The Fifth Circuit Court of Appeals on Monday determined the Commodity Futures Trading Commission employed an “unprecedented interpretation” of a 39-year-old rule when it filed a “novel civil liability suit” against energy futures trading company EOX Holdings and a Houston energy trader that resulted in a $7.5 million penalty.
The ruling wiped out $6.5 million of the penalty and sent the case back to U.S. District Judge Sim Lake’s courtroom. The opinion was authored by Judge Edith H. Jones and joined by judges Carl E. Stewart and Stuart Kyle Duncan. The panel found EOX and broker Andrew Gizienski lacked “fair notice” that their actions were a violation of the rule prohibiting commodity traders from “taking the other side of orders” without client consent.
“This case was the first enforcement action brought by the CFTC for ‘taking the other side’ under this 39-year-old rule,” the judges wrote in an 18-page ruling.
It was a case of first impression for the Fifth Circuit, requiring it to interpret 17 C.F.R. 155.4(b)(2)(i), which states that no broker or affiliated persons shall “Knowingly take, directly or indirectly, the other side of any order of another person revealed to the introducing broker or any of its affiliated persons by reason of their relationship to such other person, except with such other persons’s [sic] prior consent and in conformity with contract market rules approved by or certified to the [CFTC].”
EOX, which has offices in New York, London and Houston, hired Andrew Gizienski in 2010 to serve as head of its northeast power desk. He officed in Houston with five other brokers. CFTC filed suit in September 2018 against EOX and Gizienski, alleging in part they had run afoul of Rule 155.4(b)(2)(i) by surreptitiously taking the other side of their customers’ orders without consent.
At trial an on appeal, the parties disagreed on the definition of “taking the other side of an order.”
EOX and Gizienski argued it meant “becoming a counterparty with a financial interest and the possibility of profit and loss.”
CFTC argued it meant “mak[ing] the decision to trade opposite the order and execut[ing] the trade opposite the order.”
“The defendants’ definition thus excluded brokers like Gizienski who exercise discretion over the accounts they trade, while the CFTC’s definition included such brokers. In the jury instructions, the district court accepted the CFTC’s construction of the rule,” the Fifth Circuit explained in its ruling Monday.
The Fifth Circuit wrote that CFTC’s construction of the rule was “thoroughly unpersuasive.”
The jury heard five days of testimony in August 2022 and deliberated for about one day before returning its verdict Aug. 9, clearing EOX and Gizienski of insider trading claims but finding that they had, in 65 of 122 challenged transactions, taken “the other side of orders” in violation of the rule.
The jury assessed a civil penalty for those regulatory violations of $6.5 million and assessed an additional $990,000 in penalties for other related violations that were not challenged in this appeal.
EOX and Gizienski filed notice they were appealing to the Fifth Circuit in November 2022.
The Fifth Circuit wrote that prior to bringing this suit against EOX and Gizienski, the CFTC had “never publicly stated that to ‘take the other side of trades’ includes the broker’s trading for a discretionary account without himself having a financial interest in that account.”
“The CFTC had issued no guidance that might have put the defendants on notice that they were violating Rule 155.4(b)(2)(i),” the panel held. “Over the course of nearly four decades, the CFTC had taken ‘no steps to advise the public that it believed the practice was questionable.’”
Constantine Gekas of Gekas Law Limited, who represents EOX and Gizienski, said he does not comment on pending litigation. CFTC did not immediately respond to a message seeking comment Tuesday.
In August 2022 when the CFTC secured the verdict, acting director of enforcement Gretchen Lowe issued a statement.
“The CFTC is committed to maintaining the integrity of the markets and protecting customers,” she said. “As we said at the outset of this case, the illegal use of inside or confidential information undermines confidence in the markets and will not be tolerated.”
CFTC is represented by its own Raagnee Beri, Joseph Konizeski and Anne Stukes.
EOX and Gizienski are also represented by Joe F. Wright, executive vice president and general counsel of EOX’s parent company, OTC Global Holdings.
The case number is 22-20622.