Greg Kilminster
Head of Product - Content
US court orders FTX to pay $12.7bn in fraud damages
The Commodity Futures Trading Commission (CFTC) has secured a landmark $12.7 billion judgement against FTX Trading Ltd. and its affiliated firm, Alameda Research LLC. The decision by the US District Court for the Southern District of New York marks one of the largest restitution and disgorgement orders in financial history, intended to compensate victims of the cryptocurrency exchange’s collapse.
The ruling mandates FTX to pay $8.7 billion in restitution to defrauded customers, with an additional $4 billion in disgorgement. The funds are earmarked for those who suffered losses due to the fraudulent scheme orchestrated by FTX’s founder, Samuel Bankman-Fried, and his associates. Commissioner Kristin N Johnson, in her statement on the judgement, noted the significance of this decision, highlighting the CFTC’s commitment to holding fraudsters accountable.
Misrepresentation and misuse of funds
FTX, which once billed itself as a secure platform for trading digital assets, was found to have grossly misled its users. The court determined that FTX falsely claimed to segregate customer assets from its own, while in reality, client funds were commingled and misappropriated to support risky trading strategies at Alameda Research. The company’s promotional materials presented it as the "safest and easiest way to buy and sell crypto," a claim the court found to be deceptive.
Commissioner Johnson emphasised that the failure to segregate customer funds was a fundamental breach of trust and a critical factor in the collapse of FTX. She noted that customer protection rules, particularly those safeguarding customer assets, are crucial to the vibrancy of derivatives markets and the broader financial system. "In the absence of trust, the custodial relationship cannot thrive," Johnson stated, emphasising the need for stringent customer protection rules to ensure market integrity.
In addition to financial penalties, the court imposed permanent injunctions against FTX, preventing further violations of the Commodity Exchange Act (CEA) and related CFTC regulations. The company is also prohibited from engaging in future trading activities and is required to cooperate with ongoing CFTC investigations.
CFTC chairman warns of broader issues
CFTC Chairman Rostin Behnam highlighted the broader regulatory implications of the case, suggesting that FTX’s downfall exemplifies the risks in the largely unregulated crypto market. “FTX used age-old tactics to create an illusion of safety,” Behnam said, adding that the regulatory framework essential to prevent such collapses was absent. He called for urgent legislative action to close regulatory gaps in the digital asset sector.
Commissioner Johnson echoed these concerns, pointing to the conflicts of interest that plagued FTX and Alameda from their inception. She described the vertically-integrated structure of the two entities, controlled by Bankman-Fried, as a key factor that enabled their fraudulent activities. Despite these significant conflicts of interest, the absence of effective regulation allowed these issues to go unaddressed, ultimately contributing to the loss of billions in customer funds.
A swift resolution in an ongoing saga
The case against FTX and its leadership began in December 2022, following the company’s spectacular collapse. The CFTC moved swiftly, filing a complaint that was later expanded to include key FTX insiders. The court had previously issued judgments against former executives all of whom were implicated in the fraud.
Ian McGinley, Director of the CFTC’s Division of Enforcement, praised the speed and scale of the resolution. “Not only is this the largest recovery in CFTC history, but we achieved it with remarkable speed,” McGinley said, noting that in just 21 months, a major collapse has resulted in a full resolution that compensates victims.
Commissioner Johnson commended the CFTC’s Division of Enforcement for their efforts, but also cautioned that much work remains to be done. She called for the CFTC to adopt a comprehensive rule that directly addresses the regulatory gaps that allowed FTX’s misconduct to occur, particularly in the emerging digital asset markets.
Future litigation and ongoing efforts
While the consent order resolves the CFTC’s case against FTX as an entity, the agency's litigation against Bankman-Fried and other individuals remains active. The CFTC continues to pursue restitution, disgorgement, and further penalties against the four defendants, seeking to ensure full accountability.
Commissioner Johnson's statement also highlighted the critical need for enhanced transparency and oversight in the digital asset space. She noted that the catastrophic failure of FTX indicates the urgent necessity for the CFTC to implement robust customer protection rules that address conflicts of interest, risk management, and transparency.
As the cryptocurrency industry awaits the final outcomes of FTX’s bankruptcy proceedings, the case stands as a stark reminder of the regulatory challenges that persist in this sector. Johnson concluded, "There is no time to waste. The time is now for the Commission to adopt a comprehensive rule addressing customer protections."
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CFTC awards whistleblower over $1 Million for uncovering digital asset market violations
The Commodity Futures Trading Commission (CFTC) has granted a whistleblower award exceeding $1 million to an individual who provided substantial information and support that enabled the CFTC to pursue an enforcement action related to digital asset markets. This action was based on information about improper trading activities that were previously unknown to the CFTC.
“Identifying unlawful conduct in the digital asset marketplace is a major priority for the CFTC, especially as everyday Americans are increasingly victimized by digital asset scams,” commented Director of Enforcement Ian McGinley. “During the last fiscal year, digital asset cases accounted for almost 50% of the CFTC’s docket, and the majority of whistleblower tips that year were related to digital assets.”
Whistleblowers can receive anywhere between 10 and 30 percent of the monetary sanctions collected, with these awards being paid from the CFTC's Customer Protection Fund.
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Australian Treasury proposes amendments to consumer data right rules
The Australian Treasury has issued a consultation on proposals to amend the Competition and Consumer (Consumer Data Right) Rules 2020 (CDR Rules). The proposed changes include amendments to the consent rules and operational enhancements.
Some context
Under the Consumer Data Right (CDR) framework, individuals and businesses (CDR consumers) can request access to specific data sets relating to them through trusted third parties. Data holders are required to provide access to the data while ensuring its quality, security, privacy, and confidentiality. Additionally, data holders are required to disclose publicly available information on specified product offerings to CDR consumers or other persons.
Key takeaways
Consent Amendments:
- Extending the data minimization principle to disclosure to ensure privacy protection coverage for consumers.
- Allowing consumers to provide multiple CDR consents with a single action.
- Permitting data recipients to pre-select the specific consent elements necessary to provide the requested good or service.
- Simplifying the information that data recipients need to provide to consumers when seeking their consent.
- Allowing data recipients to consolidate the delivery of 90-day notifications to minimize consumer notification fatigue.
- Requiring data recipients to provide consumers with information about all supporting parties who may access a consumer’s data when seeking consent.
- Requiring data recipients to delete redundant CDR data unless a consumer has given de-identification consent.
Operational Enhancements:
- Requiring data holders to provide a straightforward process for consumers to appoint a nominated representative and offering an online process for account administrators to be appointed as nominated representatives.
- Allowing accredited authorized deposit-taking institutions (ADIs) to hold CDR data as a data holder when a consumer applies to acquire a product from an ADI.
- Clarifying that a CDR representative principal must ensure their representatives comply with consumer data standards as if they were an accredited data recipient (ADR).
- Removing the obligation for data holders to provide account holders with an online service to stop CDR data disclosure to a particular ADR in response to requests made by secondary users.
- Providing a trial products exemption in the energy sector, similar to the existing exemption in the banking sector.
Next Steps
The deadline for feedback is 9 September 2024.
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CP24/16: FCA proposes new value for money framework for pensions schemes
The Financial Conduct Authority (FCA) has released consultation paper (CP) 24/16 outlining proposed rules and guidance for a new value for money (VFM) framework for savers invested in default arrangements of workplace defined contribution (DC) pension schemes. The consultation aims to implement a joint framework for workplace defined contribution schemes, involving the FCA, the Department for Work and Pensions (DWP), and the Pensions Regulator (TPR).
Key takeaways
The framework introduces four elements:
- Consistent measurement and public disclosure of investment performance, costs, and service quality by firms for all such arrangements against metrics allowing effective assessment of VFM.
- Enable oversight and challenge of an arrangement’s value by IGCs and Governance Advisory Arrangements (GAAs) for contract-based schemes, requiring them to assess performance against other arrangements on a consistent and objective basis.
- Public disclosure of assessment outcomes, including a Red Amber Green (RAG) VFM rating for each arrangement.
- Requirement for firms to take specified actions where an arrangement is assessed as not VFM (Red or Amber).
The FCA is seeking feedback on the proposed scope of the requirements, the calculation and publication of core metrics on cost, performance, and service quality, the process to be adopted by IGCs in assessing arrangements, the range of actions to be taken by firms in the event an arrangement is of poor value for money, the annual publication cycle, and the evolution of the framework over time.
Next steps
The Government intends to incorporate the VMF into the Pension Schemes Bill, which includes legislating for the framework across the market, including schemes regulated by TPR, along with other measures. Responses to the consultation will be shared with the Government and TPR to facilitate the swift development of a consistent approach once legislation is in place.
The deadline for feedback is 17 October 2024.
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