By Christian Berthelsen 

A former jet-fuel trader for Delta Air Lines Inc. is in settlement talks with U.S. commodities regulators over allegations that he used advanced knowledge of the airline's market moves to profit on personal trades, according to people familiar with the matter.

Jon Ruggles made more than $3.3 million in illicit profits between April and December 2012 by front-running Delta's trades through his wife's accounts, according to a disciplinary notice by CME Group Inc. Mr. Ruggles used two accounts in the name of Ivonne Ruggles more than 80 times to execute the scheme, the notice said.

He is now in discussions with the Commodity Futures Trading Commission to settle a civil enforcement action related to the matter. While the terms of his negotiations with the CFTC are unclear, the case is expected to be resolved soon, according to a person with knowledge of it.

The CME, which owns the New York Mercantile Exchange where energy contracts are traded, said on Monday it had permanently banned Mr. Ruggles from trading on its exchanges. It also fined him $300,000 and ordered the return of $2.8 million in trading proceeds, which was the amount made during the time he was subject to CME jurisdiction. The CME's disciplinary notice said it would waive claim to any amount he pays part of a settlement with the CFTC.

Mr. Ruggles's trades were placed using crude oil futures and options as well as contracts used to bet on the price difference between crude oil and heating oil, according to a person familiar with the case. Airlines use crude and heating oil contracts as a proxy to hedge exposure to jet fuel prices, since there are limited ways to trade jet fuel in futures markets and the trading volume is thin.

A lawyer for Mr. Ruggles declined to comment.

Attorneys say such cases are rare, but they are starting to get more attention from regulators under the Dodd-Frank Act. New rules have widened the scope of people who are expressly prohibited from using confidential information for personal trading gains.

The CFTC can now impose fines of as much as $140,000 for every violation that occurred under such a scheme, or seek a fine equal to the illicit gains, whichever is larger. They can also impose a trading ban more broadly, such as barring a defendant from any market regulated by the CFTC.

In a similar case settled by the CFTC in December, the agency accused gasoline trader Arya Motazedi of a form of insider trading for profiting from personal trades that were made with the knowledge of trades he was about to place on behalf of his employer. The CFTC and Mr. Motazedi's lawyer declined to identify his employer at the time.

Though his illicit profits amounted to little more than $200,000, the agency fined Mr. Motazedi $100,000, demanded return of the proceeds and permanently banned him from trading or registering as a futures industry professional.

"Regulators have recently relied on the antifraud provisions to treat front-running like insider trading," said Andrew Lourie, a former federal prosecutor who now specializes in enforcement defense at law firm Kobre & Kim. "The lines between insider trading and front-running are blurred for the most part. It's all called fraud."

Fuel costs are one of the airline industry's biggest expenses. Many have tried in recent years to mitigate the impact of volatile swings in market prices on their business by using hedging techniques.

These programs have a mixed record. Sometimes they help airlines manage costs, lock in margins and avoid price volatility, and at times have even generated trading profits that aided the bottom line. But on other occasions, wrong bets have resulted in big losses that undercut results. Just this year, Delta said it would once again abandon its hedging program after losing $336 million on it in the fourth quarter of 2015.

The U.S. Department of Justice also launched an inquiry into the Ruggles case, but no longer appeared to still be investigating it, according to two people familiar with the investigation.

Mr. Ruggles held positions with Swiss trading house Trafigura AG, Bank of America Merrill Lynch Corp. and Citigroup Inc. According to the 2014 book "The Secret Club that Runs the World," Mr. Ruggles initially generated more than $400 million in trading gains for Delta, including a complex bet on heating oil prices that made more than $100 million and helped fund the company's bonus pool.

But he later fell out of favor as the market turned against his positions and senior managers imposed a new strategy, ultimately leading to a $100 million paper loss.

A spokesman for Delta said Mr. Ruggles was fired in December 2012 after they learned of the investigation and he refused to answer executives' questions about it.

His wife, Ivonne, was also banned by the CME but not fined, in part because the exchange found she did not execute any of the trades herself. Ms. Ruggles is a cosmetics industry executive, according to her LinkedIn profile. Mr. Ruggles is now doing work in the oil refining sector of the energy industry, and they remain together, according to a person familiar with the case.

Write to Christian Berthelsen at christian.berthelsen@wsj.com

 

(END) Dow Jones Newswires

June 18, 2016 02:48 ET (06:48 GMT)

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