The CBS News program “60 Minutes” claims that members of Congress have been buying stock in companies during debates on legislation that could affect the companies’ businesses. Worse yet, 60 Minutes claims that some members of Congress are profiting on trades made with non-public information learned during private briefings. CBS did not claim that any of these investments was illegal, but there is a perception that members of Congress are profiting from non-public information they learned while performing their duties for the nation.
Legislation previously proposed to prevent this kind of conduct failed to progress through Congress. Representative Spencer Bachus, an Alabama Republican and chairman of the financial services committee was one of the Congressmen whom 60 Minutes claims traded securities based on non-public information. The program said that during the 2008 financial crisis, Bachus made an investment that bet stock prices would fall while he was briefed privately about the financial crisis confronting the world. Bachus denied this allegation. Bachus, however, has issued a comment, which suggests he would support legislation that would treat trading on non-public information by lawmakers and their staff as securities fraud.
The chairmen of the House and Senate panels said they would introduce measures requiring lawmakers and their staffs to file reports showing all securities transactions made within a 90-day period involving more than $1,000. Representative Sean Duffy, a freshman Republican from Wisconsin introduced legislation that would require members of Congress to establish a blind trust for all of their stock holdings or disclose all of their stock trades within three days.
SEC Appeals Decision Rejecting its $285 Million Settlement Agreement with Citigroup
Until last week, many securities lawyers were wondering whether the SEC would appeal U.S. District Judge Jed Rakoff’s decision last month rejecting a $285 million settlement agreement that it made with Citigroup to resolve claims that firm misled investors about an investment in CDO holding risky mortgage backed securities. Last week, the SEC advised Judge Rakoff that it will be appealing his ruling. Judge Rakoff criticized the SEC for resolving cases without requiring the defendants to admit wrongdoing. The SEC’s Director of Enforcement, Robert Khuzami said “We believe the District Court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits.”
The SEC said its proposed settlement with Citigroup would put “money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount — risks that always exist no matter how strong the evidence.”
The CFTC is Seeking Comments on its Interpretation of what Constitutes “Actual
Delivery” for a Retail Commodity Transaction to Fall Outside the CFTC’s Jurisdiction for
In 2004, the U.S. Court of Appeals for the Seventh Circuit issued a decision in CFTC v. Zellner, which tipped existing case law on its head by holding that the CFTC lacked jurisdiction over a retail foreign currency transaction by concluding that it was not a “contract of sale of a commodity for future delivery” (commonly known as a “futures contract”). The Court held that the CFTC had jurisdiction over the business of trading contracts for the future delivery of a commodity, but that it did not have jurisdiction over spot contracts that called for actual delivery of a commodity – even if, in practice, the buyer never paid the full price for the commodity and the seller never delivered the commodity to the buyer, and margin calls were issued to customers to hold or reestablish an open position. Before Zellner, most courts held that if a given transaction functioned like a futures contract it had to be traded on a licensed board of trade and that the CFTC had jurisdiction over it.
After the Seventh Circuit issued its opinion in Zellner, most courts followed the decision leaving the CFTC without jurisdiction over many precious metals and foreign currency dealers who were engaging if fraudulent practices. Congress addressed this jurisdictional void when it adopted section 742(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act last year. This section amended section 2(c)(2)(D) of the Commodity Exchange Act (“CEA”) giving the CFTC jurisdiction over “Retail Commodity Transactions” whether they fit the definition of a futures contract or not. In short, Congress gave the CFTC jurisdiction over agreements, contracts, and transactions for the sale of a commodity on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.
Subsection 2(c)(2)(D)(ii)(III)(aa), however, provides an exception for contracts that result in “actual delivery” within 28 days or such longer period as the Commission may determine by rule or regulation based on the typical commercial practice in cash or spot markets for the commodity involved. The CFTC is seeking comments from the public concerning its interpretation of what the term “actual delivery” means under subsection 2(c)(2)(D)(ii)(III)(aa). Not surprisingly, the CFTC has interpreted this term along functional lines.
The CFTC has said that it intends to consider the following factors: ownership, possession, title, and physical location of the commodity purchased or sold, both before and after execution of the agreement, contract, or transaction; the nature of the relationship between the buyer, seller, and possessor of the commodity purchased or sold; and the manner in which the purchase or sale is recorded and completed.
The CFTC provided the following examples to illustrate how it will determine whether actual delivery has occurred within the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa).
Example 1: Actual delivery will have occurred if, within 28 days, the seller has physically delivered the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin, or financing, into the possession of the buyer and has transferred title to that quantity of the commodity to the buyer.
Example 2: Actual delivery will have occurred if, within 28 days, the seller has physically delivered the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin, or financing, whether in specifically segregated or fungible bulk form, into the possession of a depository other than the seller and its parent company, partners, agents, and other affiliates, that is: (a) a financial institution as defined by the CEA; (b) a depository, the warrants or warehouse receipts of which are recognized for delivery purposes for any commodity on a contract market designated by the Commission; or (c) a storage facility licensed or regulated by the United States or any United States agency, and has transferred title to that quantity of the commodity to the buyer.
Example 3: Actual delivery will not have occurred if, within 28 days, a book entry is Made by the seller purporting to show that delivery of the commodity has been made to the buyer and/or that a sale of a commodity has subsequently been covered or hedged by the seller through a third party contract or account, but the seller has not, in accordance with the methods described in Example 1 or 2, physically delivered the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin, or financing, and transferred title to that quantity of the commodity to the buyer, regardless of whether the agreement, contract, or transaction between the buyer and seller purports to create an enforceable obligation on the part of the seller, or a parent company, partner, agent, or other affiliate of the seller, to deliver the commodity to the buyer.
Example 4: Actual delivery will not have occurred if, within 28 days, the seller has purported to physically deliver the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin, or financing, in accordance with the method described in Example 2, and transfer title to that quantity of the commodity to the buyer, but the title document fails to identity the specific financial institution, depository, or storage facility with possession of the commodity, the quality specifications of the commodity, the identity of the party transferring title to the commodity to the buyer, and the segregation or allocation status of the commodity.
Example 5: Actual delivery will not have occurred if, within 28 days, an agreement, contract, or transaction for the purchase or sale of a commodity is rolled, offset, or otherwise netted with another transaction or settled in cash between the buyer and the seller, but the seller has not, in accordance with the methods described in Example 1 or 2, physically delivered the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin, or financing, and transferred title to that quantity of the commodity to the buyer, regardless of whether the agreement, contract, or transaction between the buyer and seller purports to create an enforceable obligation on the part of the seller, or a parent company, partner, agent, or other affiliate of the seller, to deliver the commodity to the buyer.
The SEC is Analyzing Data to Spot Fraud
