Overview
Easterday Ranches, Inc. (a cattle feedyard) made false statements to, and violated position limits established by, a futures exchange regulated by the Commission. Accordingly, the Commission appropriately brought (and today settles) charges against Easterday Ranches of violating provisions of the Commodity Exchange Act (“CEA”) that specifically address these types of misconduct.
Unfortunately, the Commission has also elected to add a fraud charge involving cash transactions that the Commission does not regulate, on behalf of a single corporation that does not need the Commission’s assistance, and that is resulting in a settlement that is devoid of any practical effect. I, therefore, respectfully dissent.
At its core, what happened here was a “garden variety” business fraud involving cash commodity transactions. One corporation (Easterday Ranches) defrauded another corporation (Tyson Fresh Meats, Inc.). The courts in this country are chock-full of private litigation over alleged frauds of this nature. In fact, Tyson initially sought relief by filing a civil suit against Easterday Ranches, which seems logical and appropriate.
Unfortunately, the Commission has injected itself into this cash market, single-victim, business fraud by charging Easterday Ranches with violating an anti-fraud provision in the CEA and the Commission’s implementing regulations thereunder. In doing so, it justifies the fears of unwarranted government overreach voiced by market participants[1] when the Commission was developing its rules to implement this anti-fraud enforcement authority, which was granted to it as part of the Dodd-Frank Act.[2]
And to what end? The settlement approved today includes a permanent injunction against future fraudulent conduct by a company that will soon be out of business, as well as orders of restitution and a civil monetary penalty (the “penalty”) that will never be paid.
Procedural Posture
The settlement of this enforcement action encompasses all three counts of the Complaint that the Commission has filed against Easterday Ranches:
- Count 1: Fraud, in violation of CEA Section 6(c)(1) and Commission Rules 180.1(a)(1)-(3);
- Count 2: False statements to a registered futures exchange – the Chicago Mercantile Exchange (“CME”) – regarding Easterday Ranches’ inventory of cattle and related purchases and sales of cattle in applications for bona fide hedge exemptions from position limits, in violation of CEA Section 9(a)(4); and
- Count 3: Exceeding position limits established by CME, in violation of CEA Section 4a(e).
The charges brought in Counts 2 and 3 of the Complaint (i.e., false statements to a futures exchange and position limit violations) fall squarely within the Commission’s statutory mandate under the CEA with respect to the futures markets. I therefore voted to approve filing them, and I would support a settlement that is appropriately tailored to resolving these charges.
It is evident, however, that the sizeable monetary sanctions imposed in this settlement (a penalty of $30 million and restitution to Tyson of the $233,008,042 in losses that it suffered as a result of the fraud) are driven not by those charges,[3] but rather by the fraud charge in Count 1 of the Complaint. I voted not to file the fraud charge in Count 1, and I similarly dissent from the approval of a settlement whose terms clearly are structured primarily to resolve that charge.
The Commission’s Cash Market Enforcement Authority
The CEA has always provided the Commission with anti-manipulation authority over cash market transactions. Why? Futures contracts regulated by the Commission serve a price discovery function. Well-functioning futures (and other derivatives products) rely upon a sound underlying cash market and may reference cash market indexes in their pricing. Therefore, cash market transactions can potentially be part of a scheme to manipulate prices of derivatives that are regulated by the Commission. Congress has recognized these relationships between prices of cash transactions and derivatives products, and thus the CEA historically has provided the Commission with anti-manipulation enforcement authority with respect to cash transactions.
Section 753 of the Dodd-Frank Act is entitled “Anti-Manipulation Authority.” It amended Section 6(c)(1) of the CEA[4] to include an enhanced “Prohibition Against Manipulation,” as well as a “Special Provision for Manipulation by False Reporting” and a provision addressing “Other Manipulation.” Despite Congressional focus on manipulation,[5] courts have held that the prohibition on “any manipulative or deceptive device or contrivance” that the Dodd-Frank Act added in Section 6(c)(1) means that the Commission can bring an enforcement action based on fraud in a cash commodity transaction (i.e., one that does not involve a futures contract, swap, or other derivatives product) – even if no manipulation is alleged.
The anti-fraud enforcement authority provided to the Commission in CEA Section 6(c)(1) is an important tool for the agency. Appropriate circumstances for its use are to protect the integrity of the derivatives markets that the Commission regulates, and where the alleged fraud in the cash market is widespread (particularly where it is targeted at retail customers who often are unable to bear the cost of pursuing judicial remedies on their own). Indeed, for a number of years, the Commission has aggressively used this enforcement authority to punish and deter fraud involving cash commodity transactions for these purposes.
Here, however, there is no indication that Easterday Ranches’ fraud against Tyson threatened the integrity of the futures markets. Any such threat that may have arisen was in Easterday Ranches’ false statements to CME and its breach of position limits; that threat, however, is fully addressed by Counts 2 and 3 of the Complaint charging Easterday Ranches with violations of CEA Sections 9(a)(4) and 4a(e), respectively,[6] which are specifically targeted to such misconduct and which existed long before enactment of the cash market anti-fraud authority in the Dodd-Frank Act. Nor did Easterday Ranches engage in a widespread fraud victimizing retail customers. To the contrary, it committed a single-victim fraud against an entity that is fully possessed of the means to pursue its own legal remedies (which it is in fact doing).
The Commission has neither the capacity nor the expertise to become an “uber cop on the beat” to police all fraud in all cash transactions involving all commodities. It is essential, therefore, that the Commission exercise caution in applying the new anti-fraud authority over cash commodity transactions provided in the Dodd-Frank Act. Yet, far from exercising caution, the Commission has reached to bring a single-victim cash market fraud charge against Easterday Ranches in this case that, from a policy perspective, there is no reason to bring.
Tangential Relationship to Regulated Futures Markets
In order to give the case the appearance of being related to the derivatives markets that the Commission regulates, the Commission’s Complaint alleges that Easterday Ranches defrauded Tyson in order to cover losses that Easterday Ranches had incurred in trading cattle and corn futures contracts.[7] But while futures losses may have provided a motive for Easterday Ranches’ fraud, that fraud in no way implicated the Commission’s regulation of the futures markets. The Commission’s Complaint against Easterday Ranches does not allege a single act of fraud relating to any futures contract purchased or sold by either Easterday Ranches or its victim, Tyson.
I believe the Commission, in this case, should have focused its attention on the charges in Counts 2 and 3 of the Complaint that are directly relevant to the futures markets that lie at the heart of the Commission’s responsibilities under the CEA. Unfortunately, the Commission instead has expended its limited human and budgetary resources on a fraud charge at the outer edge of its jurisdiction, with no appreciable benefit to the markets we regulate. I believe this represents a poor use of the taxpayer funds with which we have been entrusted, which I cannot support.
The Commission’s Settlement of its Fraud Charge Against Easterday Ranches Has No Practical Effect
My understanding based on the information available to me is as follows:
Easterday Ranches filed for bankruptcy shortly after the fraud on Tyson came to light, and Tyson, after having filed a civil suit to recover its losses resulting from the fraud, is now pursuing its claims in the bankruptcy proceeding. Easterday Ranches’ land has been sold at auction as part of the bankruptcy proceeding, and the company is expected to be liquidated and cease doing business as part of (or shortly after the close of) the bankruptcy proceeding.[8]
The settlement provides that both the $233 million in restitution to Tyson, and the $30 million penalty, are expressly subordinated to the claims of all other creditors in the bankruptcy proceeding, including Tyson. Accordingly, even if the restitution and penalty are not discharged in the bankruptcy proceeding, Tyson will not receive any restitution from the Commission’s settlement, and separately the civil monetary penalty will not be paid, unless all other creditors have been paid out in full. But Easterday Ranches’ bankruptcy estate does not appear to have assets sufficient to cover all creditors’ claims against it, and thus it is unlikely that all other creditors will be made whole.
Simply put: Tyson appropriately sought relief via the filing of a civil suit and will now seek recovery in bankruptcy court. These are the correct venues for its remedies. And as for the Commission, the settlement of its fraud charge against Easterday Ranches results in a large penalty that will not be paid, as well as a permanent injunction against future fraudulent conduct and a registration ban against a soon-to-be-defunct corporate entity.[9]
In my opinion, the Commission’s pursuit of a fraud charge against Easterday Ranches has not added to any positive outcome.
Conclusion
The Commission’s governmental interest as regulator of the U.S. futures markets is fully vindicated in this case by its charges that Easterday Ranches violated the CEA by making false statements to a futures exchange and exceeding applicable position limits. I am disappointed that the Commission has unnecessarily devoted resources to an additional fraud charge that represents an inappropriately expansive application of its cash market anti-fraud enforcement authority. While that fraud charge has resulted in a settlement with big sanctions numbers, the restitution and penalty on Easterday Ranches as part of this settlement will not be paid, and the fraud charge has not served the public interest well.
[1] See, e.g., Letter from Craig S. Donohue, CME Group Inc., at 10 (January 3, 2011) (“the prohibition on fraud or deception ‘in connection with ... any commodity’ sweeps so broadly that, on its face, it could even subject someone to liability for putting out a deceptive weather forecast or supermarket advertisement.”), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27269&SearchText; Letter from Harry Ng, American Petroleum Institute, and Greg Scott, National Petrochemical & Refiners Association, at 3-4 (January 3, 2011) (“The Commission’s use of the term ‘commodity’ indicates that the rule would apply to virtually every commercial transaction in the economy . . .;” and “[the Commission’s proposed rule] would also place an enormous burden on the Commission’s resources by obligating the Commission to assume responsibility for policing commercial transactions for products and services far outside the areas of the Commission’s traditional jurisdiction and expertise.”), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26875&SearchText.
[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).
[3] In its settlement of In re Armkat LLC, CFTC Docket No. 19-29 (September 25, 2019), the Commission settled charges of position limit violations on two days – the same as charged in its Complaint against Easterday Ranches – and imposed a penalty of $140,000, with no award of restitution. And while the facts differ somewhat, the Commission’s settlement of In re Credit Suisse International and Credit Suisse Securities (USA) LLC, CFTC Docket No. 16-10 (March 22, 2016), is illustrative regarding sanctions in these matters. One Respondent received a penalty of $525,000 for exceeding position limits on several days despite having been granted a bona fide hedge exemption. The second Respondent was found to have violated CEA Section 6(c)(2), 7 U.S.C. §9(2), for making false statements to Commission staff that had the effect of inflating the amount of hedge exemptions, and received a penalty of $140,000. No restitution was awarded against either Respondent.
[4] CEA Section 6(c)(1), 7 U.S.C. § 9(1).
[5] That the focus of this new enforcement authority was manipulation also was evinced by the comments of Senator Maria Cantwell (who sponsored the provisions) and Senator Blanche Lincoln (the Chair of the Senate Agriculture Committee, which is the Commission’s authorizing Committee) during the Senate floor debate on the legislation that eventually became the Dodd-Frank Act. Senator Cantwell stated the purpose of this authority as follows: “My amendment strengthens the Commodity Futures Trading Commission’s authority to go after manipulation and attempted manipulation in the swaps and commodities markets.” She added that “it is very important to have a strong bright line, a law on the books against manipulation” because “[c]urrent law makes it very difficult for the Commodity Futures Trading Commission to prove market manipulation.” During that same floor debate, Senator Lincoln stated that “[m]arket manipulation is an ever-present danger in derivatives trading” and that “Senator Cantwell’s amendment will give the CFTC a very important new weapon in its arsenal to combat ever-evolving forms of manipulative trading schemes that undermine public confidence in the proper functioning of these markets.” 156 Cong. Rec. S3348-3349 (daily ed. May 6, 2010) (statements of Sen. Maria Cantwell and Sen. Blanche Lincoln).
[6] CEA Sections 9(a)(4) and 4a(e), 7 U.S.C. §§ 13(a)(4) and 6a(e), respectively.
[7] See Complaint, ¶¶ 3, 23, and 27.
[8] The co-owners and co-managers of Easterday Ranches were Gale Easterday and his son, Cody Easterday. Gale Easterday passed away in December 2020. Cody Easterday has pled guilty to criminal charges based on his role in the fraud on Tyson, and has resigned his position as an officer and manager of Easterday Ranches.
[9] Of course, in the absence of a fraud charge, the settlement with Easterday Ranches would still subject it to a permanent injunction against future false statements to a futures exchange and position limit violations, and the Commission could have sought a registration ban as part of its settlement of those charges.
