Enforcement hasn’t been something that the CFTC has done well. With revolving doors between enforcers and Wall Street, some have accused the CFTC of being a fox guarding a hen house.
That’s a fair comparison if the fox is blind, missing two legs, and its tail is stuck in the door. It has routinely missed deadlines for implementation of new policies on agricultural derivatives.
The agency missed or was late to the game on numerous failures and frauds including the MF Global debacle that created lasting damage to the industry it is charged to protect.
The first excuse, of course, is a lack of money. In an interview with Wall Street Journal in October 2013, former CFTC head David Meister explained that the agency was too “undersized” to properly police for the global futures and options markets. It has dropped Federal cases against JPMorgan traders and downright refused to investigate some banks over their violations of CFTC rules because it doesn’t have the resources.
But resource allocation is a matter of priorities and the CFTC has stubbornly chose to fervently pursue certain issues—position limits for one — of dubious value while crying poor. The agency has also used its overstretched investigative resources to prosecute minor technical violations of customer segregation rules by futures commission merchants dating back several years in what appeared to be an attempt to justify an unpopular rule change.
But budget cuts aren’t the only reason why enforcement has failed.
The CFTC and the Federal Trade Commission, which enforces laws against false marketing in commodity markets, have investigated and shut down companies. They have “enforced.”
But neither maintains criminal prosecution authority. And this bureaucracy’s biggest problem. Brother and sister agencies don’t play well together.
After an investigation, the CFTC must take new cases to lawyers at other agencies like the Justice Department, many of whom have worked with, golfed with, and dined with the defense lawyers representing the banks or other financial institutions.
In some cases, these Federal lawyers even once defended the accused.
And given that Federal lawyers are allowed to pick and choose which cases they want to pursue, McCaskill noted that many cases won’t reach a courtroom because of Washington’s hand-washing nature.
That doesn’t mean the agency can’t do more to allow local officials in Florida to handle these cases.
They just choose not to. Either they don’t trust state prosecutors or their pursuit for glory – read: ego – is getting in the way.
The pawns of Palm Beach
From the testimony, a major takeaway was that the CFTC has failed to get the local lawyers involved. And that’s pretty staggering. As McCaskill explained, state lawyers do not enjoy the luxury of picking and choosing its cases. To McCaskill, these cases are slam dunks, because local juries are likely to convict with strong evidence, and that alone would ensure a future trading ban against bad actors.
McCaskill called for the agency to “get into a meaningful partnership with local prosecutors.”
More regulatory power isn’t the answer, nor is tossing more money at the problem, as Washington is want to do. Instead, the CFTC and a number of other agencies need should enforce the existing laws and use the structural advantages of the state legal system to ensure a day in court.
While there is some truth to the notion that the fear of prosecution is less likely to pivot the career path of the serial scamster, it is also the case that the CFTC hasn’t been able to instill fear into low-level scammers ripping off average Americans. The kings of con rely upon pawns like Spicer to scale their frauds. (The Florida metals scams have victimized 9,100 investors since 2001) The reality is that jail would be an effective deterrent – one that would run these young, entry-level scammers away from finance. Former construction worker and first-time fraudster Spicer, when asked by McCaskill, admitted he would avoid not just commodities but the entire financial sector as a place of employment for the rest of his life after his conviction.
After all, if the CFTC can’t deter local gold scams, how will they ever prevent Too Big to Fail banks – and those members of Washington’s crony inner-circle – from ever playing by the rules?
Hat tip to McCaskill—check her out at the 1:14 mark.
Image courtesy of Don Hankins