CFTC in Settlement Talks With Ex-Delta Fuel Trader -- WSJ
June 18 2016 - 3:03AM
Dow Jones News
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)
Copyright (c) 2016 Dow Jones & Company, Inc.
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