Back in September 2023, when the
Commodity Futures Trading Commission (CFTC) filed a complaint against Traders
Global Group Inc., the operator of prop trading firm My Forex Funds (MFF), it was
probably hoping for a decisive legal victory.
In the lawsuit, CFTC’s Division of
Enforcement claimed that the defendants, Traders Global Group and founder
Murtuza Kazmi, fraudulently solicited customers to enter into leveraged forex
exchange transactions. According to the US derivatives market regulator, what
MFF presented as a prop trading platform, offering customers to “become
professional traders” and trade with Traders Global’s proprietary funds,
was actually a Ponzi-like scheme luring customers to lose money.
For the CFTC, the MFF case is more than a
regular case. The lawsuit captured widespread attention in the FX industry as
one of the first enforcement actions against the emerging prop trading hype.
Financial regulators such as the CFTC often seek high-profile litigations to
consolidate their authority over new domains, shape industry practices, and strengthen their positions in the eyes of the public.
Interesting but probably not significant development in CFTC vs #MyForexFunds today:
CFTC commissioner Pham rips her own agency. She made the remarks in August 2023 and May 2024, but they were released publicly today:https://t.co/RFuZLXGuVhhttps://t.co/RFuZLXGuVh
— MD Financial Skills (@MDiamondFinance) July 3, 2024
On August 29, two days
before filing the complaint, the US District Court in New Jersey handed the
agency an early win, an ex-parte restraining order freezing the defendants’
assets and nominating receivership on the MFF business.
Eden Lang, Partner at Herzog
Since then, however, the road has been
less uphill than what the CFTC planned. In November 2023, the court did grant
in part the CFTC’s motion for a preliminary injunction against MFF, based on a prima facie look at the facts brought by
the agency.
Yet, during the hearing, it was revealed that the CFTC failed to
inform the court that a sworn declaration by an agency investigator included
false statements (to support the motion for an asset freeze, the CFTC wrongly
alleged that Traders Global transferred $31.5 million to “unidentified
accounts” of the founder; shortly afterwards it discovered that the money
was used for lawful tax payments).
In a sidebar exchange , the judge lashed out
at the CFTC counsel: “I am trying to
understand the timeline of this. You learned of this discrepancy, this mistake
a week or two after the filing, and you didn’t inform the Court or defense
counsel […] if that is accurate, CFTC is going to be in a lot of trouble
today.” The court decided to cut the freeze order from $310 million
(as originally requested by the CFTC) to $12 million.
Important Notice 📢
Yesterday we learned that, without prior notice or discussion, a provincial securities regulator in Canada and the commodities regulator in the United States issued orders preventing us from trading securities or accessing funds in our bank accounts.
Until… pic.twitter.com/dKpxmx5axT
— MyForexFunds (@MyForexFunds) September 1, 2023
MFF Fights Back
Following the revelations, MFF retaliated
in March with its own motion against the CFTC. Defendants accused the CFTC
staff of “repeatedly lying” to the court, asking for sanctions against
plaintiffs that will include, at minimum, an “evidentiary hearing on the
CFTC’s pattern of misconduct.”
In addition to mischaracterizing the 31.5 million tax payments, the MFF defense alleged that CFTC counsels sought to intrude on the attorney-client privilege between founder Kazmi and his counsel.
Clashes and reciprocal accusations
between litigants aren’t a rare phenomenon. But last week, the MFF allegations were amplified from a surprising direction: CFTC commissioner Caroline D. Pham.
In a scathing statement, Pham called the
recent allegations a “serious blight on the CFTC’s reputation and credibility”.
Pham, who previously criticized the Commission’s “ready, shoot, aim” approach
to enforcement actions, mentioned a number of previous staff misconducts from
recent years that reflect “CFTC’s deficiencies across governance and culture”.
She urged the Commission to carry out an internal investigation and reassign
the case to a different enforcement team.
What does the in-house criticism against
the CFTC can teach us about the MFF case and future of prop-trading
regulations? It should be emphasized that although the court did grant the CFTC a
temporary injunction against MFF, concluding preliminary evidence does show the
case is not meritless.
It should also be noted that while Pham has strongly
disparaged the agency’s litigatory conduct, her statement does not focus on the
legal merits of the case. In fact, from her previous statement in the matter of
MFF, delivered in August 2023, she called the fraud allegations “reprehensible”
and hoped that the victims would be made whole. The court also has yet to decide
on the sanctions motion filed by MFF.
Nevertheless, the focus on staff
misconduct (at the expense of MFF’s alleged violations) has no doubt caused
significant embarrassment for the CFTC. The agency may still win the case, but
allegations against the Division of Enforcement would not easily vanish,
especially when voiced at the Commissioner’s table. The agency would likely be
pressured to take swift action to prevent future events from occurring.
More important, though, are the
implications for prop or funded trading platforms. The MFF lawsuit is a telling
example of the “regulation by enforcement” approach: when facing a new and
unregulated activity, financial watchdogs often prefer to take matters to the
court, instead of communicating plans to the public or revising decades-old
rulebooks.
The enthusiasm for protecting customers from fraud is warranted but
can lead to mishaps when cases are not handled properly. For prop companies,
the result may be more years of prolonged litigation at the expense of
regulatory clarity, particularly when the industry and customers need it the most.
Back in September 2023, when the
Commodity Futures Trading Commission (CFTC) filed a complaint against Traders
Global Group Inc., the operator of prop trading firm My Forex Funds (MFF), it was
probably hoping for a decisive legal victory.
In the lawsuit, CFTC’s Division of
Enforcement claimed that the defendants, Traders Global Group and founder
Murtuza Kazmi, fraudulently solicited customers to enter into leveraged forex
exchange transactions. According to the US derivatives market regulator, what
MFF presented as a prop trading platform, offering customers to “become
professional traders” and trade with Traders Global’s proprietary funds,
was actually a Ponzi-like scheme luring customers to lose money.
For the CFTC, the MFF case is more than a
regular case. The lawsuit captured widespread attention in the FX industry as
one of the first enforcement actions against the emerging prop trading hype.
Financial regulators such as the CFTC often seek high-profile litigations to
consolidate their authority over new domains, shape industry practices, and strengthen their positions in the eyes of the public.
Interesting but probably not significant development in CFTC vs #MyForexFunds today:
CFTC commissioner Pham rips her own agency. She made the remarks in August 2023 and May 2024, but they were released publicly today:https://t.co/RFuZLXGuVhhttps://t.co/RFuZLXGuVh
— MD Financial Skills (@MDiamondFinance) July 3, 2024
On August 29, two days
before filing the complaint, the US District Court in New Jersey handed the
agency an early win, an ex-parte restraining order freezing the defendants’
assets and nominating receivership on the MFF business.
Eden Lang, Partner at Herzog
Since then, however, the road has been
less uphill than what the CFTC planned. In November 2023, the court did grant
in part the CFTC’s motion for a preliminary injunction against MFF, based on a prima facie look at the facts brought by
the agency.
Yet, during the hearing, it was revealed that the CFTC failed to
inform the court that a sworn declaration by an agency investigator included
false statements (to support the motion for an asset freeze, the CFTC wrongly
alleged that Traders Global transferred $31.5 million to “unidentified
accounts” of the founder; shortly afterwards it discovered that the money
was used for lawful tax payments).
In a sidebar exchange , the judge lashed out
at the CFTC counsel: “I am trying to
understand the timeline of this. You learned of this discrepancy, this mistake
a week or two after the filing, and you didn’t inform the Court or defense
counsel […] if that is accurate, CFTC is going to be in a lot of trouble
today.” The court decided to cut the freeze order from $310 million
(as originally requested by the CFTC) to $12 million.
Important Notice 📢
Yesterday we learned that, without prior notice or discussion, a provincial securities regulator in Canada and the commodities regulator in the United States issued orders preventing us from trading securities or accessing funds in our bank accounts.
Until… pic.twitter.com/dKpxmx5axT
— MyForexFunds (@MyForexFunds) September 1, 2023
MFF Fights Back
Following the revelations, MFF retaliated
in March with its own motion against the CFTC. Defendants accused the CFTC
staff of “repeatedly lying” to the court, asking for sanctions against
plaintiffs that will include, at minimum, an “evidentiary hearing on the
CFTC’s pattern of misconduct.”
In addition to mischaracterizing the 31.5 million tax payments, the MFF defense alleged that CFTC counsels sought to intrude on the attorney-client privilege between founder Kazmi and his counsel.
Clashes and reciprocal accusations
between litigants aren’t a rare phenomenon. But last week, the MFF allegations were amplified from a surprising direction: CFTC commissioner Caroline D. Pham.
In a scathing statement, Pham called the
recent allegations a “serious blight on the CFTC’s reputation and credibility”.
Pham, who previously criticized the Commission’s “ready, shoot, aim” approach
to enforcement actions, mentioned a number of previous staff misconducts from
recent years that reflect “CFTC’s deficiencies across governance and culture”.
She urged the Commission to carry out an internal investigation and reassign
the case to a different enforcement team.
What does the in-house criticism against
the CFTC can teach us about the MFF case and future of prop-trading
regulations? It should be emphasized that although the court did grant the CFTC a
temporary injunction against MFF, concluding preliminary evidence does show the
case is not meritless.
It should also be noted that while Pham has strongly
disparaged the agency’s litigatory conduct, her statement does not focus on the
legal merits of the case. In fact, from her previous statement in the matter of
MFF, delivered in August 2023, she called the fraud allegations “reprehensible”
and hoped that the victims would be made whole. The court also has yet to decide
on the sanctions motion filed by MFF.
Nevertheless, the focus on staff
misconduct (at the expense of MFF’s alleged violations) has no doubt caused
significant embarrassment for the CFTC. The agency may still win the case, but
allegations against the Division of Enforcement would not easily vanish,
especially when voiced at the Commissioner’s table. The agency would likely be
pressured to take swift action to prevent future events from occurring.
More important, though, are the
implications for prop or funded trading platforms. The MFF lawsuit is a telling
example of the “regulation by enforcement” approach: when facing a new and
unregulated activity, financial watchdogs often prefer to take matters to the
court, instead of communicating plans to the public or revising decades-old
rulebooks.
The enthusiasm for protecting customers from fraud is warranted but
can lead to mishaps when cases are not handled properly. For prop companies,
the result may be more years of prolonged litigation at the expense of
regulatory clarity, particularly when the industry and customers need it the most.
