The Commission brought a civil enforcement case connected to a criminal insider trading conspiracy in natural gas markets referred to as the Classic Energy cases.  The follow-on CFTC civil case is against co-conspirator, and former Classic Energy broker Lee Tippett, who awaits sentencing after his criminal conviction for conspiracy to commit honest services wire fraud and commodities fraud.  I supported the Commission’s enforcement action against the defendant.  However, I did not support settling that action prior to an upcoming trial in this case against another defendant where the Commission may require the defendant’s cooperation, and prior to his sentencing.  Nor did I support any language in the settlement that allows the defendant to escape admitting to all of his wrongdoing, given that he played a part in a massive criminal scheme.

DOJ’s Criminal Prosecution of the Classic Energy Case

The Department of Justice described the Classic Energy conspiracy as commodities traders and brokers who conspired to trade natural gas futures contracts using misappropriated material, non-public information.[1]  DOJ described that the co-conspirators engaged in fraudulent, non-competitive trades and prohibited fictitious sales, including prearranged trades in natural gas futures contracts for their own personal gain.[2]  DOJ described that the co-conspirators caused prices to be reported, recorded, and registered on designated commodities markets that were not true, bona fide prices.[3]  Five co-conspirators have been convicted and await sentencing.[4]

DOJ criminally charged the defendant Tippett with conspiracy to commit honest services fraud and commodities fraud—the charge for which the defendant pled guilty.  As part of his guilty plea, the defendant did not agree to plead to facts in his criminal complaint related to the insider trading part of the conspiracy, but did agree to plead to facts related to fraudulent prearranged trading, kickbacks, and concealment.  His guilty plea included the following facts within the multiyear timeframe of 2013-2019:[5]

Defendant knew and understood that a trader steered business from the trader’s company to commodities broker Classic Energy in exchange for illegal kickbacks; Defendant knew and understood that the owner of Classic Energy Mathew Webb and the trader engaged in unlawful and fraudulent prearranged trading in natural gas futures so that Webb’s personal investment business took the other sides of the trades, with Webb and the trader sharing unlawful proceeds for their personal benefit; Webb hired defendant Tippett to facilitate the distribution of unlawful kickbacks and proceeds of prearranged trades; After 2016 and through at least 2019, because Webb was bared by a commodities trading exchange, defendant Tippett brokered all trades for Webb, and Webb increased defendant Tippett’s share of unlawful proceeds;

• Defendant Tippett funneled money to the trader knowing that the money was obtained from illegal kickbacks ad unlawful prearranged trading in furtherance of the conspiracy;
• Defendant Tippett funneled more than $4 million in unlawfully obtained sums, including approximately $3.3 million to the trader, through various conduits and intermediaries, including the trader’s family, and defendant Tippett kept a portion for himself; and
• Defendant Tippett engaged in conduct to conceal the conspiracy, including making false and misleading statements to a commodity trading exchange investigating Webb that were designed to conceal defendant’s role in Webb’s personal investment business (e.g. falsely claiming Webb hired the defendant so he could get back into trading when the defendant had never worked as a trader and was hired to facilitate unlawful payments).

The CFCT’s Enforcement Action Following Criminal Conviction and Proposed Settlement

I supported the Commission bringing a civil enforcement action against the defendant Tippett, and commend our staff and the Department of Justice.

I cannot support the settlement prior to the upcoming trial and the defendant’s criminal sentencing because by settling now, the Commission may be giving up the ability to secure the defendant’s cooperation in the upcoming trial.  The government typically does not settle with co-conspirators prior to trial.  Because a defendant’s cooperation (such as testifying at trial or providing information to the government) is an important factor in deciding the terms of a settlement, the government typically waits until after trial.  Cooperation is also an important factor in the court’s consideration in sentencing.

I also cannot support the settlement because the Commission is not bringing full accountability to the defendant by letting him settle without admitting to all of his illegality.  The Commission is not using every enforcement tool it has to deter others from insider trading and commodities fraud schemes, including the tool of requiring the defendant to admit his wrongdoing as a condition of settlement.

The Commission Should Discontinue its Routine Practice of Settling Cases Without Requiring a Defendant to Admit Wrongdoing

I recently issued a statement opposing the CFTC’s routine practice of settling cases without requiring a defendant to admit wrongdoing.[6]  My understanding was that the only exception to this routine practice was where the defendant pled guilty.  That exception appears to be limited to the defendant’s plea, and with language that could allow the defendant to escape the admissions that he does make.[7]  In requiring conditions of settlement, the Commission is not bound to what the defendant pled guilty to in a criminal prosecution.  Requiring defendant admissions in the CFTC’s civil enforcement cases serves the critical public interest goals of enforcement – justice, accountability, ad deterrence.

I proposed the Heightened Enforcement Accountability and Transparency Test (HEAT Test) for the CFTC to require more defendants to admit wrongdoing in CFTC enforcement settlements.  The HEAT Test is designed to identify those cases calling for greater public accountability and transparency—where the CFTC should send a message about the paramount importance and strength of our enforcement program.[8]  Given the state of natural gas markets today, I cannot imagine a more fitting case to send this message to deter others who would seek to impact that market.

Given the Challenges to Commodities Markets, in Particular Natural Gas, the CFTC Should Bring the Strongest Law Enforcement Results Possible Against Illegal Conduct That Undermines the Integrity of Natural Gas Markets and Could Artificially Increase Prices

In my HEAT Test proposal, I said that the CFTC is in an environment that calls out for public accountability, transparency, and maximizing the deterrent impact of its enforcement settlements because of challenges facing commodities markets, including natural gas markets.  Commodity markets, including natural gas, continue to face significant challenges post-pandemic, with supply chain issues, with price volatility in the current economic cycle, and with geopolitical issues surrounding Russia’s invasion of Ukraine.  Commodity producers, consumers, and end users are under increasing pressure.

At this particular time, the public is looking to the CFTC to have the strongest law enforcement program that we can have—to root out manipulation and other distortions to the price discovery process that undermines the fundamental hedging utility of the derivatives markets, and thereby undermine market integrity.  Transparency and public accountability increase public trust in the CFTC and deter future illegality.  Defendant admissions aid in that public trust.  Without full accountability, the deterrent effect for future violations of the law is significantly reduced, as is the public trust.  The CFTC should require the defendant to admit to his multi-year, multi-faceted, criminally fraudulent conspiracy involving the natural gas markets—markets that affect the cost for many Americans to heat their homes.

With natural gas markets under considerable stress, with high volatility and high prices, straining American farmers, producers, and families, there is a need for the CFTC to send a pronounced message that we will bring the strongest actions possible against anyone engaged in, or contemplating engaging in, illegal actions that impact the integrity of natural gas markets.