The “Eddie Murphy Rule” deserves its nickname: The CFTC presents a classic insider trading case

Although it took several decades to come to light, the fact pattern laid out in the film “Trading Places” has finally come to pass. However, instead of alleging that the alleged miscreants bribed a U.S. government official to get a sneak peek at orange harvest information to gain an advantage in trading frozen concentrated orange juice futures, the defendant in a recent CFTC enforcement case is alleged to have been employees of the CFTC of a state have bribed. own company for essential, non-public information relating to the petroleum market.

On December 14, 2023, the US Commodity Futures Trading Commission entered into a settlement with a global commodities trader with oil and gas trading operations. In parallel, this commodities trader entered into an agreement with the US Department of Justice to defer prosecution for violations of the Foreign Corrupt Practices Act.

This case marks a significant milestone in the CFTC's enforcement of insider trading in the commodities markets. While previous cases were similar to landmark cases, this action demonstrates the CFTC's intent – and ability – to prosecute the type of insider trading cases commonly brought in the securities arena. The CFTC found that for more than six years, the commodities trader paid a consultant to bribe employees of a South American state-owned company, referred to in the attached order as “SOE A,” to obtain confidential company information. Although the information related to physical oil trading, the CFTC linked the trading to conduct in the markets for related futures and other derivatives, thereby establishing its jurisdiction.

The case relies on the so-called “Eddie Murphy Rule,” Rule 180.1, which was promulgated in 2011 in part because then-CFTC Chairman Gary Gensler believed the wrongful actions of Eddie Murphy’s character in the hit film “Trading Places” was not the case, there were clear violations of the CFTC rules at the time. It was explicitly modeled on Rule 10b-5 of the Securities Exchange Act of 1934, the source of authority long relied on by the Securities and Exchange Commission in insider trading cases.

In the decisive order, the CFTC noted the traditional elements of an insider trading operation and concluded that the bribes provided the commodity trader with unlawfully withheld information that gave him an unfair advantage in his physical oil trading with SOE A:

• Materiality. Information purloined included (1) advance notice of SOE-A oil shipments, including details of the quality and quantity of fuel oil shipped, (2) details of SOE-A negotiations with the commodity trader's competitors, including competing bids for cargoes and SOE -A-Delivery negotiation strategy and (3) further information on SOE A's commercial plans.
• Not public. The information stolen was confidential information that was not known outside of SOE A.
• Breach of a duty of confidentiality. SOE A's bribed employees had a duty to SOE A to keep the information confidential and breached that duty when they provided the embezzled information to the commodities trader's paid consultant.
• Knowingly dealing in the property of MNPI acquired in breach of duty. At least one trader employed by the commodity trader made physical oil transactions and associated hedges on the futures markets with knowledge of possession of the stolen information.

To establish these elements, the CFTC referred to evidence it had collected in the case, presumably at least in part from electronic communications. This included using code words – such as referring to bribes as “breakfast” – fictitious names, non-company email accounts and encrypted messaging platforms to hide their wrongdoing.

The scheme reportedly netted about $30 million in profits. As part of the settlement, the commodities trader will pay a $61 million fine and disgorge its profits, in addition to implementing policies and procedures to ensure future compliance with the relevant laws and regulations.

The policy implications of this case are clear (e.g. reviewing policies and training materials to ensure that extractive interests are explicitly taken into account), but the larger implications may be thematic. This matter provides management with an excellent opportunity to make clear that the prohibition on a manager's improper use of material non-public information is broad and comprehensive, and is not a technical effort for each individual venue. Given that the annual review season is about to begin for many managers, a dedicated contribution to this case may well be worthwhile.