The Commodity Futures Trading Commission (CFTC or Commission) released its fiscal year 2023 enforcement results on November 7, 2023. The CFTC’s Enforcement Division filed 96 enforcement actions in 2023, alleging a variety of violations in various markets that resulted in more than $4.3 billion in civil penalties, restitution and disgorgement. Both metrics show an increase compared to last year, when the Commission initiated 82 enforcement actions and imposed more than $2.5 billion in refunds, disgorgements and penalties. The increase in cases is largely due to a near doubling of fraud cases.
CFTC Chairman Rostin Behnam praised the commission’s “laser focus.”[] to combat and deter fraud and manipulation” and the record number of proceedings initiated.
Although fewer enforcement actions were filed against energy industry participants in 2023 than in previous years, many enforcement actions in 2023 remain relevant to those transacting or otherwise participating in energy markets. Enforcement actions of general concern include those alleging (1) manipulative, deceptive, and fraudulent conduct, (2) reporting and record-keeping violations, and (3) misuse of confidential information.
Some examples of enforcement actions affecting or relevant to the energy sector are as follows.
Manipulative, deceitful and fraudulent behavior
The CFTC continues to focus on misconduct that undermines market integrity, such as fraud, manipulation, spoofing (i.e., bidding or offering with the intent to abort before execution), or other forms of disruptive trading. For example, in September, the CFTC filed a complaint in federal court against an energy trading company and its primary trader for manipulative and fraudulent conduct that sent false signals of increased buying or selling interest in the natural gas and crude oil futures markets, for failure to monitor, and for Violation of a previous CFTC order.
The CFTC alleged it was a spoofing scheme that involved placing hundreds of large crude oil and natural gas futures orders that were intended to be canceled before execution, while simultaneously placing orders on the opposite side of the same futures markets. Placing and then canceling the first set of orders benefited the other side of the market by distorting actual supply and demand. Spoofing and similar market-disrupting activities remain a key focus of the CFTC.
Reporting and Recordkeeping Practices
The CFTC continues its vigorous enforcement of compliance with reporting practices. In 2023, the CFTC filed charges against several companies, including financial institutions, that failed to properly record and retain transaction communications and companies whose supervisors failed to prevent employees from transmitting unauthorized communications to conduct trading activities use and completed this.
For example, the CFTC found that employees, including executives, used forms of communication that were not approved by the company, including personal text messages and WhatsApp, in internal and external communications. As a result, these communications were not maintained and retained by the Company and could not be readily produced upon request by the CFTC.
In addition to these reporting violations, the CFTC also found that the companies failed to carefully monitor matters related to their businesses, such as CFTC registrations, and violated regulatory requirements. The CFTC noted that it has fined more than $1.1 billion from 20 financial institutions over the past two years for these types of record-keeping, reporting and oversight failures.
Improper Use of Confidential Information
Misuse of confidential information is another area where energy commodity traders must remain vigilant. For example, the CFTC accused a trader of a fraudulent scheme in which he misused knowledge of his employer’s options and futures positions and associated feeder cattle orders to trade through his personal trading account for his own benefit, in breach of a duty violated his employer.
The CFTC found that as an employee, the trader had a duty of trust and confidence to his employer and owed his employer a duty to act in his best interests, to keep his employer’s material, non-public information confidential, and not to misuse the information for his own benefit own financial or personal benefit. This expectation and obligation also apply to energy commodity trading.
Expectations for the future
We expect aggressive enforcement action from the CFTC to continue in the coming year. For example, in October 2023, the CFTC issued an Enforcement Advisory to assist its enforcement staff in recommending future enforcement decisions to the CFTC. The opinion focuses on the appropriateness of civil monetary penalties to deter misconduct, the need for oversight by corporate compliance monitors or advisors to ensure remediation and reduce the likelihood of future misconduct, and determining whether admissions are appropriate in an enforcement case .
Companies trading energy commodities subject to CFTC jurisdiction must remain vigilant in their conduct and monitoring of their market and trading activities. Maintaining and implementing a robust compliance program tailored to a company’s business and activities can help prevent or curb unlawful behavior.
Morgan Lewis advises on all matters relating to the energy sector, including advising on trading commodity futures for energy products, advising on compliance programs and responding to enforcement actions initiated by government regulators.
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