On September 28, 2018, the Commodity Futures Trading Commission (“CFTC”) filed a civil enforcement action in the Southern District of New York against an introducing broker and one of its associated persons, alleging that they misused material, nonpublic information in connection with block trades of energy contracts on the ICE Futures U.S. market in violation of 7 U.S.C. § 9(1) and 17 C.F.R. § 180.1(a). CFTC v. EOX Holdings LLC, Case No. 1:18-cv-08890 (S.D.N.Y. Sept. 28, 2018) (Complaint for Injunctive Relief, Civil Monetary Penalties, and Other Equitable Relief). In conjunction with the enforcement action, James McDonald, CFTC’s Director of Enforcement, announced the creation of a new Insider Trading & Information Protection Task Force.
According to the CFTC’s complaint, the individual broker exercised discretionary trading authority over the account of a friend, and also facilitated block trades for other customers of the brokerage. In an attempt to curry favor with the friend, the broker allegedly shared material, nonpublic information relating to other customers, including identities, trading activity, and positions. The CFTC alleges that this was done in violation of the broker’s duties of trust and confidence. The brokerage had allegedly waived a company policy prohibiting its brokers from exercising discretionary authority over customer accounts, but failed to institute policies and procedures to monitor the broker’s trading to minimize conflicts of interest. The CFTC further alleges that the brokerage failed to retain all pre-trade communications with customers and failed to prepare and keep adequate written records of customer orders.
According to the CFTC’s accompanying release, the Task Force is a coordinated effort across the CFTC’s Enforcement Division to identify and charge those who engage in insider trading or improperly use confidential information in connection with those markets regulated by the CFTC. The CFTC indicated that the Task Force will thoroughly investigate and, where appropriate, prosecute instances where individuals have abused access to confidential information.
While this is not the first insider trading case brought by the CFTC, the creation of the Task Force indicates that the CFTC will be increasing its focus on insider trading. Coupled with the lawsuit, it serves as a reminder that insider trading should not only be thought of in the traditional securities context, but also when trading in the commodities markets.