Last week the Commodity Futures Trading Commission brought and settled its first enforcement action sounding in the securities concept of insider trading, relying on the relatively new Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against employment of a manipulative or deceptive device in connection with futures trading.
According to the CFTC, from September 3 through November 26, 2013, Arya Motazedi, a gasoline trader employed by an unnamed “large, publicly traded corporation” misappropriated “non-public, confidential and material information” of his employer to benefit his own trading of energy futures contracts listed on the New York Mercantile Exchange, Inc. Specifically, on 34 occasions Mr. Motazedi allegedly traded opposite his employer’s accounts to effectively and illicitly transfer funds from the firm to himself, and on 12 other occasions he traded in advance of orders he placed for the firm to generate “additional profits for himself to the detriment of the company.”
The CFTC claimed that Mr. Motazedi owed a duty of confidentiality to his employer. This duty arose, said the Commission, because he and his employer “shared a relationship of trust and confidence,” and because his employer had express policies that prohibited him from engaging in personal transactions that “created an actual or potential conflict of interest.”
The CFTC charged that Mr. Motazedi’s trading constituted fraud, as well as impermissible fictitious sales and non-competitive trades.
The CFTC also claimed that Mr. Motazedi’s trading violated the relatively new Dodd-Frank provision (click here to access Commodity Exchange Act Section 6(c)(1)), US Code §9(1), and the corresponding CFTC rule (click here to access CFTC Rule 180.1) that prohibit any person from engaging in “any manipulative or deceptive device or contrivance” in connection with futures trading that uses, attempts to use, or employs “any manipulative device, scheme or artifice to defraud” or operates “as a fraud or deceit upon any person.” The CFTC said that Mr. Motazedi’s “knowing or reckless misappropriation and misuse" of his employer's proprietary trading information to trade his personal accounts breached his duty to his employer and thus was a violation of the relevant law and CFTC rule.
To resolve this matter, Mr. Motazedi agreed to pay restitution of almost US $217,000 to his employer and a fine of US $100,000, and agreed to be permanently banned from trading CFTC-supervised products subject to the rules of a registered trading facility.
On the same day the CFTC action and settlement were announced, the CME Group and Mr. Motazedi also settled a disciplinary action brought by NYMEX related to the same essential facts at issue in the CFTC matter. Mr. Motazedi also agreed to pay restitution to his former employer, a trading suspension and another fine of US $100,000 to resolve the NYMEX action.
My View: Once again, the Commodity Futures Trading Commission’s Division of Enforcement has pushed the envelope on the application of Dodd-Frank’s prohibition against employment of a manipulative or deceptive device in connection with futures trading, and its parallel rule 180.1. Here the CFTC used these provisions to prosecute an individual who allegedly traded based on the confidential information of his employer to his employer’s detriment. The CFTC has used these provisions previously in a wide range of enforcement actions stemming from its first use in the JP Morgan “London Whale” episode to allegations of illegal off-exchange metals transactions, claims of more traditional manipulation of wheat and allegations of spoofing. The CFTC clearly regards its new Dodd-Frank authority “as a broad, catch-all provision reaching fraud in all its forms – that is, intentional or reckless conduct that deceives or defrauds market participants.” Because it is not clear what limits, if any, a court may ultimately place on the CFTC in using these provisions, they are a powerful tool for the Commission to pressure settlements from potential respondents. This is worrisome for the industry, which can only hope the Division uses its new tools judiciously.