The ‘Eddie Murphy Rule’ Earns Its Moniker: The CFTC Brings a Classic Insider Trading Case

While it took a few decades to surface, the fact pattern set forth in the movie “Trading Places” has finally come to pass. However, instead of the alleged wrongdoers bribing a U.S. government official for a sneak peek at orange harvest information to get an advantage in trading frozen concentrated orange juice futures, the defendant in a recent CFTC enforcement matter is alleged to have bribed employees of a state-owned enterprise for material, nonpublic information relating to the petroleum market.

On December 14, 2023, the U.S. Commodity Futures Trading Commission entered into a settled action with a global commodities merchant with oil and gas trading operations. In a parallel action, that commodities merchant entered into a deferred prosecution agreement with the U.S. Department of Justice for Foreign Corrupt Practices Act violations.

This case marks a significant milestone in the CFTC’s enforcement of insider trading in the commodities markets. While prior cases resembled front-running cases, this action establishes the CFTC’s intention—and ability—to pursue the type of insider trading cases commonly brought in the securities space. The CFTC found that for more than six years, the commodities merchant paid a consultant who bribed employees of a South American state-owned enterprise, which the settled order refers to as “SOE A,” for confidential company information. Although the information related to physical oil trading, the CFTC linked the trading to conduct that occurred in 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 felt that the wrongful acts by Eddie Murphy’s character in the hit movie “Trading Places” were not clear-cut violations of the CFTC rules at the time. It was expressly modeled on Rule 10b-5 under the Securities Exchange Act of 1934, the source of authority long relied on by the U.S. Securities and Exchange Commission in insider trading cases.

In the settled order, the CFTC called out the traditional elements of an insider trading action in finding that the bribes provided the commodities merchant with unlawfully misappropriated information that gave it an unfair advantage in its physical oil trading with SOE A:

• Materiality. The misappropriated information included (1) advance notice of SOE A oil shipments, including details concerning the quality and quantity of fuel oil being shipped, (2) details of SOE A negotiations with the commodities merchant’s competitors, including competing bids for cargoes and SOE A’s negotiation strategy and (3) other information regarding SOE A’s commercial plans.
• Nonpublic. The misappropriated information was confidential information not known outside of SOE A.
• Breach of a Duty of Confidentiality. The bribed SOE A employees owed a duty to SOE A to keep the information confidential and breached that duty when they provided the commodities merchant’s paid consultant with the misappropriated information.
• Knowingly Trading in Possession of MNPI Obtained in Breach of Duty. At least one trader employed by the commodities merchant entered into physical oil transactions and related hedges in the futures markets in knowing possession of the misappropriated information.

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

The scheme allegedly yielded approximately $30 million in profits. As part of the settlement, in addition to implementing policies and procedures to ensure future compliance with the laws and regulations at issue, the commodities merchant will pay a $61 million monetary penalty and disgorge its profits.

The policy implications from this case are obvious (e.g., reviewing policies and training materials to ensure that commodity interests are expressly in scope), but the greater impact may be thematic. This matter provides an excellent opportunity for senior management to reinforce that a manager’s prohibition on impermissible uses of material, nonpublic information is expansive and comprehensive, and not a technical venue-by-venue effort. Given that annual review season is about to kick off for many managers, a specific entry addressing this case may be well worth the effort.