The Commodity Futures Trading Commission (CFTC or Commission) released its enforcement results for fiscal year 2023 on November 7, 2023. The CFTC’s Division of Enforcement filed 96 enforcement actions in 2023 charging a range of violations in a variety of markets that resulted in more than $4.3 billion in civil monetary penalties, restitution, and disgorgement. Both metrics show an increase from last year, when the Commission initiated 82 enforcement actions and imposed more than $2.5 billion in restitution, disgorgement, and penalties. The uptick in cases stemmed largely from a near doubling of fraud-related cases.
CFTC Chairman Rostin Behnam lauded the Commission’s “laser-focus[] on stopping and deterring fraud and manipulation” and the record number of cases initiated.
Although energy industry participants were the subject of fewer enforcement actions filed in 2023 than prior years, many enforcement actions in 2023 remain relevant to those who transact in or otherwise participate in energy markets. Enforcement actions of general relevance include those alleging (1) manipulative, deceptive, and fraudulent conduct, (2) reporting and recordkeeping violations, and (3) improper use of confidential information.
Some examples of enforcement actions involving or relevant to the energy sector include the following.
Manipulative, Deceptive, and Fraudulent Conduct
The CFTC remains focused on misconduct that undermines market integrity, such as fraud, manipulation, spoofing (i.e., bidding or offering with the intent to cancel before execution), or other forms of disruptive trading. For example, in September, the CFTC filed a complaint in federal court against an energy trading firm and its head trader for engaging in manipulative and deceptive conduct that sent false signals of increased buying or selling interest to the natural gas futures and crude oil futures markets, for failing to supervise, and for violating a prior CFTC order.
The CFTC alleged a spoofing scheme that involved placing hundreds of large orders for crude oil and natural gas futures that were intended to be cancelled before execution, while placing orders on the opposite side of the same futures markets. Placing and then cancelling the first set of orders benefitted those on the opposite side of the market by distorting the actual supply and demand. Spoofing and similar market-disruptive activity remain a key focus of the CFTC.
Reporting and Recordkeeping Practices
The CFTC continues vigorous enforcement of compliance with reporting practices. In 2023, the CFTC filed and settled charges against multiple entities, including financial institutions, that failed to properly record and retain communications of transactions, and against entities whose supervisors failed to stop employees from using unapproved communications to conduct trading activities.
For example, the CFTC found that employees, including those at senior levels, engaged in internal and external communications using forms of communications that were not approved by the company, including personal text messages and WhatsApp. As a result, these communications were not maintained and preserved by the company and could not be readily produced if requested by the CFTC.
In addition to these reporting violations, the CFTC also found that the entities failed to diligently supervise matters related to their businesses as CFTC registrations and violated supervision requirements. The CFTC noted that in the last two years, it has imposed more than $1.1 billion on 20 financial institutions for these types of recordkeeping, reporting, and supervision failures.
Improper Use of Confidential Information
Improper use of confidential information is another area where energy commodity traders must remain vigilant. For example, the CFTC charged a trader with a fraudulent scheme where he misused knowledge of his employer’s options and futures positions and associated orders for feeder cattle to trade for his own benefit through his personal trading account in breach of a duty to his employer.
The CFTC stated that as an employee, the trader had a duty of trust and confidence to his employer, owed his employer a duty to act in its best interests, keep confidential his employer’s material non-public information, and not misappropriate the information for his own financial or personal benefit. This expectation and duty are equally applicable in energy commodity trading.
Expectations for the Future
We continue to expect aggressive enforcement actions by the CFTC in the coming year. In October 2023, for example, the CFTC issued an Enforcement Advisory to assist its enforcement staff in recommending future enforcement resolutions to the CFTC. The Advisory focuses on the adequacy of civil monetary penalties to deter misconduct, the need for oversight by corporate compliance monitors or consultants to ensure remediation to reduce the likelihood of future misconduct, and the determination of whether admissions are appropriate in an enforcement case.
Companies transacting in energy commodities subject to the CFTC’s jurisdiction must remain vigilant in their conduct and oversight of their market and trading activities. Maintaining and implementing a robust compliance program that is tailored to a company’s business and activities can help prevent or mitigate violative conduct.
