Houston Natural Gas Trader: The Employer’s Orders, the Broker’s Profits

In this CFTC insider trading action, a Houston natural gas trader agreed to a $669,750 civil penalty after steering his employer’s block trades to prices that enriched a broker and other traders, then sharing their profits. He also passed the broker confidential market analysis and used employer orders to limit the broker’s losses. Someone inside the desk could recognize the orders, the broker and the paperwork. The employer was supposed to benefit from that trading relationship. Its trader had arranged to benefit personally instead.

The Commodity Futures Trading Commission’s September 30, 2020 order records the trader’s admission of its findings and conclusions. The core trading scheme ran from April 2013 through at least February 2016. The trader became head of his employer’s Southeast/Gulf Coast desk, traded natural gas futures on ICE and NYMEX, and owed the company a duty to keep its information confidential and avoid using it for his own benefit.

How Employer Block Orders Became Someone Else’s Profit

The trader supplied his employer’s block-order information to a voice broker who used it to arrange profitable trades for himself or other customers. The information included prices, quantities, volumes and the limits on what the employer would accept.

The CFTC’s account of the desk distinguishes trading through an exchange’s electronic order book from block trades. A block trade is a privately negotiated transaction in exchange-listed futures that meets the exchange’s minimum quantity. The trader used voice brokers to find someone willing to take the other side and help execute the transaction. The criminal information explains that block trades still had to use fair and reasonable prices in light of market conditions. It describes Henry Hub, near Louisiana’s Gulf Coast, as the standard pricing reference for natural gas futures, with stored reserves and weather among the factors affecting supply and demand.

That ordinary business relationship gave the scheme its cover. The trader appeared to be asking the broker to locate a counterparty. In some transactions, the broker took the other side through a trading firm he owned and controlled. In others, he passed the information to either of two independent energy traders who were his customers.

The employer’s trader prearranged bids and offers at prices that let those counterparties profit on offsetting trades with other market participants. The CFTC found that the prices did not maximize the employer’s profit. The trader knew when he disclosed the information that he would share in the resulting gains.

The broker even continued charging the employer brokerage commissions, helping conceal that he was taking the other side. We find that detail especially telling: the employer was billed a brokerage fee on trades its own employee had arranged for the broker’s private benefit.

Can the Commodity Market Be Manipulated?

Yes. Here, the CFTC found that prearranged natural gas futures trades produced false prices recorded by the exchanges. The favored counterparties could effectively select the price they needed to make their offsetting trades profitable. That connects the misuse of employer information to the integrity of the market’s prices.

The Justice Department’s criminal information supplies a concrete example. It alleged that on May 15, 2015, the employee sent the broker an instant message ordering 642 lots of an ICE Natural Gas Henry Hub futures contract. The broker’s trading firm filled the employer’s buy order and bought the same quantity through three offsetting trades at lower prices, making a profit.

The criminal filing explains that offsetting trades close a futures position through an opposite transaction in the same contract and delivery month. The difference between the opening and offsetting prices determines the gain or loss. In that example, the employer’s purchase supplied the price at which the broker’s firm profited.

This is why the execution price matters as much as the information leak. The admitted civil findings describe an employee using both his knowledge of the employer’s orders and his authority to place them for someone else’s benefit.

The Storage Report and the Broker’s Downside

The trader also gave the broker his employer’s confidential natural gas market analysis ahead of the weekly Energy Information Administration Natural Gas Storage Report. The report measures gas held in underground storage and the change from the prior week. According to the CFTC order, the trader shared that information expecting the broker to trade in his personal account and return a share of any profits.

The arrangement also covered the risk that the analysis would not produce profitable trading. At times, the employee gave the broker an employer order that the broker could fill to limit his losses. The CFTC found that those orders served the broker’s interests and, indirectly, the employee’s. The employer’s trading authority had become a cushion for someone else’s losing position.

How the Profit Payments Looked Ordinary

The trader and broker communicated, executed and documented the trades as ordinary employer business. They also disguised the money returning to the employee. The CFTC found that checks came through an investment company, the brokerage firm or another participant’s trading firm. They went to the employee or a real estate company owned by a family member, making the proceeds look like legitimate investments.

The criminal information alleged another layer: the participants agreed to document certain proceeds on Form 1099-MISC to make the funds appear to be legitimate investment proceeds or income. It reproduced a text message in which the employee asked the broker’s wife about the tax form:

An ordinary-sounding tax request sits inside the government’s account of disguised trading profits. The criminal allegation ties the form to the effort to conceal the payments.

The False Explanations to ICE and the CFTC

The trader denied the very arrangement that made the trades profitable for the broker. ICE’s Market Regulation Department interviewed him while investigating the broker and brokerage firm. He said he had neither authorized nor known about the broker taking the other side of his employer’s orders. The CFTC found those statements false.

In his interview with the CFTC, he also misrepresented the relationship with the broker, the fictitious trading and his knowledge of broker-controlled accounts taking the other side. He failed to disclose their express agreement to that arrangement.

The order explains why the answers mattered: investigators were examining whether the broker used employer information for his personal benefit and whether the employee knew. His explanations concealed the connection between the order he placed, the account that filled it and the profits returned to him.

What Is the Penalty for Market Manipulation?

In this case, the CFTC imposed a civil penalty larger than the trader’s gains and ordered him to give up the $427,067 he received from the scheme. The order calls that payment disgorgement: giving up the gains. The order also imposed six years of trading and specified registration restrictions.

Can CFTC Prosecute Criminal Violations?

The CFTC brings civil and administrative enforcement actions. The Justice Department brings criminal prosecutions. The employer’s trader pleaded guilty in July 2020 to a conspiracy involving wire fraud and violations of the Commodity Exchange Act, according to the Justice Department’s February 1, 2021 announcement. In a related participant’s guilty plea, described in the same announcement, another natural gas trader admitted using nonpublic information for prearranged trades, splitting the profits and agreeing to disguise proceeds as income on IRS forms.

What Evidence Is Required to Prove Fraud?

For this scheme, the useful evidence connects access to the employer’s information, the chosen execution price, the account on the other side and the money coming back. An insider may understand why an order went to a particular broker, who controlled the counterparty account or why a payment described as an investment followed a profitable trade. We work with that knowledge and the records together.

The CFTC’s fiscal year 2021 budget describes surveillance data including trade quantity, time, price and participant account numbers. Those fields can connect transactions. The employer’s instructions, account ownership and communications explain the relationships behind them, which makes the trading records and messages particularly important here.

A 2024 World Federation of Exchanges working paper, An Analysis of Market Manipulation Definitions Around the World, describes traditional surveillance systems flagging suspicious patterns for human analysts to investigate. It also describes the difficulty of following strategies across sequences of trades. Applied to this case, the useful question is who can explain why the employer accepted the price and how the counterparty came to receive the order.

The pattern appears in other employer-information actions. In an energy trader’s action, the CFTC alleged that prearranged trades shifted value into personal accounts. In a fuel-hedging employee’s action, it alleged use of employer information through the employee’s wife’s accounts. Each puts entrusted information, trading authority and private benefit in the same picture.

Can I Get Paid for Being a Whistleblower?

Eligible CFTC whistleblowers can receive 10% to 30% of the sanctions collected in qualifying actions. That award is shared when more than one whistleblower receives it. We assess how your knowledge fits the CFTC whistleblower program with you.

The False Claims Act is a separate program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Why That Order Went There

If you saw employer orders favor a broker’s account or trading profits return as investment payments, talk with our whistleblower experts about what happened inside the desk. We work with you to build your strongest CFTC whistleblower case, bring in CFTC whistleblower lawyers who understand energy trading, and stay beside you through the process.