CFTC Settles Enforcement Action Against Commodity Trading Firm for Alleged Fraud in Connection with Physical Commodity Trading Only – No Derivatives

Emphasizing its broad authority over fraud solely in connection with commodities – not just fraud in connection with derivatives referencing commodities – the Commodity Futures Trading Commission settled an enforcement action against Freepoint Commodities LLC on December 14, 2023, where it alleged that the firm illegally traded fuel oil based on non-public information obtained through “corrupt payments” in violation of an applicable provision of the Commodity Exchange Act (7 USC Sec. 9(1)) and a CFTC rule (180.1).  Freepoint is a commodities trading firm based in Connecticut which the CFTC said maintains “oil and gas trading operations around the world.”

Freepoint resolved the CFTC’s enforcement action by agreeing to pay $91 million to the CFTC, comprising $61 million as a civil penalty and $30.5 million as disgorgement. 

The CFTC alleged that, from approximately June 2012 through November 2018, at least one Freepoint trader schemed to obtain non-public information from a South American-based state-owned enterprise (SOE). The CFTC claimed that this scheme involved the payment of bribes to obtain this non-public information to employees and agents of the SOE that had an obligation to maintain this information confidentially. This information related to the SOE’s shipping and negotiation strategy and bids made by oil and gas trading firms other than Freepoint for fuel oil shipments.

The CFTC also claimed that one or more Freepoint traders knowingly utilized this non-public information to make trading decisions related to physical fuel oil, understanding it was illicitly obtained and knowing it harmed competitors and the integrity of the fuel oil market. Although the CFTC noted that Freepoint hedged some of its fuel oil purchases on US futures exchanges, its charges rested solely on the firm’s trading of “physical oil products in knowing possession of misappropriated and corruptly obtained material non-public information.”

The CFTC’s enforcement action against Freepoint is its third enforcement action in three years against trading firms alleged to have obtained material, non-public information from non-US state-owned enterprises for their trading advantage through bribery and other corrupt means. In the other two actions, however — one against Vitol Inc in December 2020 and the other against another international commodity trading group in May 2022 — the CFTC charged the firms for trading both physical commodities and derivatives relying on the improperly obtained information.

Separately, Freepoint agreed to pay in excess of $98 million to end an investigation by the US Department of Justice for alleged violations of the Foreign Corrupt Practices Act emanating from the same underlying conduct, of which $68 million constitutes a criminal penalty while the remainder of the fine represents forfeiture.  The DOJ agreed to credit up to one-third of Freepoint’s criminal fine against amounts the firms may pay in a related investigation by law enforcement authorities in Brazil, and up to 25% of the disgorgement amount against forfeiture paid to the CFTC. Additionally, Freepoint entered into a Deferred Prosecution Agreement with the DOJ as part of its resolution of the DOJ’s investigation. The CFTC's civil fine of $61 million may be offset by Freepoint's payments to the DOJ for its criminal penalty.

In resolving their enforcement actions involving Freepoint, both the CFTC and DOJ acknowledged the firm’s claim that it had voluntary taken “significant remedial steps” to enhance its internal controls and policies to avoid a repeat offense.

Analysis

Relying on 7 USC Sec. 9(1)) (Commodity Exchange Act Section 6(c)(1)) and CFTC Rule 180.1, the CFTC has asserted broad authority to prosecute fraud-based manipulation. It has brought enforcement actions against individuals and firms where it has alleged:

1. fraudulent or manipulative conduct or an attempt to engage in such conduct (e.g., a manipulative device, scheme or artifice to defraud, or a material misrepresentation or deceptive omission);
2. scienter; and
3. the activity was in connection with:
   1. a swap;
   2. a contract of sale of any commodity in interstate commerce; or
   3. a futures contract on a registered entity.

The Freepoint enforcement action demonstrates that the CFTC will assert its authority where solely the trading of physical commodities is involved, not just when derivatives trading is involved too. (For background on the CFTC’s deployment of CEA Section 6(c)(1)) and CFTC Rule 180.1, see “Federal Appeals Court Upholds Expansive CFTC View of Prohibition Against Manipulative or Deceptive Device and Restrictive View of Actual Delivery”  in the July 28, 2019 edition of Bridging the Week.)