by Douglas K. Yatter, Sohom Datta, and Cameron J. Sinsheimer

This is Part IV of a four-part post. For Part I, discussing the CFTC’s historical authority to bring insider trading actions, and the CFTC’s expanded authority after the Dodd-Frank Act, click here. For Part II, discussing recent enhancements in the CFTC’s ability to detect insider trading, and four of the CFTC’s foundational insider trading cases, click here. For Part III, discussing two of the CFTC’s recent settlements involving insider trading and misuse of confidential information, click here.

In another new area of collaboration between the agencies, the CFTC’s Division of Enforcement announced in March 2019 that it would work alongside the DOJ to investigate foreign bribery and corruption relating to commodities markets, issuing an enforcement advisory on self-reporting and cooperation for violations of the CEA involving foreign bribery.[1] The agency’s first enforcement action in this area arrived in late 2020 with an order that included a focus on misappropriation of confidential information.

On December 3, 2020, the CFTC announced a settlement with Vitol Inc., a global commodities trading firm with offices in Houston, for alleged violations of the CEA based on bribes to foreign government officials. According to the order, the company violated Section 6(c)(1) of the CEA[2] and Regulation 180.1[3] by making improper payments to employees and agents of certain state-owned enterprises (SOEs) in Brazil, Ecuador, and Mexico in connection with trading in oil markets, among other acts.[4] Some of the payments were to secure “preferential treatment and access to trades.”[5] But the CFTC’s order specified that other payments enabled the company to obtain “confidential information,” including “specific price information” and information concerning an SOE’s “projected supply, demand, and strategic planning.”[6] The order noted that the agents of the SOE who provided the information “owed a duty to the SOE under law and applicable employment policies to keep the information confidential.”[7] According to the findings in the order (which the company neither admitted nor denied, except to the extent admitted elsewhere), traders at the company, “while in possession of this improperly obtained information, traded and secured physical oil products and related derivative contracts in a broad range of oil markets in the United States and globally,” including exchange for physical (EFP) transactions.[8] As in Byrnes, the CFTC found the company liable for the acts of its employees and agents.[9]

The language used by the CFTC in this order suggests that the Division of Enforcement is mindful of aligning the scope of its authority under Rule 180.1 with SEC Rule 10b-5. In adopting Rule 180.1, the CFTC stated that a violation would entail “trading on the basis of material nonpublic information in breach of a pre-existing duty” or “on the basis of material nonpublic information that was obtained through fraud or deception.”[10] Every CFTC order on this topic since then has used the “on the basis of” language to frame the violation, including Motazedi,[11] Ruggles,[12] Classic Energy,[13] and Schultz.[14] Yet here, the CFTC described the offense as trading “while in possession of” the improperly obtained confidential information, not trading “on the basis of” the information.[15] This subtle but potentially significant shift brings the CFTC into closer alignment with the SEC’s approach under Rule 10b-5, which has a provision defining trading “on the basis of” material nonpublic information to include trading where “the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.”[16]

More broadly, as discussed above, the CFTC’s first insider trading cases involved trading by the person who possessed the confidential information, while more recent cases have targeted tippers who disclosed confidential information for others to trade. This latest action demonstrates a further evolution to focus on the recipients of confidential information.[17] While it remains to be seen how the CFTC will interpret and apply tippee liability beyond the bribery context at issue here, the range of fact patterns of interest continues to grow.

In a parallel criminal case, the same company entered into a deferred prosecution agreement with the DOJ based on two counts of conspiracy to violate the Foreign Corrupt Practices Act, a resolution based largely on the same improper payments at issue in the CFTC case.[18] The DOJ has also prosecuted individuals involved in the matter.[19] Although the DOJ did not pursue a charge here under the CEA as it did in Schultz, this case stands as a further example of the increasingly close coordination between the agencies on a growing range of matters involving commodities markets.

Conclusion

The recent cases discussed above have each advanced the CFTC’s enforcement program on insider trading and misappropriation of confidential information. Taken together, these cases send a clear signal that the agency is committed to identifying and deterring such conduct in commodity derivatives markets. Like the SEC, on whose rule the CFTC modeled its own, the CFTC may now pursue not only those who trade on misappropriated information for their own benefit, but also those who provide tips for others to do so and the recipients who use such information. The agency takes a broad view of the types of duties that may give rise to liability for misappropriation, including employment agreements and other forms of confidentiality obligations, and it increasingly seeks to use data analytics to identify and investigate trades that may relate to confidential information. In some cases, the CFTC may also collaborate with the DOJ on parallel criminal enforcement.

In this evolving landscape, firms that participate in the commodities markets may wish to review their policies, procedures, and training programs to ensure that their personnel understand how liability can arise from misappropriation of confidential information and take appropriate steps to prevent and address such conduct.

Footnotes

[1] CFTC Press Release, CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices (Mar. 6, 2019), https://www.cftc.gov/PressRoom/PressReleases/7884-19; see also CFTC Enters the Market for Anti-Corruption Enforcement, N.Y.U. Compliance & Enforcement Blog (Mar. 20, 2019), https://wp.nyu.edu/compliance_enforcement/2019/03/21/cftc-enters-the-market-for-anti-corruption-enforcement.

[2] 7 U.S.C. § 9(1).

[3] 17 C.F.R. § 180.1.

[4] Order Instituting Proceedings Pursuant to Section 6(c) and (d) of the CEA, Making Findings, and Imposing Remedial Sanctions, at 2, In re Vitol, Inc., CFTC Dkt. No. 21-01 (Dec. 3, 2020) (“Vitol CFTC Order”).

[5] Id.

[6] Id.

[7] Id. at 4.

[8] Id. at 2, 6.

[9] Id. at 10 (citing CEA § 2(a)(1)(B), 7 U.S.C. § 2(a)(1)(B)).

[10] Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. at 41,403 (emphasis added).

[11] Motazedi CFTC Order at 6.

[12] Ruggles CFTC Order at 6.

[13] Classic Energy CFTC Order at 6.

[14] Schultz CFTC Order at 6.

[15] Vitol CFTC Order at 2.

[16] 17 C.F.R. § 240.10b5-1 (2020) (emphasis added); see also Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,727 (Aug. 24, 2000) (“[T]he goals of insider trading prohibitions . . . are best accomplished by a standard closer to the ‘knowing possession’ standard than to the ‘use’ standard.”).

[17] Vitol CFTC Order at 9 & n.7.

[18] Deferred Prosecution Agreement, United States v. Vitol Inc., No. 20-cr-539 (E.D.N.Y. Dec. 3, 2020).

[19] Dep’t of Just. Press Release, Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case, https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case (noting related charges against an individual who received bribes, an individual who acted as an intermediary, and a trader).

Douglas Yatter is a partner in the New York office of Latham & Watkins and Co-Chair of the firm’s Commodities and Derivatives Regulation and Enforcement Practice. Sohom Datta and Cameron Sinsheimer are associates in the firm’s New York office.

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