Understand how lax compliance led to problems for a Royal Dutch Shell Executive charged in an Insider Trading commodity scheme.
About the Author
My name is Joshua McCarty. I am currently a Freelance Videographer. Specifically, I make videos that bring awareness to subject matters of importance. In 2007 I was incarcerated for making poor decisions and spent over six years in four different prisons in Georgia. Now I try to bring awareness to recidivism and the roots causes that lead formerly incarcerated people back to prison. I developed a curriculum and I go into transitional centers to teach the men all the things (resume building, interview etiquette etc.) I did not know upon my release.
Upon completion of this Case Study, participants will be able to:
- Understand the meaning of Insider Trading
- Understand the severity of penalties for people that are charged with the crime of Insider Trading.
- Describe the disciplinary actions for being guilty of conspiracy.
- Identify the differences between fraud and Insider Trading.
- Explain procedures for these types of actions upon find of guilt.
This case study was written for people who work in the financial services industries, or other white-collar professions.
Securities, Commodities Fraud, Wire Fraud, Insider Trading, White-collar crime, John Edward James, Whiteside Energy
Current State of the Industry
Discovery of Insider Trading has become more common in recent history. As our government grows, more investigations follow. The Securities and Exchange Commission routinely investigates people that break securities laws. Some people feel as though they never make enough money. If they conspire to use deception to increase their wealth, they may face significant challenges that include time in prison.
Future State of the Industry
The team at Compliance Mitigation wants to reduce the number of people that go through government investigations. We can achieve our goal by creating case studies that profile the consequence for people that faced government investigations and charges for white-collar crimes. We specifically want to help people that work in the financial services industry with valid case studies that will teach the consequences of their actions.
Natural gas is what’s known as a hard commodity—a raw product that must be mined or drilled. Similar to stocks, commodities are traded but trades take place in the commodities market. Commodities trading generally happens through futures contracts, which are agreements to buy or sell at a specified price on a specified date.
In this case, a gas trader admitted to engaging in conspiracy to forge documents and to forge classified materials. The trader intended to use those documents in an illegal scheme. He would engage in deceptive trades in natural gas contracts. Someone tipped off the Justice Department’s Criminal Division, alleging that the defendant engaged in Insider Trading. The investigation began. Later, the employee entered a guilty plea for his intent to commit wire fraud while also naming another accomplice to the crime. This case continues to develop and will likely result in more criminal charges against others.
This case study concerns John Ed James. James served as the Chief Operating Officer at Whiteside Energy, a commodities hedge fund. This hedge fund has approximately $10 billion in assets under management. The hedge fund industry strives to manage assets for other people, and clearly, Whiteside Energy had a massive market share.
Based on the press release, John Edward James forged certain documents and other non-disclosed material. He forged those documents in a fraudulent scheme to deceive others. He and others would rely upon those deceptions to earn illicit profits through insider trades in the commodities market. Mr. James set up illegal pre-arranged trades that generated close to one million dollars in illicit proceeds.
During the initial investigation and confession, John Ed James admitted that he conspired with Marcus Schultz, who also profited from the illegal scheme. Mr. Schultz already had a history of committing white-collar crimes. His background revealed that Schultz had pleaded guilty the charge of “conspiracy to commit wire fraud” one year previously.
An analysis of the information contained in the press release suggests that John Ed James, operating a large hedge fund, and Marcus Schultz, a senior-level employee at Royal Dutch Shell, plotted in tandem to participate in deceptive trade practices. They schemed by forging documents to influence the market for their own personal reward.
As the COO of a high-profile hedge fund, James had a duty and a responsibility to treat his clients ethically. He failed, apparently unable to control his inner greed. By disregarding his duty to conduct business in a truthful and integral way, he faced severe consequences. He plotted on the ignorance of others to “stack the deck” in his favor.
Many people start their careers with the intention of doing well. Something in the marketplace tempts to abandon their duty and responsibility to abide by the law and by the principles of good character. They rarely understand the consequences of their behavior, or they delude themselves into believing that they won’t get caught.
The SEC’s aggressive actions show that insider trading schemes have become more prevalent, especially in the climate that we are in now as a country. The federal government and Federal Bureau of Investigation (FBI) are becoming more and more vigilant. Their tactics result in the discovery of more suspicious trading activity and more investigations.
During James’ judicial proceeding to plead guilty, he declared that he had an accomplice. James said that Mr. Schultz conspired with him in the scheme to deceive others. They both engaged in fraudulent trades in predetermined gas contracts. If the government proves that people traded on “non-public” information, they may face charges for the white-collar crime of insider trading.
With his previous conviction, Schultz has an upcoming sentencing in mid-2021. That sentence is for an unrelated fraud case. The new criminal charges will complicate matters regarding sentencing. Both he and Mr. James will face additional sanctions for the new criminal conduct.
Since Mr. James cooperated with his admission of guilt, he also helped the FBI target another co-defendant in Mr. Schultz. James’ cooperation agreement may result in a lower sentence. Prior to sentencing, the government will conduct a more thorough investigation to assess the amount of loss, which will influence sentencing. If there were additional damages, Mr. James will be forced to pay restitutions plus other fines.
Even with an admission of guilt for wire fraud, Mr. James can still face more than ten years in prison due to his role in this case.
People that have high levels of authority within an organization play an essential role in setting the tone. People look to authority figures in the “chain of command” for guidance and direction. If they see the “main” person engaging in foul-play, others perceive that behavior as permission to disregard laws and regulations.
We recommend better training. If leaders use case studies that profile the consequences that follow for people who break laws, they will think before engaging in criminal behavior.
They should understand:
How investigations begin, the financial costs to defend against a white-collar crime, and the penalties that follow.
The more people understand, the better judgment they will exercise. We recommend more and better training for people that work in white-collar professions.