In the most recent exercise of the Commodity Futures Trading Commission’s expanded enforcement authority under the Dodd-Frank Act, the CFTC filed a Complaint against attorney Jay Bruce Grossman claiming that Grossman aided the fraud of Hunter Wise Commodities and various dealers and intermediaries. The CFTC further asserts that Grossman aided and abetted his clients in entering into retail commodity transactions that were required to be exchange-traded.
The complaint alleges that since Grossman “aided, abetted, counseled, commanded, induced, or procured” the illegal activities, Grossman is liable for the underlying violations of his clients. In announcing the complaint, the CFTC’s Director of the Division of Enforcement, Aitan Goelman, stated: “This action shows that the Commission will not hesitate to bring cases against gatekeepers, including attorneys who are complicit in violating the [Commodity Exchange Act].”
Although this may be an extreme case with bad facts (Grossman’s clients appear to have been operating the type of fraudulent commodities operation targeting retail customers that the CFTC historically has prosecuted), the aiding and abetting theory on which the CFTC’s action is premised is equally applicable to violations of the swap-related provisions of Dodd-Frank, such as reporting, clearing, recordkeeping, and business conduct requirements. Attorneys advising clients on swap issues under the Commodity Exchange Act must keep in mind that their own conduct can be scrutinized in the prosecutorial discretion of the CFTC’s Enforcement Division.
The alleged aiding and abetting activity
In the complaint, the CFTC alleges, among other things, that Hunter Wise, with the assistance of Grossman, developed a business line in which Hunter Wise and various dealers marketed to retail customers physical precious metals transactions. Despite the fact that Hunter Wise and dealers represented to the market that customers would receive title to the physical metals, Hunter Wise instead traded derivatives to manage the exposure to customer orders. According to the complaint, there were no physical metals.
The complaint states that Grossman aided the fraud of Hunter Wise and various dealers and intermediaries by preparing agreements and transfer forms that created the illusion that physical metals were being bought for the customers’ accounts knowing that Hunter Wise was merely entering into a net financial position to hedge the transactions. The complaint further alleges that when Dodd-Frank made this type of off-exchange retail commodity transaction (and fraud relating to such a transaction) an explicit violation of the Commodity Exchange Act, Grossman did not advise clients to stop using or alter the misleading agreements. The CFTC asserts that Grossman advised clients that the transactions were “a completely defendable business model” and that the transactions were Dodd-Frank compliant.