involving manipulation and/or deception, and thus
the CFTC found that the judicial guidance was still
relevant and useful.
information or conditions that affect or tend to affect
the price of any commodity in interstate commerce,
knowing, or acting in reckless disregard of the fact that
such report is false, misleading or inaccurate.”
(Emphasis added).
Pursuant to CEA Section
6(c)(1)(C), mistakenly transmitting, in good faith,
false, misleading or inaccurate information to a price
reporting service is insufficient to constitute a
violation under new CEA Section 6(c)(1)(A).
In its entirety, Rule 180.1 provides that:
(a) It shall be unlawful for any person, directly
or indirectly, in connection with any swap, or
contract of sale of any commodity in interstate
commerce, or contract for future delivery on or
subject to the rules of any registered entity, to
intentionally or recklessly:
(1)
Use or employ, or attempt to use or
employ, any manipulative device, scheme, or
artifice to defraud;
(2)
Make, or attempt to make, any
untrue or misleading statement of a material
fact or to omit to state a material fact
necessary in order to make the statements
made not untrue or misleading;
(3)
Engage, or attempt to engage, in
any act, practice, or course of business,
which operates or would operate as a fraud
or deceit upon any person; or
(4)
Deliver or cause to be delivered, or
attempt to deliver or cause to be delivered,
for transmission through the mails or
interstate commerce, by any means of
communication whatsoever, a false or
misleading or inaccurate report concerning
crop or market information or conditions
that affect or tend to affect the price of any
commodity in interstate commerce,
knowing, or acting in reckless disregard of
the fact that such report is false, misleading or
inaccurate. Notwithstanding the foregoing,
no violation of this subsection shall exist
where the person mistakenly transmits, in
good faith, false or misleading or inaccurate6
information to a price reporting service.
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However, the CFTC recognized that Rule 180.1
gives the CFTC broad enforcement authority to
prohibit fraud and manipulation “in connection with
a contract of sale for any commodity in interstate
commerce,” (emphasis added) and stated that it
expects to exercise its authority under new CEA
Section 6(c)(1) “to cover transactions related to the
futures or swaps markets, or price of commodities in
interstate commerce, or where the fraud or
manipulation has the potential to affect cash
commodity, futures, or swaps markets, or participants
in those markets.” By way of a non-exclusive
example, the CFTC stated that if an entity employed
a deceptive device to sell precious metals to
customers as a way for the customers to speculate on
the value of such commodities, or if an entity
employed a deceptive device to sell an agricultural
commodity to persons seeking to hedge price risk in
that commodity, depending on the facts and
circumstances, the CFTC would exercise its authority
against such an entity under new CEA Section 6(c)(1)
and Rule 180.1.
The CFTC also dismissed comments that Congress
intended the scope of Section 753 of the Dodd-Frank
Act to address actual fraudulent manipulation of the
commodities markets, and that absent a manipulative
effect on the market, there should be no liability
under Rule 180.1. According to the CFTC, the
Rules respect “the jurisdiction that Congress
conferred upon the Commission and [fulfill] its core
mission and the purposes of the Act to protect market
participants and promote market integrity. The
foregoing should not be interpreted, however, to
mean that a violation of…Rule 180.1 necessarily
requires proof of a market or price effect.”
Therefore, the CFTC rejected commenters’
requests to add language limiting Rule 180.1. The
CFTC noted that “[a] market or price effect may
well be indicia of the use or employment of a
In particular, the CFTC found the Supreme
Court’s emphasis on the word “manipulative” very
instructive.8 The Court stated that the use of the
word was, and is, virtually a term of art when used in
connection with securities markets, but connotes
intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially affecting
the price of securities. The CFTC referred to the
Court’s conclusion that this interpretation reflected
the “unmistakable…congressional intent to proscribe
a type of conduct quite different from negligence.”
A.
Commenters’ Positions and
Related CFTC Responses for Rule
180.1
The following is an analysis of the CFTC’s likely
position on certain topics related to Rule 180.1,
gleaned from the CFTC’s response to various
comments from market participants in the preamble
to the Rules:
1.
The Scope of the
Application of Rule 180.1
The CFTC intends to interpret and apply new
CEA Section 6(c)(1) and Rule 180.1 “not technically
and restrictively, but flexibly to effectuate its remedial
purposes.” In particular, the CFTC stated that Rule
180.1 requires a “fraud or manipulation, or attempted
fraud or manipulation, and that the fraud or
manipulation, or attempted fraud or manipulation, be
‘in connection with’ any swap, or contract of sale of
any commodity in interstate commerce, or contract
for future delivery on or subject to the rules of any
registered entity.” Accordingly, the CFTC dismissed
as being “misplaced” concerns that its use of the
word “commodity” would give the CFTC broad
authority to regulate “virtually every commercial
transaction in the economy.”
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including front running, and noted that Rule 180.1
“reaches all manner of fraud and manipulation within
the scope of the statute it implements, CEA [S]ection
6(c)(1).”
manipulative or deceptive device or contrivance,”
but that “a violation of…Rule 180.1 may exist in the
absence of any market or price effect” as well.
The CFTC also rejected commenters’ requests to
remove references to “attempt” from the Rules,
because the statutory language of new CEA Section
6(c)(1) specifically directs the CFTC to include
“attempt.” This is of particular note because there is
no prerequisite of an overt act of manipulation under
Rule 180.1. Thus, unlawful activity may occur even
in cases of attempted “use or employment” to engage
in manipulation.
In rejecting commenters’ concerns regarding the
constitutionality of Rule 180.1, the CFTC stated that
Rule 180.1 is modeled on SEC Rule 10b-5, which
has “been subjected to extensive judicial review and
has withstood constitutional challenges, including
those based on a fair notice argument.” The CFTC
emphasized that “[s]uch extensive judicial review
serves as an important benefit to the Commission and
provides the public with increased certainty because
the terms of Exchange Act Section 10(b) and SEC
Rule 10b-5 have withstood challenges to their
constitutionality in both civil and criminal matters.”
The CFTC also noted that nothing in new CEA
section 6(c)(1) “shall affect, or be construed to affect,
the applicability of section 9(a)(2).”9 The CFTC
stated that new CEA Section 6(c)(1) and Rule 180.1
were intended to augment, not take away from, the
CFTC’s existing authority to prohibit fraud and
manipulation.
Additionally, the CFTC found
nothing in new CEA Section 6(c)(1) or Rule 180.1
that affected or should be construed to affect the
applicability of CEA Section 4b. For example, the
CFTC stated that CEA Section 4b applies to “a
broker’s misrepresentations to his customer about
risk.”
Finally, the CFTC declined to adopt any per se rule
regarding
specific
fraud-based
manipulation,
2.
The Disclosure
Implications of Rule 180.1
As a general matter, the CFTC does not believe
that Rule 180.1 or Section 753 of the Dodd-Frank
Act “are problematic or will create uncertainty as to
the existence of disclosure obligations when applied
to the markets the Commission regulates.” In
particular, the CFTC stated that Rule 180.1 does not
impose any new affirmative duties of inquiry,
diligence, or disclosure on market participants, except
“as necessary to make any statement made to the
other person in or in connection with the transaction
not misleading in any material respect.” Notably,
however, the CFTC added that “the derivatives
markets are not…caveat emptor markets,” and that the
CEA already has “many provisions designed to
protect market participants through disclosure
requirements applicable to Commission registrants.”
Accordingly, the CFTC noted that “[d]epending on
the facts and circumstances, violation of such duties
could constitute a violation of the…Rule.”
Furthermore, the CFTC clarified that it is not a
violation of Rule 180.1 to “withhold information
that a market participant lawfully possesses about
market conditions.” The CFTC noted that failure to
disclose information prior to entering into a
transaction “either in an anonymous market setting or
in bilateral negotiations” is not an outright violation
of Rule 180.1 and that silence, absent a “pre-existing
duty”10 to disclose, is not a fraudulent or deceptive
practice.11
The CFTC also noted that because of the nature
of derivatives markets—unlike securities markets—
market participants are allowed to trade on the basis
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misleading statement of a material fact with the intent
to send the letter to the market. Following protocol,
the author first submits the letter to internal
compliance personnel.
Compliance personnel
quickly detect the misleading statement of a material
fact and delete the offending language. Under Rule
180.1(a)(2), such a scenario may constitute an
actionable offense, even though the parties involved
displayed good business practice and a successful
compliance policy.16 In all likelihood, however, the
CFTC will analyze each scenario according to the
totality of the facts and circumstances.
Likewise, the CFTC also declined to exclude
“fraud-by-partial-omissions” from Rule 180.1, stating
that “fraud-by-partial-omissions” or half-truths could
violate Rule 180.1 where the facts and circumstances
of a particular case so warranted.
of lawfully obtained material, nonpublic information,
and that Rule 180.1 does not prohibit trading on the
basis of material nonpublic information except as
otherwise prohibited by law.12 However, the CFTC
articulated that if a person trades on the basis of
material nonpublic information in breach of a “preexisting duty,” or trades on the basis of material
nonpublic information that was obtained through
fraud or deception, such person may be in violation
of Rule 180.1.
Finally, the CFTC declined to adopt comments
recommending outright rejection of the potential
application of the “fraud-on-the-market” theory13
under Rule 180.1, noting that the fraud-on-themarket theory is useful where it cannot be
demonstrated that investors had relied on fraud that
reached the market.14
4.
The Statutory
Exception for Good Faith
Mistakes
3.
Operation of the
Provision Prohibiting Material
Misstatements and Omissions
The CFTC refused to expand the good faith
exception of CEA Section 6(c)(1)(C) to cover all
parts of Rule 180.1 and 180.2. The CFTC stated
that it was following the plain text of CEA Section
6(c)(1)(C) in applying the good faith exception in
Rule 180.1 only to the mistaken transmission of
“false or misleading or inaccurate information to a
price reporting service.” The CFTC noted that
although it could have extended the exception to all
of CEA Section 6(c) and 9(a)(2), it did not do so
because the scienter requirement of Rule 180.1
functions to ensure that good faith mistakes or
negligence will not “constitute a violation of
the…[R]ules under any circumstance.” Thus, if a
person does not meet the scienter requirement, he or
she will not be found to have engaged in a
manipulative or deceptive device or contrivance.
The CFTC rejected commenters’ requests to
delete the phrase “or attempt to make” from Rule
According to the CFTC, Rule
180.1(a)(2).15
180.1(a)(2) is intended to cover situations in which a
person attempts to employ a manipulative device or
artifice to defraud. By way of example, the CFTC
stated that “when a supervisor attempts to have a
subordinate make a fraudulent material misstatement
or omission but that subordinate rebuffs the
supervisor’s request, the phrase ‘or attempt to make’
would operate to reach the supervisor’s attempted
fraud.”
Unfortunately, the CFTC’s position fails to
recognize that the “or attempt to make” phrase may
also capture other, more subtle fact patterns that may
fall under the rubric of attempted fraud. For instance,
assume a market participant drafts a letter containing a
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stroock special bulletin
Congress intended here.” 19 In this regard Chairman
Gensler also noted that “[i]n the past, the CFTC had
the ability to prosecute manipulation, but to prevail,
it had to prove the specific intent of the accused to
create an artificial price” whereas now there is no
specific intent requirement.
Notably, however, the interplay between a
recklessness standard and the “attempt” phrase (as
discussed above) creates an inconsistency that the
CFTC chose not to address. Specifically, the concept
of a recklessness standard applying to an attempted
manipulation is inherently illogical, because “[b]y its
very nature, the act constituting the attempt must be
done with the intent to engage in the particular
conduct.”20 It is unclear how the CFTC intends to
handle such a scenario.
5.
The Required Scienter
for a Violation of Rule 180.1
According to the preamble, “a showing of
recklessness is, at a minimum, necessary to prove the
scienter element of…Rule 180.1” (emphasis added),
and that an “inadvertent mistake or negligence” is
not sufficient to trigger a violation of Rule 180.1.
The CFTC stated that, consistent with “longstanding precedent” under both the commodities and
securities laws, the CFTC defines “recklessness” as
“an act or omission that departs so far from the
standards of ordinary care that it is very difficult to
believe the actor was not aware of what he or she was
doing.” As such, the CFTC noted that proof of
knowledge is not required. The CFTC also pointed
out that a plaintiff bears the burden of proving a
potential violation by a preponderance of the
evidence.
Finally, the CFTC reiterated that it will be guided,
but not controlled, by the judicial precedent
interpreting and applying scienter under Exchange
Act Section 10(b) and SEC Rule 10b-5. In relying
on judicial interpretation of Exchange Act Section
10(b), the CFTC emphasized the Supreme Court’s
interpretation of the phrase “manipulative or
deceptive device or contrivance” to “clearly
connot[e] intentional misconduct.”17
It also
emphasized the Supreme Court’s statement that
Exchange Act Section 10(b) was “designed as a
catchall clause to prevent fraudulent misconduct.”18
According to CFTC Chairman Gary Gensler at the
July 7, 2011 hearing discussing the Rules, extending
the Commission’s anti-manipulation reach to
prohibit the reckless use of fraud-based manipulative
schemes “closes a significant gap as it will broaden the
types of cases [the CFTC] can pursue and improves
the chances of prevailing over wrong-doers. For
the…public, that’s the key. I think that’s what
6.
The Scope of the
Phrase “In Connection With”
Responding to commenters’ requests that the “in
connection with” language of Rule 180.1(a) be
modified,21 the CFTC responded that it would not
change the text of Rule 180.1. The CFTC stated
that it interprets the words “‘in connection with’
broadly, not technically or restrictively.” The CFTC
also clarified that new CEA Section 6(c)(1) and Rule
180.1 “reach all manipulative or deceptive conduct in
connection with the purchase, sale, solicitation,
execution, pendency, or termination of any swap, or
contract of sale of any commodity in interstate
commerce, or contract for future delivery on or
subject to the rules of any registered entity.”
Accordingly, the CFTC stated that Rule 180.1
“covers conduct including, but not limited to, all of
the payment and other obligations arising under a
swap.” Nonetheless, the CFTC noted that while the
interpretation of the phrase is broad, it is not limitless,
and referred to interpretive case law in the securities
context as guidance for the derivatives context.22
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stroock special bulletin
as a general matter, a supervisory failure may be one
of the facts and circumstances that the CFTC
considers in determining whether a violation of Rule
180.1 exists.
7.
Penalty and Effect on
Automated Trading Systems
Section 753 of the Dodd-Frank Act also amends
CEA Section 6(c) to provide, in a case of
manipulation or attempted manipulation in violation
of CEA Section 6(c) or 9(a)(2), a civil penalty of “up
to the greater of $1,000,000 or triple the monetary
gain to the person for each such violation; and
restitution to customers of damages proximately
caused by violations of the person.”
Section
6(c)(10)(C) applies for other violations, and “provides
for a civil penalty of not more than an amount equal
to the greater of $140,000 or triple the monetary gain
for each such violation.”
With regard to the enhanced sanctions under
Section 753 of the Dodd-Frank Act, the CFTC
stated that it would follow CEA Section
6(c)(10)(C)(ii), which remains unchanged by the
Rules and which states that the CFTC may assess
damages in any case of manipulation or attempted
manipulation in violation of CEA Section 6(c) or
9(a)(2). The CFTC refused to limit the application
of the penalties in any way, and therefore refused to
exclude new CEA Section 6(c)(1)(A) from the
application of the penalties for manipulation, because
“such an outcome would conflict with the plain
language of the statute.” Thus, to commenters’
dismay, the CFTC noted that “false or misleading or
inaccurate reporting” falls under the type of unlawful
manipulation specifically prohibited by new CEA
Section 6(c)(1)(A), and therefore the CFTC would
be able to assess a penalty of equal to or greater than
$1 million or treble damages for such a violation, in
accordance with CEA Section 6(c)(10)(C)(ii).
The CFTC also declined to require trading entities
to adopt a heightened supervision of algorithmic and
automated trading systems, because this went beyond
the scope of its rulemaking authority. Nevertheless,
Rule 180.2
Rule 180.2 is adopted pursuant to new CEA
Section 6(c)(3), which makes it “unlawful for any
person, directly or indirectly, to manipulate or
attempt to manipulate the price of any swap, or of
any commodity in interstate commerce, or for future
delivery on or subject to the rules of any registered
entity.” Rule 180.2 mirrors the text of new CEA
Section 6(c)(3) verbatim.
The following is an analysis of the CFTC’s likely
position on certain topics related to Rule 180.2,
gleaned from the CFTC’s response to various
comments from market participants on the preamble
to the Rules:
B.
Commenters’ Positions and
Related CFTC Responses for Rule
180.2
Commenters indicated that under Rule 180.2, it is
difficult to determine the difference between
prohibited manipulative conduct and legitimate
competitive trading activities. The CFTC explained
that in applying Rule 180.2, it will be guided by the
traditional four-part test for manipulation that has
developed in case law arising under CEA Sections
6(c) and 9(a)(2), as follows:
•
the accused had the ability to influence market
prices;
•
the accused specifically intended to create or
effect a price or price trend that does not
reflect legitimate forces of supply and demand;
•
artificial prices existed; and
•
the accused caused the artificial prices.
The CFTC noted that unlike Rule 180.1, Rule
180.2 does not have a recklessness standard—a person
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stroock special bulletin
Kolachalam, an associate in the Corporate
Department.
This Stroock Special Bulletin is one of a series of
articles by Stroock’s Derivatives and Commodities
Practice Group to keep clients and friends informed
of significant developments in this fast-changing area.
must act with the requisite specific intent—because a
recklessness standard might capture legitimate
conduct.
Although the CFTC emphasized that specific
intent to move prices is required, it refused to rule
out that such specific intent could be conclusively
presumed. It emphasized that although an artificial
price may be conclusively presumed under certain
facts and circumstances, this does not mean that an
artificial price may be conclusively presumed in all
cases. For example, where “a trader violates bids and
offers in order to influence the volume-weighted
average settlement price, an artificial price will be a
‘reasonably probable consequence’ of the trader’s
intentional misconduct.”23 In addition, the CFTC
noted that “in the proposed [r]ule[s] [the CFTC] did
not say that an artificial price will be conclusively
presumed in the absence of any evidence, only that
‘extensive economic analysis may not be necessary’ to
prove that an artificial price existed.” Thus, the
CFTC clarified that “in some cases the conclusion
that prices were affected by a factor not consistent
with normal forces of supply and demand will require
economic analysis, but in other cases, such a showing
may…‘follow inescapably from proof of the actions
of the alleged manipulator.’”
Finally, the CFTC also stated that it interprets the
term “indirectly”24 to include “a circumstance where
a person uses a third party (e.g., an executing broker)
to execute trades designed to manipulate, so it will be
no defense that the person did not himself execute
the transaction.”
For More Information
Conrad G. Bahlke
212.806.6555
[email protected]
Melvin A. Brosterman
212.806.5632
[email protected]
Marvin J. Goldstein
212.806.5629
[email protected]
Scott M. Le Bouef
212.806.6662
[email protected]
Mark N. Rae
212.806.5816
[email protected]
Jeffrey Daniel
212.806.6237
[email protected]
Michael A. Tselnik
212.806.5435
[email protected]
1.
________________________
By the Derivatives and Commodities Practice Group
of Stroock & Stroock & Lavan LLP, which gratefully
acknowledges the assistance of Preethy S.
8
Prohibition on the Employment, or Attempted Employment, of
Manipulative and Deceptive Devices and Prohibition on Price
Manipulation, 76 Fed. Reg. 41398 (July 14, 2011). The
Rules became effective on August 15, 2011. The Rules
were originally proposed on November 3, 2010; see
Prohibition of Market Manipulation, 75 Fed. Reg. 67657
(Nov. 3, 2010). The CFTC’s notice of proposed
rulemaking in connection with the Rules solicited
comments on all aspects of the Rules (as proposed). To
address the comments received, the CFTC included a
preamble to the Rules explaining and clarifying certain
issues raised in these comment letters. For a detailed
discussion of the Rules (as proposed) see “CFTC
Issues Releases Covering Market Manipulation
and Disruptive Trading Practices,” Stroock Special
Bulletin,
December
15,
2010,
available
at
http://www.stroock.com/sitecontent.cfm?contentID=58&
itemID=1017.
stroock special bulletin
2.
3.
President Barack Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act into law on
July 21, 2010, with an original effective date of July 16,
2011. For a detailed discussion regarding the Dodd-Frank
Act’s general effective date, see “CFTC Issues Dodd-Frank
Act General Effective Date Relief Final Exemptive
Order,” Stroock Special Bulletin, August 4, 2011, available at
http://www.stroock.com/sitecontent.cfm?contentID=58&
itemID=1095 and “CFTC and SEC Provide
Temporary Dodd-Frank Effective Date Relief,”
Stroock Special Bulletin, July 15, 2011, available at
http://www.stroock.com/sitecontent.cfm?contentID=58&
itemID=1088.
of any commodity in interstate commerce, or for future
delivery.
10. According to the preamble, a “pre-existing duty” is a duty
established by “law, rule, agreement, understanding or
other source.”
11. For example, the CFTC stated that “no comment”
statements are “generally the functional equivalent of
silence.”
12. See, e.g., CEA Section 4c(a) as amended by the DoddFrank Act.
13. Fraud-on-the-market is defined as fraud occurring when an
issuer of securities gives out misinformation that affects the
market price of stock, the result being that people who buy
or sell are effectively misled even though they did not rely
on the statement itself or anything derived from it other
than the market price (Black’s Law Dictionary 732 (9th ed.
2009)).
Implementation of some of the rules under CEA Section
6(c) required additional rulemaking by the CFTC. Other
provisions set forth in Section 753 of the Dodd-Frank Act,
such as CEA Section 6(c)(2), did not require CFTC
rulemaking to become effective and became effective on
the Dodd-Frank Act general effective date, July 16, 2011.
For a more detailed discussion, see supra, note 2.
4.
As of the date of this publication, the term “swap” has not
yet been defined by CFTC regulation. The CFTC
proposed rules “further defining” swaps on May 23, 2011.
See Further Definition of “Swap,” “Security-Based Swap,” and
“Security-Based Swap Agreement”; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, 76 Fed. Reg. 29818
(May 23, 2011). The comment period for this proposed
rule closed on July 22, 2011.
14. In this regard, the CFTC emphasized that the “fraud-onthe-market” theory, which includes a presumption of
reliance as an element for private rights of action arising
under SEC Rule 10b-5, does not include a presumption of
reliance as an element for government enforcement actions
under SEC Rule 10b-5. Notably, the CFTC declined to
opine on the required elements of a private right of action
under CEA Section 6(c)(1) and Rule 180.1, on the
grounds it was beyond the purview of this rulemaking.
5.
See supra, note 2.
15.
6.
The inclusion of the phrase “or inaccurate” is the only
change from Rule 180.1 (as proposed). According to the
CFTC, “[t]his change is necessary to ensure symmetry
between…Rule 180.1 and CEA Section 6(c)(1)(C).”
7.
Rule 180.1 is also similar to the anti-manipulation
authority granted to the Federal Energy Regulatory
Commission (see sections 315 and 1283 of the Energy
Policy Act of 2005, amending the Natural Gas Act and the
Federal Power Act, respectively (Energy Policy Act of
2005, Public Law 109–58, §§ 315, 1283, 119 Stat. 594
(2005) (amending 15 U.S.C. 717c–1; 16 U.S.C. 824v)))
and the Federal Trade Commission (see sections 811 and
812 of the Energy Independence and Security Act of 2007
(Energy Independence and Security Act of 2007, Public
Law 110–140, §§ 811, 812, 121 Stat. 1492 (2007)
(amending 42 U.S.C. 17301, 17302))).
8.
The CFTC refers to Ernst & Ernst v. Hochfelder, 425 U.S.
185, 199 (1976).
9.
Section 9(a)(2) makes it unlawful for any person to, among
other things, manipulate or attempt to manipulate the price
“Make, or attempt to make, any untrue or misleading
statement of a material fact or to omit to state a material
fact necessary in order to make the statements made not
untrue or misleading.” (Rule 180.1(a)(2) (emphasis
added)).
16. This example is taken from the Coalition of Physical
Energy Companies’ comment letter, dated January 3, 2011.
17. The CFTC cites Ernst & Ernst v. Hochfelder, 425 U.S. 185,
201 (1976).
18. The CFTC cites Chiarella v. United States, 445 U.S. 222,
226 (1980), citing Hochfelder, 425 U.S. at 202, 206.
19. Commenters also requested that the CFTC clarify that the
scienter requirement would not be premised on the
“collective knowledge” of an entire company, only on the
knowledge of the person participating in the deceptive or
fraudulent conduct. Under the collective knowledge
theory, the conduct of one corporate agent is aggregated
with another corporate agent’s state of mind. Therefore a
corporation can be held liable for the fraud of one of its
employees. This theory has been hotly debated in the
courts, and there is disagreement among the circuit courts
9
stroock special bulletin
on how to rule on this theory. The CFTC decided to
leave this issue open. The CFTC explained that “the
Commission intends to follow the law of the various
circuits and, in all cases, consider the totality of the facts
and circumstances of a particular case before deciding
whether enforcement action is appropriate and in the
public interest.” It is unclear how, and to what extent, the
CFTC will implement the new recklessness standard of
Rule 180.1.
22. Specifically, the CFTC referred to the Supreme Court’s
decision in SEC v. Zandford, 535 U.S. 813 (2002). In that
decision, the Court gave the following example in its
opinion, which the CFTC noted as illustrative for purposes
of interpretation:
“[Where] a broker embezzles cash from a client’s
account or takes advantage of the fiduciary relationship
to induce his client into a fraudulent real estate
transaction, then the fraud would not include the
requisite connection to a purchase or sale of securities.
Likewise if the broker told his client he was stealing the
client’s assets, that breach of fiduciary duty might be in
connection with a sale of securities, but it would not
involve a deceptive device or fraud.”
20. See American Petroleum Institute and the National
Petrochemical and Refiners Association comment letter,
dated January 3, 2011. See also Braxton v. United States, 500
U.S. 344, 351 n.* (1991) (holding that “attempt” requires
a specific intent to commit the unlawful act, e.g., a murder
could be committed without an intent to kill, but an
attempted murder requires a specific intent to kill).
(SEC v. Zandford, 535 U.S. 813, 825 n. 4).
23. The CFTC references In re Di Placido (2008 WL 4831204
(CFTC 2008) at 4831232).
21. “It shall be unlawful for any person, directly or indirectly,
in connection with any swap, or contract of sale of any
commodity in interstate commerce, or contract for future
delivery on or subject to the rules of any registered entity,
to intentionally or recklessly….” (Rule 180.1(a) (emphasis
added)).
24. “It shall be unlawful for any person, directly or indirectly, to
manipulate or attempt to manipulate the price of any swap,
or of any commodity in interstate commerce, or for future
delivery on or subject to the rules of any registered entity”
(Rule 180.2 (emphasis added)).
10
stroock special bulletin
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