CFTC Blasted in Court for ‘Bad Faith’ Misconduct in Fraud Case

The Commodity Futures Trading Commission headquarters in Washington, DC, US, on Friday, Dec. 23, 2022. The collapse of the FTX crypto exchange adds urgency to a Washington push to transform the CFTC into a top crypto watchdog, according to the head of the derivatives regulator. Photo by Ting Shen /Bloomberg

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(Bloomberg) — A federal judge in New Jersey is weighing an unusual recommendation to sanction the US Commodity Futures Trading Commission, based on a report that the derivatives watchdog made such significant missteps in a 2023 fraud case that the agency should dismiss it and pay legal fees.

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“The CFTC’s conduct, which was undertaken over the course of a year and involved numerous instances of sanctionable behavior, was willful and undertaken in bad faith,” the special master in the case, Jose Linares, wrote in a report unsealed Tuesday. He was tasked with overseeing the CFTC’s handling of a case against Traders Global Group Inc., a proprietary trading firm known as My Forex Funds.

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In August 2023, the CFTC sued My Forex Funds and Chief Executive Officer Murtuza Kazmi, accusing the firm of operating a large-scale, Ponzi-like scheme. The firm allegedly reaped hundreds of millions of dollars in profits, with the CEO buying a $1.6 million Lamborghini Aventador and a multimillion-dollar estate in Canada, according to the CFTC.

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That same month, a judge granted an order freezing the assets of Kazmi and My Forex Funds. The judge agreed to the asset freeze based on the regulator’s claims that the CEO had moved millions into a personal bank account. The transfers were actually payments to Canadian tax authorities, his attorneys said.

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The CFTC failed to be “upfront, direct and transparent” by correcting the record, according to the unsealed report, and instead “took deliberate steps down a path of obfuscation and avoidance.” 

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Attorneys for Kazmi and the firm said they were pleased the special master rebuked the agency. The report will now go to US District Judge Edward Kiel for a decision.

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“Our clients are — and always have been — compliant with the law and innocent of the allegations and claims brought against them,” law firms Quinn Emanuel and King & Spalding said in a joint statement. “The CFTC falsely accused our clients of fraud, shut down their businesses, and froze all of their money on the basis of a false, secret submission to the court.”

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Conduct by the regulator’s staff led to failures that were “foreseeable, which means they were also avoidable,” CFTC Acting Chairman Caroline Pham, who has previously questioned the agency’s handling of the case, said in a statement Tuesday.

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The agency put four attorneys and an investigator on administrative leave amid allegations of employee misconduct in the case, Bloomberg reported last week.

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“The CFTC must now accept accountability so that appropriate corrective action can finally be taken to address the conduct issues, and the CFTC can put this behind us and move forward to restore the agency’s credibility and reputation,” Pham said in the statement.

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