Perjury and False Statements

Background: The CFTC's Enforcement Authority

Created in 1974 for the principal purpose of regulating commodity futures trading, the Commission's authority and mission have broadened to include many financial derivatives. For example, the CFTC now has authority over securities futures derived from market indexes, non-security-based swaps, and options on foreign currency.

Over the past few years, the CFTC has filed some of the largest civil enforcement actions in the United States. From the Libor cases ' exceeding $1 billion in civil monetary penalties (CMPs) to date ' to the infamous “London Whale” matter, to the pending enforcement action against former New Jersey Governor Jon Corzine, the CFTC continues to flex its regulatory muscle.

Although the Commission itself may impose penalties for violations of the Commodity Exchange Act (CEA) in administrative hearings, in recent years it has regularly proceeded under its authority to seek injunctive relief, disgorgement of illegal profits, and CMPs in enforcement actions filed in federal district court. 7 U.S.C. ' 13a-1(a); 7 U.S.C.” 13a-1(d)(1). Section 4b of the CEA contains broad antifraud provisions, covering attempts to “cheat or defraud” or simply “willfully to deceive.” 7 U.S.C. ' 6b(a)(1)(A), (C). Dodd-Frank added additional antifraud provisions to section 4b, which mirror the language of SEC Rule 10b-5. See 7 U.S.C. ' 6b(e).

The CFTC's Division of Enforcement is responsible for investigating violations of the CEA. Under authority delegated by the Commission, generally on a case-by-case basis, the enforcement staff may subpoena individuals to testify under oath in investigative interviews, and compel the production of books, records, and tangible objects. 17 C.F.R. ' 11.4(a). For registrants, the staff may use the Commission's supervisory authority to obtain such evidence. 17 C.F.R. ' 11.2(a).

Until Dodd-Frank, the only recourse against those whom the staff believed had lied to them was to seek criminal prosecution from the relevant U.S. Attorney ' an uncertain prospect entrusted to a different agency.

New False Statements Provision

In July 2010, under public pressure seeking greater accountability for the financial industry, Congress passed the Dodd-Frank Act. Dodd-Frank broadened the Commission's jurisdiction, including, notably, over many over-the-counter derivatives.

Dodd-Frank also gave the CFTC a powerful new tool. Under section 6(c)(2) of the Act, as amended by section 753 of Dodd-Frank:

It shall be unlawful for any person to make any false or misleading statement of a material fact to the Commission ' or to omit to state in any such statement any material fact that is necessary to make any statement of a material fact made not misleading in any material respect, if the person knew, or reasonably should have known, the statement to be false or misleading.

7 U.S.C. ' 9(2).

The provision was inserted late in the process by Sen. Maria Cantwell (D-WA), as part of a larger effort to broaden the Commission's authority to combat market manipulation. Senator Cantwell (WA): “Antimarket Manipulation Authority.” Congressional Record 156:65 (May 4, 2010) p. S3100-01. Almost incidentally, the Senate granted the CFTC formidable authority to combat false statements, a power that is, notably, not shared by the Securities and Exchange Commission.

The elements of claims under section 6(c)(2) are: 1) a statement, 2) made to the Commission or staff, 3) that is false or misleading and 4) material, and the declarant has the relevant 5) scienter, defined here under the “knew or reasonably should have known” standard. Omissions are also actionable, if the inclusion of the omitted information was necessary to make an affirmative statement not misleading. 7 U.S.C. ' 9(2). Statements may be oral or written.

Significantly, and putting aside the difference in burden of proof, the Commission's new authority is substantially broader than the criminal authority of the Department of Justice in prosecutions for perjury (18 U.S.C. ” 1621, 1623), or false statements (18 U.S.C. ' 1001). The perjury statutes require affirmative statements, rather than omissions. See 18 U.S.C. ” 1621, 1623. And although the false statements law includes covering up material facts by “trick, scheme, or device,” it, like the perjury statutes, requires willful falsity. 18 U.S.C. ' 1001(a). This is a much bigger hurdle than Dodd-Frank's much lesser “reasonably should have known” standard.

Perhaps most striking is the ability of the CFTC to punish statements that are merely “misleading.” With perjury, by contrast, it is well-established that even a witness who clearly sought to mislead his questioner cannot be found guilty if his answers were literally true. Bronston v. United States, 409 U.S. 352, 359 (1973).

But section 6(c)(2) also uses the term “misleading,” and although no court has yet interpreted that term, it is plainly broader than “false,” and is unlikely to sustain a literal truth defense. Because the enforcement staff ' not unlike prosecutors in the grand jury ' is present during the questioning and also has the authority to file enforcement actions, it is now even more imperative for witnesses to be well-counseled about the consequences of misleading statements, even if literally true.

Notably, too, enforcement actions are not limited to statements made under oath. From time to time, the staff conducts informal interviews, and these fall under the statute as well. Even letters submitted by counsel, if the elements are met, may spell trouble for a client seeking to mislead the CFTC. See CFTC v. Arista LLC, et al., 2013 WL 6978529 (S.D.N.Y. Dec. 3, 2013) (finding violation of section 6(c)(2) based in part on letter submitted through counsel).

The breadth of the new provision is remarkable, but it does have at least one important limiting principle: only material statements or omissions are actionable. That
familiar standard will typically be met if the false statement “has a natural tendency to influence, or was capable of influencing, the decision of the decision-making body to which it was addressed,” Kungys v. United States, 485 U.S. 769, 770 (1988).

Filed Cases

The Commission has wasted no time in exercising its newfound authority. At least six times, beginning in late 2012, it has instituted proceedings for, or settled, violations of section 6(c)(2). The underlying conduct has been varied, ranging from sworn testimony in a formal investigation (In re Butterfield (CFTC 2013), CFTC v. Newell, 1:12-cv-06763 (N.D. Ill. 2012)); to apparently unsworn testimony in an investigative interview (In re Obolensky (CFTC 2014)); to false statements in a letter from counsel (Arista, 2013 WL 6978529, at *7); to false statements in substantive documents filed with the Commission (CFTC v. MF Global Inc., et al., 13-CIV-4463 (S.D.N.Y. 2013) and CFTC v. Peregrine Financial Group, et al., 1:12-cv-05383 (N.D. Ill. 2012)).

And the penalties are not insignificant. Artem Obolensky, for example, was ordered to pay $250,000, solely for his false statements during the staff's investigation of a currency options trade between the bank where he was President and a counterparty. Susan Butterfield, an employee of a Commission registrant, was ordered to pay a $50,000 CMP based on false statements that she ultimately retracted, though not before she had been confronted with proof that she had not been truthful.

In an interesting twist, the CFTC recently charged false statements in a parallel civil/criminal investigation where the U.S. Attorney did not. In May 2013, the Commission amended its complaint in the Arista matter to allege violations of section 6(c)(2), alleging that a company and its principals had violated the provision by misrepresenting certain account balances, asset values, and fees in a letter sent to the staff by Arista's then-counsel. On Dec. 3, 2013, Judge Paul A. Engelmeyer entered a consent judgment finding the allegations to be true. Although the defendants separately pleaded guilty to fraud and conspiracy, they did not plead guilty to violating section 1001, leaving the CFTC alone to vindicate the integrity of its process using its new-found enforcement authority.

Conclusion

As author James Stewart wrote in his 2011 book, Tangled Webs: How False Statements Are Undermining America, “[m]ounting evidence suggests that the broad public commitment to telling the truth under oath has been breaking down, eroding over recent decades.” The CFTC's new authority, in that corner of the legal system at least, should introduce realistic consequences for such false statements. For our financial markets, that means a potential much-needed deterrent effect. For white-collar defense counsel, that means a need for great caution when clients are being interviewed by the Commission staff, on or off the record.

Daniel R. Alonso,'a former federal prosecutor and litigation partner at Kaye Scholer LLP, recently stepped down as the Chief Assistant District Attorney in New York County and expects to return to the private sector later this year. He is a member of this newsletter's Board of Editors.

During the Monica Lewinsky scandal of the late 1990s, it became fashionable for commentators to decry the relative lack of perjury prosecutions arising out of civil matters. These critics were generally spot on: Criminal prosecutors, busy with their own caseloads, rarely have an appetite to plunge into complicated civil lawsuits in search of those who obstruct the civil justice system.

Much more common, of course, are prosecutions for: 1) false statements to federal investigators, under 18 U.S.C. ' 1001; and 2) lies under oath during grand jury proceedings, 18 U.S.C. ' 1623 or, less frequently, criminal trials. 18 U.S.C. ' 1621. The simplest reason is that the prosecutor ' the only actor in the justice system with the authority to charge defendants with perjury ' is present at the time of the crime. If the lie is serious enough, the prosecutor has the authority to vindicate the sanctity of the oath or the integrity of the investigation.

But what if civil regulators also had the authority to punish false statements in the course of their investigations, without relying on prosecutors and criminal prosecutions? The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) has granted the Commodity Futures Trading Commission (CFTC) civil enforcement powers to do just that.

Background: The CFTC's Enforcement Authority

Created in 1974 for the principal purpose of regulating commodity futures trading, the Commission's authority and mission have broadened to include many financial derivatives. For example, the CFTC now has authority over securities futures derived from market indexes, non-security-based swaps, and options on foreign currency.

Over the past few years, the CFTC has filed some of the largest civil enforcement actions in the United States. From the Libor cases ' exceeding $1 billion in civil monetary penalties (CMPs) to date ' to the infamous “London Whale” matter, to the pending enforcement action against former New Jersey Governor Jon Corzine, the CFTC continues to flex its regulatory muscle.

Although the Commission itself may impose penalties for violations of the Commodity Exchange Act (CEA) in administrative hearings, in recent years it has regularly proceeded under its authority to seek injunctive relief, disgorgement of illegal profits, and CMPs in enforcement actions filed in federal district court. 7 U.S.C. ' 13a-1(a); 7 U.S.C.” 13a-1(d)(1). Section 4b of the CEA contains broad antifraud provisions, covering attempts to “cheat or defraud” or simply “willfully to deceive.” 7 U.S.C. ' 6b(a)(1)(A), (C). Dodd-Frank added additional antifraud provisions to section 4b, which mirror the language of SEC Rule 10b-5. See 7 U.S.C. ' 6b(e).

The CFTC's Division of Enforcement is responsible for investigating violations of the CEA. Under authority delegated by the Commission, generally on a case-by-case basis, the enforcement staff may subpoena individuals to testify under oath in investigative interviews, and compel the production of books, records, and tangible objects. 17 C.F.R. ' 11.4(a). For registrants, the staff may use the Commission's supervisory authority to obtain such evidence. 17 C.F.R. ' 11.2(a).

Until Dodd-Frank, the only recourse against those whom the staff believed had lied to them was to seek criminal prosecution from the relevant U.S. Attorney ' an uncertain prospect entrusted to a different agency.

New False Statements Provision

In July 2010, under public pressure seeking greater accountability for the financial industry, Congress passed the Dodd-Frank Act. Dodd-Frank broadened the Commission's jurisdiction, including, notably, over many over-the-counter derivatives.

Dodd-Frank also gave the CFTC a powerful new tool. Under section 6(c)(2) of the Act, as amended by section 753 of Dodd-Frank:

It shall be unlawful for any person to make any false or misleading statement of a material fact to the Commission ' or to omit to state in any such statement any material fact that is necessary to make any statement of a material fact made not misleading in any material respect, if the person knew, or reasonably should have known, the statement to be false or misleading.

7 U.S.C. ' 9(2).

The provision was inserted late in the process by Sen. Maria Cantwell (D-WA), as part of a larger effort to broaden the Commission's authority to combat market manipulation. Senator Cantwell (WA): “Antimarket Manipulation Authority.” Congressional Record 156:65 (May 4, 2010) p. S3100-01. Almost incidentally, the Senate granted the CFTC formidable authority to combat false statements, a power that is, notably, not shared by the Securities and Exchange Commission.

The elements of claims under section 6(c)(2) are: 1) a statement, 2) made to the Commission or staff, 3) that is false or misleading and 4) material, and the declarant has the relevant 5) scienter, defined here under the “knew or reasonably should have known” standard. Omissions are also actionable, if the inclusion of the omitted information was necessary to make an affirmative statement not misleading. 7 U.S.C. ' 9(2). Statements may be oral or written.

Significantly, and putting aside the difference in burden of proof, the Commission's new authority is substantially broader than the criminal authority of the Department of Justice in prosecutions for perjury (18 U.S.C. ” 1621, 1623), or false statements (18 U.S.C. ' 1001). The perjury statutes require affirmative statements, rather than omissions. See 18 U.S.C. ” 1621, 1623. And although the false statements law includes covering up material facts by “trick, scheme, or device,” it, like the perjury statutes, requires willful falsity. 18 U.S.C. ' 1001(a). This is a much bigger hurdle than Dodd-Frank's much lesser “reasonably should have known” standard.

Perhaps most striking is the ability of the CFTC to punish statements that are merely “misleading.” With perjury, by contrast, it is well-established that even a witness who clearly sought to mislead his questioner cannot be found guilty if his answers were literally true. Bronston v. United States , 409 U.S. 352, 359 (1973).

But section 6(c)(2) also uses the term “misleading,” and although no court has yet interpreted that term, it is plainly broader than “false,” and is unlikely to sustain a literal truth defense. Because the enforcement staff ' not unlike prosecutors in the grand jury ' is present during the questioning and also has the authority to file enforcement actions, it is now even more imperative for witnesses to be well-counseled about the consequences of misleading statements, even if literally true.

Notably, too, enforcement actions are not limited to statements made under oath. From time to time, the staff conducts informal interviews, and these fall under the statute as well. Even letters submitted by counsel, if the elements are met, may spell trouble for a client seeking to mislead the CFTC. See CFTC v. Arista LLC, et al., 2013 WL 6978529 (S.D.N.Y. Dec. 3, 2013) (finding violation of section 6(c)(2) based in part on letter submitted through counsel).

The breadth of the new provision is remarkable, but it does have at least one important limiting principle: only material statements or omissions are actionable. That
familiar standard will typically be met if the false statement “has a natural tendency to influence, or was capable of influencing, the decision of the decision-making body to which it was addressed,” Kungys v. United States , 485 U.S. 769, 770 (1988).

Filed Cases

The Commission has wasted no time in exercising its newfound authority. At least six times, beginning in late 2012, it has instituted proceedings for, or settled, violations of section 6(c)(2). The underlying conduct has been varied, ranging from sworn testimony in a formal investigation (In re Butterfield (CFTC 2013), CFTC v. Newell, 1:12-cv-06763 (N.D. Ill. 2012)); to apparently unsworn testimony in an investigative interview (In re Obolensky (CFTC 2014)); to false statements in a letter from counsel (Arista, 2013 WL 6978529, at *7); to false statements in substantive documents filed with the Commission (CFTC v. MF Global Inc., et al., 13-CIV-4463 (S.D.N.Y. 2013) and CFTC v. Peregrine Financial Group, et al., 1:12-cv-05383 (N.D. Ill. 2012)).

And the penalties are not insignificant. Artem Obolensky, for example, was ordered to pay $250,000, solely for his false statements during the staff's investigation of a currency options trade between the bank where he was President and a counterparty. Susan Butterfield, an employee of a Commission registrant, was ordered to pay a $50,000 CMP based on false statements that she ultimately retracted, though not before she had been confronted with proof that she had not been truthful.

In an interesting twist, the CFTC recently charged false statements in a parallel civil/criminal investigation where the U.S. Attorney did not. In May 2013, the Commission amended its complaint in the Arista matter to allege violations of section 6(c)(2), alleging that a company and its principals had violated the provision by misrepresenting certain account balances, asset values, and fees in a letter sent to the staff by Arista's then-counsel. On Dec. 3, 2013, Judge Paul A. Engelmeyer entered a consent judgment finding the allegations to be true. Although the defendants separately pleaded guilty to fraud and conspiracy, they did not plead guilty to violating section 1001, leaving the CFTC alone to vindicate the integrity of its process using its new-found enforcement authority.

Conclusion

As author James Stewart wrote in his 2011 book, Tangled Webs: How False Statements Are Undermining America, “[m]ounting evidence suggests that the broad public commitment to telling the truth under oath has been breaking down, eroding over recent decades.” The CFTC's new authority, in that corner of the legal system at least, should introduce realistic consequences for such false statements. For our financial markets, that means a potential much-needed deterrent effect. For white-collar defense counsel, that means a need for great caution when clients are being interviewed by the Commission staff, on or off the record.

Daniel R. Alonso,'a former federal prosecutor and litigation partner at Kaye Scholer LLP, recently stepped down as the Chief Assistant District Attorney in New York County and expects to return to the private sector later this year. He is a member of this newsletter's Board of Editors.