Acquittal in CFTC’s First Insider Trading Trial: Analysis and Takeaways

On August 9, 2022, in CFTC v. EOX Holdings LLC, the first insider trading trial in a Commodity Futures Trading Commission (CFTC) enforcement action, a jury in the U.S. District Court for the Southern District of Texas found in favor of the defendants—a brokerage firm and a broker employed by the firm—on insider trading claims related to block trades of energy futures contracts. The jury, however, found in favor of the CFTC on three counts alleging non-fraud commodities violations.

Key Takeaways

• The CFTC’s decision to proceed to trial against the defendants on the insider trading claims underscores the government’s focus on enforcing laws against insider trading. Recent months have seen a slate of insider trading enforcement actions brought by federal regulators, including the CFTC and the Securities and Exchange Commission, and criminal cases brought by the Department of Justice.
• While EOX is the first insider trading charge that the CFTC has brought to trial, the CFTC has been increasingly active in this area since 2010 when the Dodd-Frank Act conferred on it the authority to bring commodities insider trading enforcement actions. Officials with the CFTC have publicly stated that insider trading in the commodities markets is an increasing focus of the CFTC’s enforcement regime. 
• In finding against the CFTC on the insider trading count, it appears that the jury may have determined that the CFTC failed to establish the following elements of an insider trading offense: first, that EOX and its broker owed a duty of trust and confidence to the customers on whose behalf the broker placed trades; and second, that the broker traded based on material nonpublic information in breach of a duty.
• The jury’s finding against the CFTC on its insider trading count may cause the CFTC to reassess its insider trading theories, particularly as they apply to commodities brokers who place block trades for customers to whom they do not owe a fiduciary duty. Block trades nevertheless remain a focus of investigations by the CFTC and a developing area of insider trading law.
• Although the verdict comes as a setback to the CFTC, the continued robust enforcement by the CFTC of the laws against insider trading in commodities—including energy futures and cryptocurrencies—is expected.

Factual Background

As a broker in EOX’s Houston office, the defendant broker executed block trades in energy futures contracts on behalf of EOX customers. Block trades are transactions that meet or exceed an exchange-determined minimum threshold quantity of futures or options contracts, are privately negotiated, and are executed outside public electronic markets. As defendants argued at trial, the broker, who connects two interested customers, is on both sides of a block trade transaction, and thus must share a customer’s block trade information with the counterparty in order to complete the transaction.

The broker entered an agreement with a particular customer (“Customer A”) in which Customer A granted the broker the authority to place trades at the broker’s discretion on behalf of Customer A. This arrangement was a departure from EOX’s written policy against brokers exercising discretion over a customer account.  Under this agreement, the CFTC alleged, the broker structured and executed block trades for Customer A’s benefit by improperly using order information that the broker had obtained from other EOX customers who sought to place block trades. 

Procedural Background

In 2018, the CFTC brought an enforcement action against EOX and the broker for violations of the Commodity Exchange Act (Section 6(c)(1)) and CFTC Regulation 180.1(a), alleging that the defendants had used or disclosed customer trade information improperly to benefit Customer A. The CFTC alleged that the broker both traded based on and tipped material nonpublic customer information to Customer A to curry favor with Customer A. In doing so, the CFTC asserted, the broker violated the duties of trust and confidence that he owed to other EOX customers, whose information the broker shared with Customer A. The CFTC also alleged additional counts of non-fraud commodities violations: one count against both EOX and the broker for disclosing to Customer A orders placed by other customers and for taking the other side of orders placed by those customers without the customers’ consent; and two counts against EOX for recordkeeping and supervision violations. 

The Trial and Jury Verdict

After a seven-day trial, a jury found for the defendants on the insider trading claims and for the CFTC on the non-fraud claims. Based on the jury’s verdict on the insider trading claims, it appears that the jury may have credited the defendants’ principal arguments at trial that they (1) did not owe duties of trust and confidentiality to customers as to block trade order information and (2) did not misappropriate material nonpublic information, and thus found that the CFTC failed to prove two required elements of insider trading.

As for the question of a duty of trust and confidentiality, the defendants argued that the broker acts as an agent to both sides of a privately negotiated block trade. The broker, according to the defendants, necessarily must use his or her knowledge of a customer’s order to structure the transaction and share that information with the counterparty to complete the transaction. Thus, as the defendants argued, the broker did not owe duties of trust and confidentiality to customers placing block trades, and customers could not have reasonably expected that the broker would keep their trade information confidential. 

The defendants similarly asserted that they did not misappropriate material nonpublic information. The defendants maintained that the customer order information that the broker was alleged to have traded on and shared with Customer A was not confidential given his role as an agent to both parties in the block trade. 

According to the defendants, the CFTC could not point to any rule, agreement, or understanding that defined a duty of trust and confidentiality or provided that the customer order information at issue was material nonpublic information.

On August 25, 2022, the defendants moved for judgment as a matter of law and a new trial as to the non-fraud count alleging improper disclosure of customer information, on which the jury found in favor of the CFTC. The defendants have also indicated they will likely appeal.

Julia Koch contributed to the writing of this alert