CFTC Commissioner Caroline Pham recently issued a statement to express her deep concerns over the allegations against the CFTC over a Rule 11 sanctions motion made against the agency in a November case – CFTC v Traders Global Group – and the court’s admonishments in that case.

“This is a grave matter, and we, the Commission, will be subject to intense scrutiny over how we handle the alleged CFTC misconduct. This type of behavior cannot be tolerated at a law enforcement agency. Tone comes from the top, and therefore, I urge my fellow Commissioners to consider my below recommendations to finally take full accountability and appropriate corrective action to address the conduct issues and support CFTC staff,” Pham said.

Motion for sanctions against the CFTC

In March, the legal representatives of Traders Global Group, operating as My Forex Funds, sought sanctions against the CFTC, alleging the regulator knowingly misrepresented facts and its “staff acted in bad faith.”

That motion referred back to a case brought last August by the CFTC in a federal district court in New Jersey against Murtuza Kazmi and his companies, Traders Global Group Inc, a New Jersey corporation, and Traders Global Group Inc, a Canadian business organization, all doing business as “My Forex Funds.”

The complaint charged them with fraudulently soliciting customers to trade leveraged, margined, or financed retail foreign exchange (retail forex), and leveraged retail commodity transactions.

According to the CFTC’s complaint, the defendants, doing business as “My Forex Funds,” offered retail customers the opportunity to become “professional traders” by using Traders Global’s money to trade against third-party “liquidity providers” and share in any trading profits. They assured customers that “your success is our business,” and “we only make money when you do.” But, in reality, Traders Global (not a third-party “liquidity provider”) is the counterparty to substantially all customer trades. 

“You guys have a lot of explaining to do. Get ready to do it.”

Judge Zahid Quraishi, US District Court in New Jersey

The CFTC also alleged that Traders Global actively minimized the likelihood that customers would trade profitably by (among other things) using pretexts to terminate customer accounts, secretly using specialized software to cause customer orders to be executed at worse prices than appeared to the customer at the time an order was sent, and handicapping the extremely small number of successful customers to decrease customer profits and increase customer losses.

The regulator was able to secure a statutory restraining order at the outset of the litigation, freezing all the assets of My Forex Funds and the CEO. (A court later unfroze the majority of Kazmi’s assets.)

The ongoing regulatory action had a debilitating effect on the business and it shut down its operations.

The defendants strike back

According to the motion that My Forex Funds and Kazmi submitted to the court, the parties argued that the CFTC had knowingly misrepresented some tax payments in its lawsuit.

“By manufacturing a false justification for a total asset freeze and receivership, the CFTC caused irreparable harm to Defendants, destroying overnight a business that took years to build and leaving Mr Kazmi’s family without material support for months,” the motion states.

“Nor is the CFTC’s misconduct limited to false statements to the Court. The CFTC also improperly sought to intrude on the attorney-client privilege between Mr Kazmi and his counsel.”

According to the motion, the CFTC “lied to the court repeatedly” during the preliminary injunction hearing about the time it had learned about the falsehood of the statutory restraining order.

“Taken as a whole, the uncontroverted evidence shows a pattern of misconduct and an abuse of Defendants’ rights,” the motion added.

“The CFTC still has not acknowledged that its false statements were material or that its staff acted in bad faith, much less taken meaningful steps to redress the harm to Defendants. Sanctions are necessary here to send that message and to remedy the harm caused by the CFTC.”

Admonishment by the court

In the November 2023 civil action, the court noted that all of the defendants’ assets had been frozen since the entry of the statutory restraining order imposed in August 2023. In support of its request to freeze the assets, the CFTC relied on certain representations made by a witness (“Mr Edelstein”) and his analysis of the defendants’ financial accounts.

In court, the judge noted that the CFTC learned of a discrepancy in the financial details offered by the witness but had waited “a week or two” without informing the court or defense counsel.

The CFTC had relied on the mischaracterization to argue the restraining order should continue to restrain all of Kazmi’s personal assets, the judge pointed out. And the discrepancy was a value of $31,550,00 – an amount that turned out to be a lawful tax payment by the defendants to Canadian authorities – which the CFTC tried to argue was not material to their argument to justify the order.

“The CFTC’s failure to disclose or to correct Mr Edelstein’s error, and continued citation to the error even after realizing it was an error, is troubling at best,” the judge said. “You guys have a lot of explaining to do. Get ready to do it.”

The judge then ordered Kazmi’s assets to be unfrozen and returned to him.

Concerns and conduct issues

Pham said she was seriously concerned that it took six months for the Commission to be notified for the first time of any alleged CFTC misconduct and that that agency was admonished by the court during the litigation of this case. In fact, it took until the filing of the motion for the commissioners to learn about it, despite the Enforcement Division obviously being privy to it, she said.

She said her concerns with regard to the Enforcement Division and its conduct are not confined to this matter. “I have raised multiple instances in both internal and public statements where the CFTC’s Division of Enforcement has not been candid with the Commission in its recommendations on enforcement actions, including omitting evidence and legal arguments in our administrative proceedings that are material to the Commission’s deliberation,” Pham said.

“I believe that such lack of candor to the Commission violates the American Bar Association’s Model Rules of Professional Conduct and the duties owed by the Division to the Commission as a client.”

Caroline Pham, Commissioner, CFTC

Pham also said she brought attention to conduct issues relating to the CFTC’s Division of Enforcement last year after discovering inaccuracies in the administrative record (memoranda and legal filings) that the Division refused to correct.

And she questioned whether CFTC senior management believed it was appropriate to send legally inaccurate or deficient materials to the Commission as the basis for the administrative record that the Commission must deliberate upon to engage in decision-making and exercise the Commission’s quasi-judicial authority.

“Obviously, an inaccurate or unsupported administrative record is untenable and may lead to a miscarriage of justice,” she said.

“I believe that such lack of candor to the Commission violates the American Bar Association’s Model Rules of Professional Conduct and the duties owed by the Division to the Commission as a client such as competence, diligence, communication, and loyalty,” she added.

Pham said she has proposed reforms to the Commission’s administrative proceedings for the past two years and called for a Government Accountability Office study into the CFTC’s internal procedures.