In recent years, a few Foreign Corrupt Practices Act enforcement actions have also resulted in parallel matters against the same company by the Commodities Futures Trading Commission (CFTC) for fraud and/or other manipulative conduct. (See here for the CFTC enforcement action against Vitol (based on the same general conduct alleged in the related FCPA enforcement action) and here for the CFTC enforcement action against Glencore (based on the same general conduct alleged in the related FCPA enforcement action).
The latest example occurred last week as the CFTC – in connection with an FCPA enforcement action against Freepoint Commodities – also brought an enforcement action against Freepoint.
In summary fashion, this CFTC order states:
“Freepoint is a Connecticut-based commodities merchant with significant oil and gas trading operations around the world. Freepoint trades both physical and derivative oil products. During the Relevant Period, one or more Freepoint traders located in Connecticut engaged in a fraudulent scheme to misappropriate material non-public information from a South American state-owned enterprise (“SOE A”). Using bribes and other corrupt payments, one or more Freepoint traders fraudulently obtained sensitive market information from SOE A employees who had a duty to their employer to keep the information confidential. This confidential information included SOE A’s shipping and negotiation plans, as well as bids submitted by Freepoint competitors for fuel oil cargoes. The Freepoint employee(s) traded on the basis of this material non-public information, to the detriment of its counterparties and the integrity of those markets. One or more members of Freepoint’s oil trading group knew they were trading using misappropriated material non-public information. The transactions implicated in this fraudulent scheme yielded approximately $30 million in profits.”
The order finds:
“The global oil markets include physical commodity flows among oil producers, refiners, shipping and storage facilities, and consumers. Many oil products are traded in these markets, including crude oil, distilled and refined products, and oil byproducts blended to various specifications that are used for a variety of purposes. These varied oil products flow across geographic regions before reaching distributors and end-user consumers. The United States is a world leader in the global markets for physical oil and oil products. The physical flows of oil products around the world are linked in various physical and derivatives markets, including in the U.S. oil markets. Market participants use the derivatives markets, which include among other things futures, options, and swaps, to manage physical oil price exposures and to speculate on price trends.
Beginning in or around June 2012 and continuing through November 2018, Freepoint entered into a series of consulting agreements with an individual (the “Consultant”), who, in violation of the express terms of such consulting agreements, used a portion of the consulting fees provided by Freepoint to pay bribes to SOE A employees. In exchange for these payments, SOE A employees who had access to confidential information—and who owed a duty to SOE A to keep the information confidential—disclosed through the Consultant material non-public information to one or more U.S.-based Freepoint traders, including information material to Freepoint’s transactions with SOE A and to related physical oil trading. The Consultant received a per-barrel fee for transactions consummated using the misappropriated information he provided.
The confidential information obtained through this scheme was sensitive market intelligence that gave Freepoint an unfair advantage over SOE A and Freepoint’s competitors. On multiple occasions, one or more Freepoint traders received confidential information, including: (1) advance notice of certain of SOE A’s oil shipments, including details concerning the quality and quantity of fuel oil being shipped; (2) details of certain of SOE A’s negotiations with Freepoint’s competitors, including competing bids for cargoes and SOE A’s negotiation strategy; and (3) general information regarding SOE A’s commercial plans. One or more Freepoint traders, in knowing possession of the nonpublic information, entered into related physical oil transactions with SOE A and otherwise used the information in their business, including in purchases of fuel oil for delivery in the United States, and Freepoint hedged some of these purchases on U.S. futures exchanges.
The Freepoint trader(s) understood the sensitivity of the fraudulently obtained information and took steps to maintain it in confidence and ensure that SOE A would not learn they had it in their possession. For example, the Consultant directed one or more Freepoint traders to submit bids for all cargoes, even when Freepoint did not actually want the cargo or had not received confidential information, to avoid alerting SOE A about Freepoint’s informational advantage. One or more of Freepoint’s U.S.-based traders with access to SOE A’s confidential information did not tell their trading counterparts at SOE A that they knew the information, and the Consultant directed Freepoint traders to never use his name when speaking with SOE A personnel. To conceal the Consultant’s payments to SOE A employees, the Freepoint trader(s) and the Consultant used code words (e.g., referring to bribes as “breakfast”), fictitious names, private email accounts, and encrypted messaging applications, and the Consultant set up a series of consulting companies to receive the money to be used for bribes and his own fees.
Freepoint trader(s) traded on the basis of this corruptly obtained material non-public information. During the Relevant Period, the transactions implicated in this fraudulent scheme yielded approximately $30 million in profits for Freepoint.”
Based on the above findings, the CFTC found that Freepoint violated Section 6(c)(1) of the Commodity Exchange Act (CEA) and Regulation 180.1(a)(1)–(3), in connection with contracts of sale of a commodity in interstate commerce, by intentionally or recklessly trading physical oil products in knowing possession of misappropriated and corruptly obtained material non-public information.
As stated in the order:
“Section 6(c)(1) of the Act, 7 U.S.C. § 9(1), and Regulation 180.1(a)(1)–(3), 17 C.F.R. § 180.1(a)(1)–(3) (2022), together make it:
[U]nlawful for any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly (1) [u]se . . . or attempt to use . . . any manipulative device, scheme, or artifice to defraud; (2) [m]ake, or attempt to make, any untrue or misleading statement of a material fact or to omit to state a material fact necessary in order to make the statements made not untrue or misleading; [or] (3) [e]ngage, or attempt to engage, in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person.”
The order requires Freepoint to pay a $61 million civil monetary penalty (“CMP Obligation”), plus any post-judgment interest, and further requires Freepoint to pay $30.5 million in disgorgement plus any post-judgement interest (“Disgorgement Obligation”).
The order states:
“The CMP Obligation of sixty-one million dollars ($61,000,000) will be offset by the amount of any payment made pursuant to the resolution concerning the fraud and/or misappropriation of confidential information between the Respondent and the United States Department of Justice dated on or around December 14, 2023 (the “Criminal Resolution”).”
The Disgorgement Obligation of $30.5 million will be offset by the amount of any payment made pursuant to the Criminal Resolution, up to $22.9 million.”
Thus, the net CFTC settlement amount is approximately $7.6 million.
In the CFTC release, Director of Enforcement Ian McGinley stated:
“Misappropriation in the oil and gas markets harms not only physical and related derivative market participants, but the integrity of these markets. As demonstrated [by this action], the CFTC uses its authority under the CEA to ensure that the market is not influenced by whichever company is willing to pay the biggest bribes.”
See here for an additional analysis of the CFTC enforcement action against Freepoint.
