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Trump's swaps watchdog bows out leaving tough enforcement legacy

Suzanne Barlyn

NEW YORK, June 7 (Reuters) - When chairman of the U.S. Commodity Futures Trading Commission Chris Giancarlo steps down next month, he will leave an unlikely legacy: a major crackdown on white collar misconduct.

The Trump administration appointee is set to leave the swaps watchdog on July 15 after the Senate confirmed his replacement Heath Tarbert, a Treasury official, on Wednesday. Giancarlo's term expired in April but he has stayed on for the transition.

While regulators across the Trump administration have been pulling back from enforcement, the CFTC has bucked that trend. Giancarlo and his enforcement chief James McDonald have applied a playbook from the world of violent crime prosecution to transform the CFTC from an agency seen as cozy with industry to one with teeth, say lawyers.

"During my watch, the CFTC has been resolute in holding market participants to the highest standards of behavior. In fact, by any measure, enforcement has been among the most vigorous in the history of the CFTC, including more enforcement actions, more penalties, more accountability," said Giancarlo.

During fiscal year 2018, the CFTC filed 83 enforcement actions, a 22% increase on 2016 and a 20% increase on 2015, agency data shows. Compared with 2017, a presidential transition year that typically sees enforcement slow due to staff turnover, 2018 enforcement actions jumped 69%.

Monetary penalties totaled around $900 million in 2018, higher than five of the eight years from 2009 to 2016.

"The really key thing with this current enforcement department and Jamie at the helm is aggressiveness," said Matthew Kluchenek, a lawyer who represents clients in the CFTC's crosshairs.

McDonald, 37, joined the CFTC in 2017 from New York's Southern District where he prosecuted everything from public corruption to Bronx gang violence. He cut cooperation deals with junior gang members, offering them more favorable treatment in return for information that would help him convict bigger fish.

Now, McDonald's targets are commodities firms, brokers, and their executives.

"What we've tried to do is open an entirely new avenue of information flowing into the commission. One of those avenues is through cooperating witnesses who have inside knowledge of the misconduct," McDonald told Reuters.

By offering reduced penalties to firms and individuals who self-report lapses and cooperate in probes, McDonald has spurred executives to lead his team to other misconduct and offenders. Previously, the CFTC offered fewer incentives for firms to cooperate, making it harder for the small, resource-strapped agency to pursue big cases and hold executives accountable.

McDonald believes punishing individuals is a key deterrent. He applied his strategy when probing former trader Kamaldeep Gandhi, who admitted to manipulative futures trading practices. Gandhi agreed to cooperate and told the CFTC about others who were involved, according to McDonald.

"When you have a small agency and a small enforcement staff, you need to rely on deterrent effect and incentives," said Laura Brookover, a former CFTC enforcement lawyer.

McDonald's cooperation approach includes a two-phase settlement: offenders agree to cooperate in return for reduced penalties which are imposed once the cooperation is complete.

In March, McDonald said he would expand this program to include foreign bribery, an area the CFTC has traditionally left to the Department of Justice and the Securities and Exchange Commission.

The CFTC's tough stance has caused some consternation among the industry, which had hoped for a lighter touch under Trump. They complain it is difficult to calculate potential penalties, raising questions over whether self-reporting and cooperation are worth the risk.

With Tarbert taking over the agency, it is also unclear if McDonald will be able to continue with the program. Tarbert told Congress in March he wants to invest in enforcement but does not believe in leniency. "Self-reporting can be useful, assuming it's followed up with systematic self-correction," Tarbert added.

(Reporting by Suzanne Barlyn, editing by Michelle Price and Susan Thomas)