In the first of its kind enforcement action, the Commodity
Futures Trading Commission (CFTC or Commission) charged a firm for
impeding reporting by a whistleblower in violation of Commission
regulations. The CFTC announced a settled administrative proceeding against
Trafigura Trading LLC (Trafigura), a Houston, Texas affiliate of a
multinational commodity trading firm. According to the order, the
firm asked employees and former employees to sign non-disclosure
agreements that did not have appropriate language that allowed for
government reporting. As part of the US$55 million fine, the
Commission found Trafigura also engaged in insider trading and
market manipulation.
This CFTC action may signal a shift in the CFTC's approach to
whistleblower protection and other violations that closely mirror
the approach of the U.S. Securities and Exchange Commission
(SEC).
CFTC Findings Against Trafigura
Impeding Reporting
Regulation 165.19, promulgated under the Commodity Exchange Act (CEA) Section 23(h)-(j), makes it unlawful to
... take any action to impede an individual from communicating directly with the Commission's staff about a possible violation of the Commodity Exchange Act, including by enforcing, or threatening to enforce, a confidentiality agreement or pre-dispute arbitration agreement with respect to such communications.1
According to the order, from 2017 to 2020, Trafigura required
its employees and former employees to sign agreements with
non-disclosure provisions that prohibited disclosure of any
confidential information to a third party. Although the
non-disclosure provisions did not specifically prohibit disclosure
to regulators, the CFTC determined the language caused confusion
for Trafigura employees and "had the effect of impeding their
direct and voluntary communications with the
Commission."
This CFTC action follows on the heels of an apparent active and
ongoing enforcement sweep conducted by its sister agency, the SEC.
The SEC has brought 23 enforcement actions to date under Regulation
21F-17, its mirror provision, with the latest fine being US$18 million for violation
of its rule.
Insider Trading
From 2014 to 2019, Trafigura obtained material nonpublic information (MNPI) from an employee at a Mexican trading entity. The information received included documents with the pricing formulas used to price and sell gasoline, monthly updates about total expected import volumes and destination ports for gasoline, and competitor pricing information from bilateral negotiations. Trafigura traders used the MNPI to formulate business and negotiation strategies, determine offer prices for gasoline products, and enter trades in physical and derivative gasoline transactions. According to the order, some of the material nonpublic documents were hand-delivered to the U.S. from Mexico to prevent an electronic record of transmission of the MNPI to Trafigura. The CFTC found that Trafigura knowingly, or was at least reckless in not knowing, it was trading on MNPI that was transmitted by the Mexican trading entity employee in breach of his duty to his company. The CFTC charged Trafigura for violation of Section 6(c)(1) of the CEA and Regulation 180.1(a)(1) and (3), which prohibit fraud or manipulative conduct.
Market Manipulation
In 2017, Trafigura traders sought to take advantage of price
differences in oil between the U.S. Gulf Coast, and Singapore.
Houston-based Trafigura traders developed a plan to purchase large
amounts of U.S. Gulf Coast fuel and ship it to Singapore to make a
profit. Ahead of their anticipated purchase of physical fuel oil,
Trafigura traders bought fuel oil futures in an effort to hedge
risk. Trafigura's futures position, however, essentially forced
Trafigura into a speculative position that the oil futures prices
would increase.
At the same time, Trafigura traders understood that fluctuations
in something called the "Platts price
assessments"2 would impact the value of
Trafigura's positions. Trafigura traders began heavily bidding
and purchasing fuel oil futures during the Platts Window to
increase the Platts Benchmark. The more Trafigura traded and paid,
the more the benchmark increased, and the higher Trafigura's
profits would be on its long futures position.
The CFTC determined that Trafigura's trading activity during
the Platts Window artificially increased the Platts
Benchmark.3 The CFTC concluded that
Trafigura's activity constituted market manipulation in
violation of Section 6(c)(1) of the CEA and Regulation 180.1(a)(1)
and (3).
Settlement
Trafigura settled with the CFTC, on a no admit, no deny basis, agreeing to pay a US$55 million civil monetary penalty and agreed to certain undertakings, including modifying the non-disclosure provisions in its employee agreements to clarify that nothing in those provisions are intended to limit or prevent potential violations of law to governmental authorities. Trafigura also agreed to cooperate with the CFTC for a period of three years.
Key Takeaways
Anticipate more enforcement action in the
whistleblower impeding space. The CFTC's first of
its kind impeding reporting action is a canary in the coal mine for
commodity and derivatives market participants. It demonstrates that
the CFTC may be looking to the SEC for guidance on bringing
enforcement actions for violations of the impeding reporting
provisions in federal financial regulations. With a new director in
the CFTC's whistleblower office, that office may be looking to
ramp up enforcement in this area.
Companies should undertake a compliance review of all
employee documents, not just severance agreements.
The rules applicable to companies and individuals who impede
whistleblower reporting have been applied expansively by the
regulators. The SEC has brought cases against companies for
language included in codes of conduct, ethics manuals, training materials, and investor materials. We anticipate the CFTC
will take a broader reading of the rule as well. Companies should
consider reviewing these materials to make sure they are compliant
with the whistleblower protection rules.
Consider whether your company is subject to CFTC
jurisdiction. While many companies may not consider
themselves commodity or derivatives market participants, the CFTC
has demonstrated a growing interest in crypto and carbon markets.
Companies should be aware that activities in these spaces could
subject them to the CFTC's antifraud jurisdiction as the
CFTC's interest and enforcement actions continue to grow in
these areas. Particularly as companies consider their climate
impact and sustainability reporting, carbon credits are an
increasingly popular option to offset carbon emissions. The CFTC
could take the aggressive approach finding that activity in crypto
and carbon markets would subject those companies to CFTC
jurisdiction and therefore the impeding reporting provisions under
the CEA.
Footnotes
1. 17 C.F.R. § 165.19(b).
2. Platts is a London-based reporting agency that reports the daily price of various commodities. Platts provides a benchmark that serves as a price reference for sales contracts for physical oil and is used by market participants. Platts offers a U.S. Gulf Coast High Sulphur Fuel Oil (USGC HSFO) benchmark which can be used as the basis for negotiations on oil contracts. Platts determines the benchmark using a "market-on-close" methodology that is based on purchase bids, sales offers, and trades in USGC HSFO during a certain period of the day called the "window."
3. In re Trafigura Trading LLC, CFTC Docket No. 24-08 at 6 (Jun. 17, 2024).
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