CFTC Continues Pursuit of Misuse of Material Nonpublic Information Following Settlement with NYMEX

September 28, 2020

By Michael Spafford, Daren Stanaway & Katherine Berris

In early August 2020, the New York Mercantile Exchange (“NYMEX”), a unit of the Chicago Mercantile Exchange (“CME”), and two of its former employees settled a seven-year lawsuit brought by the Commodity Futures Trading Commission (“CFTC”) to resolve charges that the former employees leaked material nonpublic information (“MNPI”) to a broker, in violation of CFTC rules.[1] According to the parties’ consent order, the conduct of the two former employees violated Section 9(e)(1) of the Commodity Exchange Act (“CEA”), 7 U.S.C. § 13(e)(1), which prohibits insider trading, and CFTC Regulation 1.59(d)(1)(ii), 17 C.F.R. § 1.59(d)(1)(ii), which prohibits disclosure of MNPI obtained through special access as an employee of a self-regulatory organization.[2] The case marks the first time the CFTC has charged an exchange with violations of the CEA and CFTC regulations prohibiting exchange employees from disclosing MNPI and represents just one of several recent enforcement actions stemming from alleged misuse or improper disclosure of MNPI.

The CFTC first brought suit in 2013 in the U.S. District Court for the Southern District of New York (“S.D.N.Y.”) against NYMEX and two of its former employees, alleging that they disclosed private information regarding client activities to a commodities broker, sometimes in exchange for drinks, meals, and entertainment.[3] More specifically, the CFTC alleged that between 2008 and 2010, the two former NYMEX employees shared confidential information with the broker about the crude oil options and natural gas futures trades of NYMEX clients.[4] As NYMEX employees, the two individuals had lawful access to the MNPI they received but were required to keep that information confidential, and the broker was not authorized to receive it in these instances. To evade detection, one of the former employees allegedly communicated with the broker via cell phone or initially contacted the broker on a recorded line but then switched to cell phones once it came time to share confidential information.[5] The confidential information shared included identities of parties to specific trades, the buy or sell side of each party to specific trades, identities of the brokers involved in certain trades, the number of contracts traded, the prices paid, structures of specific transactions, and trading strategies of market participants.[6]

CEA Section 2(a)(1)(B), 7 U.S.C. § 2(a)(1)(B), provides, inter alia, that “[t]he act, omission, or failure of any official, agent, or other person acting for any . . . corporation . . . within the scope of his employment or office shall be deemed the act, omission, or failure of such . . . corporation . . . .” The CFTC has taken the position that employers essentially are strictly liable for torts committed by employees within the scope of their employment.[7] On summary judgment in earlier litigation in the case, NYMEX argued that neither employee disclosed MNPI to the broker for the purpose of benefitting NYMEX, and that NYMEX therefore could not be held liable, but the court disagreed, holding that NYMEX could be held vicariously liable if the employees were acting within the scope of their employment as NYMEX’s agents when they disclosed the MNPI, which remained a disputed issue of material fact.[8] NYMEX agreed in the settlement to vicarious liability for its former employees’ misconduct.[9]

The settlement imposes a joint and several civil monetary penalty of $4 million but caps the fines for the two former employees at $300,000 and $200,000, respectively, with NYMEX liable for the balance.[10] The two individuals also accepted permanent bans from trading on or subject to the rules of any registered entity, as defined in the CEA; entering into transactions involving “commodity interests;” and having commodity interests traded on their behalf, among other permanent prohibitions.[11]

Key Observations:

Adversarial Positions

It is unusual for the CFTC to take a position adversarial to that of an exchange it regulates;[12] rather, NYMEX and the CFTC generally have a cooperative relationship. That the CFTC pursued the exchange in this case exemplifies the extent to which the CFTC is committed to enforcing violations of its rules concerning MNPI. As the CFTC’s Director of Enforcement James McDonald stated in connection with the settlement, like “any other employer, commodity exchanges are responsible for violations of the CEA or CFTC regulations by their officials, employees, and agents within the scope of their employment or office.”[13]

Vicarious Liability

The court’s pre-settlement ruling denying NYMEX’s motion for summary judgement leaves the CFTC free to rely on an expansive theory of vicarious liability for employers. Given the court’s conclusion that the question of whether an employee acted in the scope of his employment is a factual determination for the jury, it is up to employers to establish clear policies regarding MNPI—and to train employees on those policies—in order to best position themselves to demonstrate that an employee who contravenes those policies is acting outside of the scope of his or her employment, and that the employer thus cannot be held liable.

Jury Still Out Regarding MNPI Recipients

The CFTC subsequently charged the broker—to whom the former NYMEX employees disclosed MNPI—with aiding and abetting the underlying misconduct.[14] The CFTC alleged that the broker “repeatedly solicit[ed] [the former NYMEX employees] for the specific material nonpublic information they disclosed to him and provid[ed] [the former NYMEX employees] with information they needed to identify and locate information about the specific trades in which [the broker] was interested.”[15] NYMEX’s settlement with the CFTC does not cover the broker, and the CFTC’s charges against him remain pending.[16] How the litigation against the broker plays out may well help to further shape the CFTC’s pursuit of MNPI recipients in the future.

The Insider Trading Task Force

In September 2018, in connection with another enforcement action alleging misuse of MNPI, the CFTC announced the formation of an Information Protection and Insider Trading Task Force to root out the type of misconduct exemplified in the NYMEX case and other similar cases—namely, “illegal use of inside or otherwise confidential information.”[17] The Task Force represents a coordinated effort across the Enforcement Division to “identify and charge those who engage in insider trading or otherwise improperly use confidential information in connection with markets regulated by the CFTC.”[18] The settlement with NYMEX, coupled with the formation of the Task Force and pursuit of other recent MNPI and insider trading cases,[19] indicates that the CFTC’s spotlight on these areas will be intense. Employers, in turn, should focus on safeguarding information that potentially could be subject to abuse by insiders and putting in place policies governing who may use that information, when, and for what purposes.

1 Press Release, CFTC, NYMEX and Two Former Employees to Pay $4 Million for Disclosing Material Non-Public Information, CFTC Release No. 8216-20 (Aug. 4, 2020), https://www.cftc.gov/PressRoom/PressReleases/8216-20?utm_source=govdelivery (hereinafter “Press Release”).

2 Consent Order, CFTC v. Byrnes, No. 13-CV-1174, ECF No. 227 (S.D.N.Y. Aug. 3, 2020) (hereinafter “Consent Order”).

3 Complaint, CFTC v. Byrnes, No. 13-CV-1174, ECF No. 1, ¶ 40 (S.D.N.Y. Feb. 21, 2013) (hereinafter “Compl.”), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbyrnescomplaint022113.pdf. The CFTC subsequently brought charges against the broker as well, which remain pending.

4 Id. ¶ 32. The broker is not part of the settlement and likely will face trial over the allegations that he unlawfully solicited the information from the two former NYMEX employees.

5 Id. ¶ 37.

6 Id. ¶ 6.

7 See CFTC v. Byrnes, No. 13-CV-1174, 2019 WL 4515209, at *10 (S.D.N.Y. Sept. 19, 2019).

8 Id. at *11-12.

9 Consent Order ¶ 31.

10 Id. ¶ 35.

11 Id. ¶ 33.

12 Alexander Osipovich, CME Settles Lawsuit With Regulator Over Leaks by Former Employees, Wall St. J. (Aug. 4, 2020), https://www.wsj.com/articles/cme-settles-lawsuit-with-regulator-over-leaks-by-former-employees-11596570764.

13 Press Release.

14 Press Release, CFTC, CFTC Charges Ron Eibschutz with Aiding and Abetting Disclosures of Material Nonpublic Information about Customer Trades in its Case against the CME Group’s New York Mercantile Exchange and Two Former Employees, CFTC Release No. 6584-13 (May 8, 2013), https://www.cftc.gov/PressRoom/PressReleases/6584-13.

15 Id.

16 Consent Order at 1 n.1; Al Barbarino, NYMEX, Ex-Staffers To Pay $4M CFTC Fine in Info Leak Case, Law360 (Aug. 4, 2020), https://www.law360.com/articles/1298489/nymex-ex-staffers-to-pay-4m-cftc-fine-in-info-leak-case.

17 Press Release, CFTC, CFTC Charges Block Trade Broker with Insider Trading, CFTC Release No. 7811-18 (Sept. 28, 2018), https://www.cftc.gov/PressRoom/PressReleases/7811-18.

18 Id.

19 See id.; Complaint, CFTC v. EOX Holdings LLC, No. 18-cv-8890, ECF No. 1 (S.D.N.Y. Sept. 28, 2018), https://www.cftc.gov/sites/default/files/2018-09/enfeoxholdingsllccomplaint092818.pdf; Press Release, CFTC, CFTC Orders Jon P. Ruggles to Disgorge More than $3.5 Million in Trading Profits and Pay a $1.75 Million Penalty for His Illegal Futures and Options Trading, CFTC Release No. 7459-16 (Sept. 29, 2016), https://www.cftc.gov/PressRoom/PressReleases/7459-16; Press Release, CFTC, CFTC Orders Arya Motazedi to Pay a Civil Monetary Penalty and Restitution and Bans Him from Trading and Registration for Engaging in Gas and Crude Oil Futures Transactions that Defrauded His Employer, CFTC Release No. 7286-15 (Dec. 2, 2015), https://www.cftc.gov/PressRoom/PressReleases/7286-15.