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On December 14, 2023, the Commodity Futures Trading Commission
(“CFTC”) and Department of Justice (“DOJ”)
Fraud Section announced the settlement of insider trading fraud
charges and Foreign Corrupt Practices Act (“FCPA”)
charges, respectively, against Freepoint Commodities LLC
(“Freepoint”). This note focuses on the CFTC charges
which involved trading on material non-public information
(“MNPI”) improperly obtained from a foreign state-owned
enterprise (“SOE”) in connection with physically
deliverable fuel oil trades. As a result of this fraudulent scheme,
the CFTC alleges that Freeport was able to generate approximately
$30 million over a period of 6 years. The CFTC order requires
Freeport to pay more than $91 million in civil and monetary
penalties and disgorgement.
This CFTC case is noteworthy because it is one of the very few
where the CFTC asserts its anti-fraud jurisdiction not with respect
to swaps, options and futures contracts (i.e.,
“commodity interests” or derivatives), but with respect
to purchases and sales of physically-delivered commodities, such as
fuel oil.
According to CFTC’s order, Freepoint, a large commodity
trader based in Connecticut, had hired an overseas consultant who
was able to obtain MNPI from certain foreign SOE’s employees
for bribes and other compensation that gave a significant
commercial advantage to Freepoint over its competitors. Freepoint
employees knew that the information was improperly obtained and
took steps to conceal that they were in possession of this
MNPI.
To establish its fraud claim under § 6(c)(1) of the CEA and
§ 180.1 of CFTC Regulations, the CFTC order found that
Freepoint’s traders: (1) attempted or engaged in prohibited
fraudulent or manipulative conduct (i.e., engaged in
fraud, such as giving bribes and other corrupt payments); (2) with
scienter (i.e., acted knowingly and attempted to conceal
their knowledge); and (3) in connection with any swap, futures
contract, or contract of sale of any commodity in interstate
commerce (i.e., the sale and purchase of physical fuel oil
which is a commodity).
The CFTC’s order signifies its ambition to expand its
anti-fraud and anti-manipulation jurisdiction with fraud claims
alleging misappropriation of MNPI (i.e., insider trading
claims) involving only physical commodities without the use of
derivatives.
In the parallel DOJ matter, DOJ announced the entry of a
deferred prosecution agreement (DPA) with Freeport, deferring
criminal prosecution on a charge of conspiracy to violate the
FCPA.
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about your specific circumstances.
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