CFTC Orders Energy Broker and Its Owner to Pay Over $1.5 Million for Misappropriating Confidential Customer Information and Other Violations

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CFTC

CFTC Orders Energy Broker and Its Owner to Pay Over $1.5 Million for Misappropriating Confidential Customer Information and Other Violations

October 9, 2019

CFTCWashington, DCThe U.S. Commodity Futures Trading Commission announced today that it issued an order filing and settling charges against introducing broker Classic Energy LLC and its owner Mathew D. Webb of Houston, Texas for Misappropriating Confidential Customer Information, nonpublic order information in connection with block trades in natural gas futures on ICE Futures US, as well as related supervision and recordkeeping violations. The order was entered on Monday, September 30, 2019.

“This enforcement action shows that the Commission will continue to vigorously pursue those who misappropriate confidential information, for personal benefit, in violation of a preexisting duty,” said CFTC Enforcement Director James McDonald.  “This form of misconduct undermines trust and confidence in vital futures markets and it will not be tolerated.”

The order imposes on Classic and Webb a civil monetary penalty of $1.5 million and also requires that Webb disgorge $413,065 in ill-gotten gains.  In addition, the order bans Webb until January 3, 2022 from trading on or subject to the rules of any CFTC-registered entity and from engaging in any activities requiring registration with the CFTC.

Misuse of Material, Nonpublic Order Information

According to the order, on at least 63 occasions between April 2014 and September 2015, Webb misused material, nonpublic block trade order information provided to him by Classic’s customers.  Instead of using this information to facilitate block trades with other market participants, as the customers expected, Webb took the other side of these block trades in his proprietary trading account.  According to the order, Webb further deceived Classic’s customers by creating the false impression that he was acting only as a broker, when in fact he was actually acting as a trading counterparty.  For example, Webb continued to charge customers brokerage commissions for block trades he filled with his proprietary trading account.  Through this scheme, Webb realized profits of over $400,000. The order finds Classic vicariously liable for Webb’s deceptive conduct.

Supervision and Recordkeeping

The order also finds multiple supervision and recordkeeping failures by Classic and Webb, including:

  • Failing to have policies and procedures in place to prevent Classic’s brokers from taking the other side of customer block trades;
  • Allowing Webb to control a proprietary trading account without adequate controls to prevent the misuse of customer information;
  • Allowing an independent trader employed personally by Webb to sit on Classic’s trading floor, where he had access to customers’ material, nonpublic information and the ability to trade on this information in Webb’s proprietary trading account;
  • Failing to maintain records of oral communications related to block trades, resulting in the loss of audio recordings for all block trades brokered by Classic before August 13, 2015; and
  • Failing to ensure that Classic had an adequate system for preserving these records.

The CFTC Division of Enforcement staff members responsible for this case are Alison Auxter, Lauren Fulks, Thomas Simek, Christopher Reed, and Charles Marvine.

*  *  *  *  *  *

Reporting of Misuse of Confidential Information

The Commission will thoroughly investigate and, where appropriate, prosecute instances in which individuals have abused access to confidential information—for example, by misappropriating confidential information, improperly disclosing a customer’s trading information, front running, or using confidential information to unlawfully prearrange trades.  In addition, the Commission will enforce laws and CFTC regulations requiring its registrants to develop and enforce policies prohibiting the misuse of confidential information.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

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