CFTC Ramps Up Whistleblower Protections

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.

All four authors are former SEC and/or CFTC senior leaders and staff. Daniel Hawke served as the Director of the SEC’s Philadelphia Regional Office and Chief of the Division of Enforcement’s Market Abuse Unit. Jane Norberg served as the Chief of the Division of Enforcement’s Office of the Whistleblower at the SEC. Christian Schultz served as the Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement. Adrien Anderson served as Counsel to former SEC Commissioner Allison Herren Lee and Senior Counsel to CFTC Commissioner Kristin Johnson. All authors are in Arnold & Porter’s Securities Enforcement & Litigation group.

Arnold & Porter monitors whistleblower developments across the various federal government whistleblowers programs including those at the SEC, CFTC, Financial Crimes Enforcement Network, National Highway Traffic Safety Administration, and the Department of Justice. We advise clients on best practices related to whistleblower compliance and defense. If you are seeking advice on how to mitigate risks in connection with these issues, or with SEC or CFTC compliance and enforcement more broadly, please reach out to the authors of this Advisory or your regular Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.