CFTC sues foreign registered exchange for engaging in activity in the US and with US persons without proper US registration

On September 24, 2020, the Commodities Futures Trading Commission (CFTC) filed suit in the US District Court for the Southern District of Texas against a foreign commodities trading platform^[1], alleging that the trading platform had illegally (a) acted as a futures commission merchant without registering with the CFTC and (b) operated as a board of trade without being designated or registered with the CFTC.

Acting as an FCM without registration

The CFTC alleges that since March 2018 the online trading platform of Laino Group Ltd. (d/b/a PaxForex) allowed customers, including those in the US, to trade commodities in foreign currency, precious metals and digital assets (such as Ether, Litecoin and Bitcoin) without being registered in the US as a futures commission merchant (FCM).

An FCM is (1) an “individual, association, partnership, corporation, or trust that … is … engaged in soliciting or in accepting orders for … the purchase or sale of:” (a) a commodity for future delivery; (b) a security futures product; (c) a swap; or (d) commodity option and (2) in connection with the activities described in (1), accepts any money, securities, or property, or extends credit to margin, guarantee, or secure any trades or contracts for such activities.^[2]

Under the Commodity Exchange Act (CEA), it is unlawful for any person to be an FCM unless such person is registered with the CFTC. Additionally, such persons must also “treat and deal with all money, securities, and property received by such person to margin, guarantee or secure trades or contracts for any customer … separately” and not comingle funds with the FCM itself or with any other customer of the FCM.^[3]

The CFTC’s claim alleges that PaxForex actively solicited US persons to participate in leveraged trading of foreign currency, precious metals and digital assets. Specifically, the CFTC alleges that PaxForex solicited US investors through its YouTube channel and its website, claiming to be “The Best Forex Broker for Beginners in the USA.” The CFTC’s complaint goes on to describe how one US PaxForex customer was solicited through his US email and his US telephone number to transact in “[contracts for difference] referenced to the prices of foreign currencies, precious metals and digital assets” on the Pax Forex platform. The CFTC claims that PaxForex violated the CEA by (a) soliciting US persons; (b) accepting orders from such US persons to trade in contracts referenced to the prices of foreign currency, precious metals and digital assets; and (c) accepting funds from such US persons in relation to these contract positions without being registered as an FCM with the CFTC.

Acting as a DCM without registration

The CFTC also alleges that PaxForex’s facilitation of these transactions is subject to the rules of a board of trade, requiring PaxForex to be designated or registered with the CFTC as a contract market.

The CEA makes it “unlawful for any person to offer to enter into, to enter into, to execute, to confirm the execution of, or to conduct any office or business anywhere in the [US] … for the purpose of soliciting or accepting any order for, or otherwise dealing in, any transaction in, or in connection with, a contract for the purchase or sale of a commodity for future delivery … unless such transaction is conducted on or subject to the rules of a board of trade which has been designated or registered with the [CFTC] as a contract market or derivative transaction execution facility….”^[4]

The CFTC alleges that the PaxForex website claimed to have a US presence with an IT infrastructure in leading industry data centers, such as New York. The CFTC then asserts that by conducting these transactions within the US without being designated or registered with the CFTC, PaxForex again violated another provision of the CEA.

CFTC seeks return of funds and bans trading

The CFTC seeks to enjoin PaxForex’s unlawful acts and practices, to compel its compliance with the CEA, and to further enjoin PaxForex from engaging in any commodity-related activity. In addition, the CFTC seeks civil monetary penalties and remedial ancillary relief, including, but not limited to, trading and registration bans, disgorgement, restitution, rescission, pre-judgment and post-judgment interest.

James McDonald, the CFTC’s Division of Enforcement Director, stated, “This action shows the CFTC’s continued commitment to ensuring that entities offering leveraged, retail transactions within our jurisdiction – including those involving digital assets – register with the CFTC. We will vigorously enforce these requirements to preserve market integrity and protect customers.”

Given the CFTC’s renewed commitment to protecting the US commodities markets, foreign entities looking to engage in commodities activities in the US or with US persons may wish to seek prior advice from legal counsel.

Learn more about the implications of this case by contacting either of the authors or your usual DLA Piper relationship lawyer.