CFTC Jumps Into the Fray of COVID-19 Enforcement
Investors and companies have closely watched the SEC and CFTC since the early days of the COVID-19 pandemic to see how they address the crisis and accompanying economic distress. In addition to guidance regarding filings and relief for companies, the SEC has implemented numerous trading suspensions and commenced several enforcement actions targeting those who have sought to profit unlawfully from the pandemic. The CFTC, by contrast, has largely provided targeted relief and advisories. That changed last week when the CFTC commenced its first civil enforcement action for misconduct tied directly to the COVID-19 pandemic.
The CFTC's lawsuit targets self-proclaimed "master trader" Defendant James Frederick Walsh. In its complaint, the CFTC alleges:
- Walsh fraudulently solicited members of the public for the purported purpose of trading off-exchange leveraged or marginal retail currency (forex).
- Walsh primarily used social-media platforms, including YouTube and Craigslist, to fraudulently market himself as a highly successfully forex trader who "routinely achieves a 76% PLUS winning average" on trades and earns "average monthly returns of 8% - 11%" or "a flat 3% guaranteed profit each month."
- Walsh claimed that he could achieve these fictitious results because he had access to "legal, inside information" in the form of "live feeds" from the banks, which would minimize an investor's risk.
- Despite receiving a cease-and-desist letter from the Texas State Securities Board (SSB) in early February 2020, Walsh incorporated misrepresentations related to the COVID-19 pandemic into his solicitations. In this regard, Walsh falsely represented that the forex market returns were even greater as a result of the impact of the COVID-19 pandemic and that the forex markets were a "safe haven" and "recession proof" from the resulting economic distress.
- Walsh violated the Commodity Exchange Act (CEA) and its regulations because, among other reasons, he failed to disclose that he had no US-based forex trading accounts was not authorized under the CEA to trade forex on behalf of US-based clients, and was not lawfully registered as a commodity trading advisor.
The CFTC is seeking an injunction, civil monetary penalties, and other relief, including trading and registration bans, restitution, disgorgement, and recission.
Although the lawsuit's allegations portray the defendant's actions in particularly stark terms, the mere commencement of the action signals that the CFTC is vigilantly monitoring for perceived bad actors trying to use the COVID-19 pandemic to defraud the public.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.