Back in September 2023, when the Commodity Futures Trading Commission (CFTC) filed a complaint against Traders Global Group Inc., the operator of prop trading firm My Forex Funds (MFF), it was probably hoping for a decisive legal victory.

In the lawsuit, CFTC's Division of Enforcement claimed that the defendants, Traders Global Group and founder Murtuza Kazmi, fraudulently solicited customers to enter into leveraged forex exchange transactions. According to the US derivatives market regulator, what MFF presented as a prop trading platform, offering customers to “become professional traders” and trade with Traders Global's proprietary funds, was actually a Ponzi-like scheme luring customers to lose money.

Major Enforcement Action in Prop Industry

For the CFTC, the MFF case is more than a regular case. The lawsuit captured widespread attention in the FX industry as one of the first enforcement actions against the emerging prop trading hype. Financial regulators such as the CFTC often seek high-profile litigations to consolidate their authority over new domains, shape industry practices, and strengthen their positions in the eyes of the public.

On August 29, two days before filing the complaint, the US District Court in New Jersey handed the agency an early win, an ex-parte restraining order freezing the defendants' assets and nominating receivership on the MFF business.

Since then, however, the road has been less uphill than what the CFTC planned. In November 2023, the court did grant in part the CFTC's motion for a preliminary injunction against MFF, based on a prima facie look at the facts brought by the agency.

Yet, during the hearing, it was revealed that the CFTC failed to inform the court that a sworn declaration by an agency investigator included false statements (to support the motion for an asset freeze, the CFTC wrongly alleged that Traders Global transferred $31.5 million to “unidentified accounts” of the founder; shortly afterwards it discovered that the money was used for lawful tax payments).

In a sidebar exchange , the judge lashed out at the CFTC counsel: “I am trying to understand the timeline of this. You learned of this discrepancy, this mistake a week or two after the filing, and you didn’t inform the Court or defense counsel […] if that is accurate, CFTC is going to be in a lot of trouble today.” The court decided to cut the freeze order from $310 million (as originally requested by the CFTC) to $12 million.

MFF Fights Back

Following the revelations, MFF retaliated in March with its own motion against the CFTC. Defendants accused the CFTC staff of “repeatedly lying” to the court, asking for sanctions against plaintiffs that will include, at minimum, an “evidentiary hearing on the CFTC’s pattern of misconduct.”

In addition to mischaracterizing the 31.5 million tax payments, the MFF defense alleged that CFTC counsels sought to intrude on the attorney-client privilege between founder Kazmi and his counsel.

Clashes and reciprocal accusations between litigants aren’t a rare phenomenon. But last week, the MFF allegations were amplified from a surprising direction: CFTC commissioner Caroline D. Pham.

In a scathing statement, Pham called the recent allegations a “serious blight on the CFTC’s reputation and credibility”. Pham, who previously criticized the Commission’s “ready, shoot, aim” approach to enforcement actions, mentioned a number of previous staff misconducts from recent years that reflect “CFTC’s deficiencies across governance and culture”. She urged the Commission to carry out an internal investigation and reassign the case to a different enforcement team.

What does the in-house criticism against the CFTC can teach us about the MFF case and future of prop-trading regulations? It should be emphasized that although the court did grant the CFTC a temporary injunction against MFF, concluding preliminary evidence does show the case is not meritless.

It should also be noted that while Pham has strongly disparaged the agency’s litigatory conduct, her statement does not focus on the legal merits of the case. In fact, from her previous statement in the matter of MFF, delivered in August 2023, she called the fraud allegations “reprehensible” and hoped that the victims would be made whole. The court also has yet to decide on the sanctions motion filed by MFF.

Nevertheless, the focus on staff misconduct (at the expense of MFF's alleged violations) has no doubt caused significant embarrassment for the CFTC. The agency may still win the case, but allegations against the Division of Enforcement would not easily vanish, especially when voiced at the Commissioner's table. The agency would likely be pressured to take swift action to prevent future events from occurring.

More important, though, are the implications for prop or funded trading platforms. The MFF lawsuit is a telling example of the “regulation by enforcement” approach: when facing a new and unregulated activity, financial watchdogs often prefer to take matters to the court, instead of communicating plans to the public or revising decades-old rulebooks.

The enthusiasm for protecting customers from fraud is warranted but can lead to mishaps when cases are not handled properly. For prop companies, the result may be more years of prolonged litigation at the expense of regulatory clarity, particularly when the industry and customers need it the most.