(Note: this post was originally published at the Harvard Law School Forum on Corporate Governance and Financial Regulation.. It is based upon a paper available for download here)
The Second Circuit’s decision in United States v. Newman has led many commentators to predict fewer insider trading enforcement actions, a prediction quickly validated by Preet Bharara, United States Attorney for Manhattan, who has both unwound guilty pleas and dropped active prosecutions. For Newman‘s critics and defenders alike, it is obvious that insider trading prosecution in the stock market is now in a period of stumbling retreat.
Yet the stock market is not the only financial market, and the trajectory of insider trading law looks very different if other asset classes are considered. Commodities markets are the world’s largest and oldest markets, and Wednesday marked the very first time an individual was sanctioned for insider trading in commodities.
Commodities are primarily regulated by the Commodity Futures Trading Commission (CFTC), a once timid regulator now inclined to muscular enforcement actions. On December 2, the CFTC issued an order filing and simultaneously settling charges against Arya Motazedi, a trader of gasoline and oil futures. The Order asserts that Motazedi had prior knowledge of the timing, size, and prices of his employer’s trades. He used this proprietary information to trade in anticipation of market price movements. Because of this insider trading (and a few more charges discussed below), Motazedi will pay almost $350,000 in fines and restitution, and he will be forever banned from his chosen profession.
This Order is significant for three reasons.
First, it is simply the first insider trading case brought for commodities trading. Despite numerous Congressional hearings, insider trading in commodities avoided the legal restrictions visited upon securities traders during the twentieth century. As recently as 2009, the CFTC could assert, “the CFTC has no jurisdiction over insider trading in any way….” Much changed when Dodd-Frank gave the CFTC a new anti-fraud authority akin to the Securities Exchange Act’s § 10(b). In the preamble to its subsequent anti-fraud rules, the CFTC quietly noted that “trading on the basis of material nonpublic information in breach of a pre-existing duty … may be in violation of [this rule].” This statement was a hint of the Commission’s possible intentions and authority, but nothing became of it until now.
Second, the CFTC Order unmistakably adopts the language of securities insider trading law, rather than charting some new path. For example, the Order reports
“Motazedi accomplished his fraud by misappropriating non-public, confidential and material information. Motazedi and his employer shared a relationship of trust and confidence that gave rise to a duty of confidentiality…. Motazedi routinely had access to material non-public information…. Motazedi breached his duties to his employer by using this information to trade in personal trading accounts and by failing to disclose such trading to his employer.”
By incorporating the key elements from a securities insider trading …read more
Source: More Fitness