Derivative Financial Fraud Cases

In the wake of the financial crisis of the past several years, several critics have pointed to the unregulated derivatives market as one of the root causes. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 with the intention of providing increased government oversight to prevent future crashes. The Act does this in two ways. First, the act gives regulatory authority over the unregulated derivatives market to the Commodities Futures Trading Commission (CFTC) and the Securities and Exchanges Commission (SEC). Secondly, it provides financial incentives and Protections for whistleblowers to report fraud within the U.S. Financial Sector. This includes violations of Dodd-Frank as well as earlier financial rules and regulations.

A derivative, put very simply, is a contract or agreement which has a fluctuating value based on outside influences. For example, a contract which is based on the price of stock market shares will have a value that rises and falls due to market fluctuations. As the derivative market has developed, it has grown in complexity. One of most heavily traded types of derivatives is the swap, in which parties agree to exchange components of financial instruments, for example, a fixed interest rate of one loan for the variable interest rate of another. In 2009, the total value of swaps was estimated at over $426 trillion, and were heavily involved in the financial markets prior to its collapse.

The Act divides the Agencies’ authority between two types of derivatives–swaps and security-based swaps. A “swap” is defined more broadly in the Act, and includes not only the market definition, but also options and other transactions based on market indices, commodities, rates, financial interests, etc. The CFTC has exclusive regulatory authority over this broad range of derivatives. However, the Act also provides some limitations as it was largely intended to provide guidance over unregulated markets. It does not provide the CFTC new authority over financial instruments already regulated under the Securities Act of 1933 or the Securities Exchange Act of 1934. Additionally, Dodd-Frank excludes security-based swaps from CFTC oversight. Security-based swaps are a narrower subgroup of swaps, involving individual securities or loans, on narrowly based securities indices. Security-based swaps are regulated by the SEC.

This is only a brief summary of the new derivatives regulations under the Dodd-Frank Act. Due to the high complexity of the financial markets, there are still numerous questions of interpretation. For example, some derivatives contain elements of both securities and commodities, and arguably could be under the auspice of either federal agency. In such cases, under Dodd-Frank, one must petition the SEC and CFTC for a final determination as to who has authority. At present, there is little guidance or administrative history to guide our complete understanding of how these matters will be resolved.

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You should be aware that qui tam claims are subject to a Statute of Limitations. The area of limitations periods is complex. There are also first to file rules, public disclosure bars, original source issues, and varying limitations in pursuing retaliation claims. If you wish to pursue your claims, you should promptly seek the opinion of an attorney regarding the merits of your qui tam claim and the applicable statute of limitations.