On December 2, 2015, the Commodity Futures Trading Commission (“CFTC”) issued an order (“Order”) instituting proceedings against, and settling with, Arya Motazedi, for various violations of CFTC Rules.1 In a significant first instance, the CFTC imposed monetary penalties and sanctions against an individual for insider trading in commodities (i.e., stealing confidential material information from a trader’s employer) even though the CFTC’s enforcement lawyers could have charged the trader under the CFTC’s traditional anti-fraud authorities, such as front running. The CFTC has indicated previously that it will exercise this new authority that it received under the Dodd-Frank Act,2 and that this authority is essentially similar to that of the Securities and Exchange Commission (“SEC”) under its Rule 10b-5.
Motazedi served as a gasoline trader for a large, unnamed, publicly traded corporation—routinely trading NYMEX gasoline futures and other types of energy futures contracts through his company’s trading account, as well as through his two personal accounts.3 According to the Order, Motazedi repeatedly misappropriated confidential material information and entered successive buy orders and sell orders on his personal accounts to front-run the company’s orders.4 Motazedi’s profits, combined with his company’s combined losses, equaled more than $216,000.5 He would not have been able to generate these profits in the absence of such confidential proprietary information.
Traditionally, this type of violation would have been charged under the CFTC’s authority to prevent front running, or fictitious sales or pre-arranged sales, which has been used on numerous previous occasions.6 Although the Commodity Exchange Act long has contained prohibitions on the use of material insider information, these prohibitions typically applied in very limited circumstances—to government employees or exchanges’ officers who came into possession of confidential information relating to commodities.7 Because futures are traded to hedge unique commercial commodity risk, or to speculate on a view of the market, and because before the Dodd-Frank Act provided the CFTC additional anti-fraud authorities,8 the CFTC has not pursued these enforcement actions, instead focusing on its anti-manipulation authority.
The Order is significant as the CFTC’s first enforcement of its anti-manipulation rules in an insider trading case. Under certain regulations promulgated under the Dodd-Frank Act, the CFTC’s authority is expanded to include fraud in commodity sales, in addition to market manipulation— including a prohibition on trading on material non-public information in breach of a pre-existing duty.9 CFTC Rule 180.1—a rule Motazedi violated— is intended to be a broad catch-all clause capturing intentional or reckless misconduct.10 Rule 180.1 is virtually identical to Section 10(b) of the Securities Exchange Act of 1934.11 While the CFTC had previously stated it will merely be guided—not controlled—by prior Section 10(b) precedents,12 this decision indicates that at least in these circumstances, the CFTC will proceed in a manner consistent with SEC precedent. Both the SEC’s and the CFTC’s critical elements of an insider trading violation focus on (i) finding a “duty” in a relationship and (ii) the breach of this duty (i.e., the misappropriation theory).13 The Order is the first example of implementation by the CFTC of its guidance and incorporates Section 10(b) language to find that Motazedi defrauded his employer (with whom he “shared a relationship of trust that gave rise to a duty of confidentiality”) and the market by “misappropriating non-public, confidential information.”14
The Order bars Motazedi from trading and orders the payment of restitution and penalties of $316,955.80.15 The Order continues the CFTC’s trend of strictly enforcing its rules—and confirms for market participants that the CFTC will view insider trading through the same lens as a securities insider trading claim under the misappropriation theory. This case clearly appears to be the harbinger of the CFTC’s division of enforcement developing its authority to prosecute insider trading violations involving futures and swaps, and that more such claims will likely follow in the future.
- In the Matter of Arya Motazedi, CFTC Docket No. 16-02, 2015 WL 7880066 (Dec. 2, 2015) [hereinafter Motazedi].
- See Keynote Address by Commissioner Sharon Y. Bowen before ISDA North America Conference, CFTC.gov (Sept. 17, 2015), http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-6#P5_1139.
- Id. at *1.
- Id. at *1-*2.
- Id. at *3.
- See, e.g., In the Matter of Mark J. Sitzmann, CFTC Docket No. 96-5, 1997 WL 82610 (Feb. 26, 1997).
- See, e.g., CFTC v. Byrnes, Comm. Fut. L. Rep. (CCH) ¶ 32,547 (Feb. 21, 2013).
- Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 747, 753, 124 Stat. 1376 (2010); CFTC Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices, 17 C.F.R. § 180.1.
- CFTC Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices, 17 C.F.R. § 180.1.
- Id. See also CFTC Prohibition on the Employment of Manipulative and Deceptive Devices, 76 Fed. Reg. 41,398, 41,403 (July 14, 2011).
- Compare Securities Exchange Act § 10(b), 15 U.S.C. § 78j (2012), with CFTC Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices, 17 C.F.R. § 180.1.
- See CFTC Antidisruptive Practices Authority Interpretive Guidance and Policy Statement Notice, 78 Fed. Reg. 31,890, 31,895 (May 28, 2013).
- Note that CFTC Rule 180.1(b) specifically says that “[N]othing in this section shall be construed to require any person to disclose to another person nonpublic information that may be material to the market price, rate, or level of the commodity transaction, except as necessary to make any statement made to the other person in or in connection with the transaction not misleading in any material respect.” It follows then, that in the absence of finding the requisite “duty,” the CFTC will not be able to make a claim of the breach of the insider trading prohibition.
- Motazedi, supra note 1, at *1.
- Id. at *9.
Client Alert 2015-352