Key Takeaways
- The CFTC's decision to proceed to trial against the defendants on the insider trading claims underscores the government's focus on enforcing laws against insider trading. Recent months have seen a slate of insider trading enforcement actions brought by federal regulators, including the CFTC and the Securities and Exchange Commission, and criminal cases brought by the Department of Justice.
- While EOX is the first insider trading charge that the CFTC has brought to trial, the CFTC has been increasingly active in this area since 2010 when the Dodd-Frank Act conferred on it the authority to bring commodities insider trading enforcement actions. Officials with the CFTC have publicly stated that insider trading in the commodities markets is an increasing focus of the CFTC's enforcement regime.
- In finding against the CFTC on the insider trading count, it appears that the jury may have determined that the CFTC failed to establish the following elements of an insider trading offense: first, that EOX and its broker owed a duty of trust and confidence to the customers on whose behalf the broker placed trades; and second, that the broker traded based on material nonpublic information in breach of a duty.
- The jury's finding against the CFTC on its insider trading count may cause the CFTC to reassess its insider trading theories, particularly as they apply to commodities brokers who place block trades for customers to whom they do not owe a fiduciary duty. Block trades nevertheless remain a focus of investigations by the CFTC and a developing area of insider trading law.
- Although the verdict comes as a setback to the CFTC, the continued robust enforcement by the CFTC of the laws against insider trading in commodities—including energy futures and cryptocurrencies—is expected.
Factual Background
Procedural Background
The Trial and Jury Verdict
After a seven-day trial, a jury found for the defendants on the insider trading claims and for the CFTC on the non-fraud claims. Based on the jury's verdict on the insider trading claims, it appears that the jury may have credited the defendants' principal arguments at trial that they (1) did not owe duties of trust and confidentiality to customers as to block trade order information and (2) did not misappropriate material nonpublic information, and thus found that the CFTC failed to prove two required elements of insider trading.
As for the question of a duty of trust and confidentiality, the defendants argued that the broker acts as an agent to both sides of a privately negotiated block trade. The broker, according to the defendants, necessarily must use his or her knowledge of a customer's order to structure the transaction and share that information with the counterparty to complete the transaction. Thus, as the defendants argued, the broker did not owe duties of trust and confidentiality to customers placing block trades, and customers could not have reasonably expected that the broker would keep their trade information confidential.
The defendants similarly asserted that they did not misappropriate material nonpublic information. The defendants maintained that the customer order information that the broker was alleged to have traded on and shared with Customer A was not confidential given his role as an agent to both parties in the block trade.
According to the defendants, the CFTC could not point to any rule, agreement, or understanding that defined a duty of trust and confidentiality or provided that the customer order information at issue was material nonpublic information.
On August 25, 2022, the defendants moved for judgment as a matter of law and a new trial as to the non-fraud count alleging improper disclosure of customer information, on which the jury found in favor of the CFTC. The defendants have also indicated they will likely appeal.
Julia Koch contributed to the writing of this alert
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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