Both oil and gas are commodities traded on global markets and regulated like securities traded on stock markets. Commodities are generally traded in “futures,” or contracts between buyers and sellers based on a future price. Prices for oil futures traded on commodity exchanges—also called benchmarks or spot prices—are set by companies who track daily futures sales for oil produced in a certain area.
Oil prices affect markets around the world and exert such a strong influence on the global economy that price shifts can affect stocks and other financial markets. The lack of regulation of oil spot prices is sufficiently concerning that the G20 asked an international forum for called the International Organization of Securities Commissions to find ways to ensure integrity of the process.
In the United States, futures are regulated by the Commodities Exchange Act (CEA) and enforced by the Commodities Futures Trading Commission (CFTC), an independent government agency created in 1974 to regulate futures trading. Potential violations of the CEA by oil and gas producers can include selling nonexistent oil futures or defrauding traders and investors by manipulating oil prices.
However, without insider information, it can be difficult to determine whether companies are manipulating future prices. To encourage those with inside information to step forward, the Dodd-Frank CFTC Whistleblower program allows whistleblowers, including non-U.S. citizens, to confidentially report companies who are fraudulently manipulating futures prices, and whistleblowers who provide original information that leads to successful CFTC prosecution can receive between 10% and 30% of monetary sanctions.
As the oil and gas industry faces increasing financial challenges, oversight of how companies report transactions that determine futures prices will be important. An ongoing fraud case, involving allegations against multiple oil and gas companies, demonstrates the potential necessity.
Atlantic Trading USA, LLC et al. vs. BP P.L.C. et al.
In 2013, a group of New York Mercantile Exchange traders alleged that several oil companies were conspiring to manipulate spot prices. In a case that has split American courts, the trader filed a class-action lawsuit in federal court naming Shell, BP and Statoil as defendants, along with three oil trading houses and two banks.
The suit alleges the companies reported false transactions to Platts, a company that incorporates daily market information into a benchmark price for Brent Crude oil, over the course of several years. The suit claims that the false information provided by the companies caused oil prices to dip, benefitting the companies’ selling plans but causing commodities traders—and, ultimately, consumers—to lose money. Traders argued the behavior violated sections of the Commodities Exchange Act prohibiting manipulation of prices.
The case moved through one district court and two appellate courts before lawyers for the traders petitioned the U.S. Supreme Court in March 2020 to hear the case. The district court and one of the appellate courts dismissed the case on grounds that because the oil was extracted, and partially traded, outside the United States, the wrongdoing occurred outside the CEA’s domestic jurisdiction. Another appellate court sided with the traders in a decision that generated support from the U.S. Solicitor General and the CFTC.
In “friend of the court” briefs filed with the Supreme Court, two former CFTC officials and two financial reform advocacy groups asked the Court to hear the case, arguing that US markets were a major instrument and victim of the defendants’ alleged fraudulent activity.
“As a result of the Respondents’ alleged manipulation, the prices at which those transactions were executed were artificial, distorted, and unreflective of genuine economic conditions,” the advocacy group brief states. “As such, their manipulation did not just injure the Petitioners, but the U.S. futures markets themselves.”
The case is currently waiting to be heard.
The Atlantic Trading case demonstrates the potential for large scale price manipulation in oil and gas commodities futures trading, as well as the growing global reach of the CFTC’s enforcement mechanisms.
In recent years, the CFTC has increased its involvement in foreign corruption. In March 2019, the CFTC released an enforcement advisory encouraging companies to “disclose violations of the Commodity Exchange Act involving foreign corrupt practices” and pledged to work with the Securities and Exchange Commission and Department of Justice, the agencies that enforce the Foreign Corrupt Practices Act (FPCA).
Given that the oil and gas industry represents more FCPA enforcement actions than any other industry and its global market, the CFTC’s increased reach offers significant opportunities for traders, industry employees, or financial watchdogs to come forward with information on anticompetitive behavior in oil and gas futures.