A Minnesota-based futures commission merchant was fined $6.5 million by the Commodities Futures Trading Commission (CFTC) for anti-money laundering (AML) program gaps and other risk management and recordkeeping failures.
CHS Hedging failed to apply adequate AML policies from January 2017 through December 2020 in the case of an owner of a ranching business and his futures and options trading account, the CFTC alleged in its order published Tuesday. The ranch owner is not named in the order, though the agency listed its case against Cody Easterday and Easterday Ranches under related filings.
Easterday pleaded guilty in March 2021 to criminal charges related to defrauding Tyson Foods and another company out of more than $244 million through a “ghost cattle” scam, in which he billed Tyson and the other company for the costs of purchasing and feeding 265,000 cattle that didn’t exist. He instead used $200 million of the money to cover commodity futures contract trading losses. Easterday was sentenced to 11 years in prison and ordered to pay $244 million in restitution in October.
Easterday conducted speculative trades through his account at CHS and made net margin payments of more than $147 million to CHS during the four years, the CFTC said. CHS allowed this to happen and set trading limits that were inconsistent with the customer’s financial resources, the agency said. The ranch owner frequently went over the trading limit, prompting CHS to raise the limit and allow him to “sustain more losses,” the CFTC alleged.
“CHS Hedging accepted the margin payments from [the customer] without adequately investigating the source of [the customer’s] funds or reporting [the customer’s] transactions in a suspicious activity report to the Department of the Treasury,” the CFTC said in a press release.
CHS didn’t maintain records of certain, pre-trade communications and failed to promptly produce records requested by the CFTC, the agency continued. Easterday’s millions in losses “were facilitated by CHS Hedging’s failure to impose and enforce appropriate trading limits on his account,” the CFTC said.
The agency further faulted CHS for ignoring advice from an independent auditor in 2017 and specialized AML auditor in 2019 to improve its controls. The firm’s chief compliance officer also serves as its designated AML officer, and she was not provided enough resources to do her duties, the CFTC said.
“The Commodity Exchange Act and accompanying regulations require [futures commission merchants] to have and actually implement adequate AML and risk management policies and procedures,” said Gretchen Lowe, acting director of enforcement at the CFTC, in the agency’s release. “These are critical components to ensure customers are protected from fraud, and the CFTC will not hesitate to take action and require significant sanctions and remediation.”
In a statement in which she said the settlement total “does not send a strong enough deterrent message,” CFTC Commissioner Christy Goldsmith Romero noted CHS has been on the receiving end of 22 enforcement actions by exchanges and the CFTC.
“As a [futures commission merchant], CHS violated its legal responsibilities to prevent excessive speculation and to implement an anti-money laundering program, something they should admit for full accountability, transparency, and deterrence,” she wrote.
CHS did not respond to a request for comment.