| WASHINGTON, July 28
WASHINGTON, July 28 The U.S. federal agency
regulating derivatives has fought just three trials since 2011,
all against small-time fraudsters in Florida. Now it is poised
to take on a series of formidable opponents in the biggest
courtroom tests yet of its efforts to crack down on market
A loss in the courtroom would be a setback for the Commodity
Futures Trading Commission as it tries to catch up with its
sister agencies, the Securities and Exchange Commission and the
Federal Energy Regulatory Commission, which have already adopted
more aggressive tactics toward reining in Wall Street excesses.
CFTC lawyers are preparing to confront Brian Hunter, who
oversaw the energy desk of hedge fund Amaranth when it collapsed
in 2006, in a federal court in Manhattan on Oct. 6. Hunter,
accused of attempted manipulation, has sought to dismiss the
case, arguing the court has no jurisdiction and that the CFTC
does not have enough evidence against him.
On Nov. 3, Royal Bank of Canada is due to go on
trial for what the CFTC alleges was an unlawful trading scheme
to realize tax benefits. RBC has called the allegations against
it "absurd," and said its trading was permissible.
Two weeks later, it will be the turn of futures trader Eric
Moncada, who is accused of manipulating wheat prices. Moncada
argues that he had good reasons for placing and canceling large
orders and did not profit from them.
The regulator is also preparing for the possible trial of
Jon Corzine, the former New Jersey Governor and MF Global chief.
The CFTC has accused him of failing to supervise employees who,
it says, raided customer funds to prop up the failing brokerage.
A court date has not yet been set for the trial and a settlement
could be reached before then.
Corzine's legal counsel says the CFTC lawsuit is based on
"meritless allegations" and that he will be vindicated in court.
The stakes are high for the CFTC, which is slowly shedding
its image as a small-time regulator responsible for keeping
agriculture and energy futures markets in check. After the
2008-2009 financial crisis, it was put in charge of helping
oversee the $710 trillion global market for swaps, a type of
Derivatives are financial products widely used on Wall
Street to hedge risk but also to engage in risky speculation.
The cases represent a daunting task for an agency with a
relatively puny budget, a thin track record in court, and
big-name opponents like Corzine, who has enlisted Andrew
Levander from law firm Dechert LLP, one of New York's most
successful white-collar defense lawyers.
The SEC has fought a dozen or more trials each year since
2011 - in comparison to the CFTC's three - and has completed 25
so far in its fiscal year 2014.
"The Commission has to be really shrewd, and serious, and
make sure its best people are on the highest-profile cases,"
Mark Wetjen, a Democratic CFTC Commissioner, told Reuters.
Wetjen, who headed the agency for five months earlier this
year, has complained that the CFTC can barely afford the highly
paid expert witnesses needed to win over a jury at trial.
"TAKE IT OR LITIGATE"
The loss of any of these high-profile cases would be a blow
to new CFTC head Tim Massad, and the enforcement chief he has
brought in, Aitan Goelman, a former federal prosecutor best
known for convicting two of the bombers for the 1995 bombing of
a federal office building in Oklahoma.
The case against Hunter is particularly important for the
CFTC, which has used it as a formal argument to introduce one of
its most contested rules, which caps the overall position in
futures any one trader can hold.
The CFTC first showed signs of getting tougher under
Goelman's predecessor, David Meister, also a former federal
prosecutor. After his appointment in 2010, Meister told staff
there would be no more haggling with defendants wanting to avoid
trial. It would be "take it or litigate."
He then crafted a series of headline-grabbing deals with
large banks over the manipulation of the Libor benchmark, which
yielded billions of dollars in fines for the U.S. taxpayer.
Proving manipulation has become easier for the CFTC because
the 2010 Dodd-Frank consumer protection law dropped the need for
it to show that the behavior was intentional. In future cases,
all it has to show is that the behavior was reckless.
There are no signs that Goelman - a veteran litigation
lawyer at the law firm Zuckerman Spaeder LLP - will deviate from
Meister's tough stance. Goelman declined to be interviewed.
Goelman has 149 people at his disposal, most of whom are
lawyers, according to the CFTC. The SEC's enforcement group, by
comparison, employs 1,200 people.
"The CFTC has been engaging in efforts to add bench strength
to its team of trial lawyers, to ensure that it is able to take
cases to trial successfully if the cases do not get resolved by
settlement," said Lawrence Zweifach, a litigation lawyer at law
firm Gibson Dunn in New York.
The CFTC declined to comment on its legal hires.
What counts is not how many lawyers the CFTC has, but how
much experience they have in the courtroom, argues William
Rosch, a retired attorney who helped a defendant beat a case
against the CFTC in 2010.
"They don't need 100 lawyers who have never tried a lawsuit.
They need about four or five guys or women who have tried lots
of lawsuits," he said.
The CFTC's effort to litigate cases is constrained by its
relatively small budget - it has earmarked $46 million for its
enforcement division in the fiscal year 2014. That's about a
tenth of the SEC enforcement division's budget.
The budget constraints may, for example, rule out the option
of holding an expensive mock trial, which the SEC has on
occasion used to prepare for trials.
It is also not clear how many expert witnesses the CFTC will
be able to afford to use in the trials, but a source familiar
with the agency's operations said some would be hired.
Expert witnesses - typically academics or partners at
consulting firms - are crucial in helping to persuade a jury and
a judge of wrongdoing in derivatives trading, which involve
highly complex financial instruments few outsiders easily
But they come at a price. The SEC, for instance, offered a
contract with a ceiling of more than $128,000 to just one
witness at a high-profile trial in 2013. In another case that
same year, the SEC was billed more than $1.3 million by an
accounting expert witness, according to records obtained by
(Reporting by Douwe Miedema and Sarah Lynch, additional
reporting by Nate Raymond in New York and Aruna Viswanatha in
Washington; Editing by Karey Van Hall and Ross Colvin)