Armed with a new tactic for targeting spoofing—placing orders with intent to cancel before execution—the Department of Justice received preliminary judicial endorsement of its new theory that spoofing constitutes wire fraud by obtaining convictions in United States v. Vorley.
Those convictions, coupled with a string of resolutions with trading firms over similar allegations—including a recent resolution in which JPMorgan Chase & Co. agreed to pay $920 million—have wary industry players asking: (1) Which markets will the DOJ focus on in 2021? (2) What time periods do I need to be concerned about? (3) Which traders are most at risk? and (4) How do I respond if the DOJ (or another regulator) shows up?
Securities Market in the Crosshairs
The DOJ has focused its spoofing enforcement efforts on futures trading, often in close collaboration with the Commodity Futures Trading Commission. And while much of the commentary surrounding the JPMorgan resolution focused on futures, careful observers may have noticed that the deal also addressed the cash securities market. This little discussed facet of the case deserves more attention.
Even before the election, the DOJ had taken steps to bolster its anti-spoofing initiative with an eye toward deploying its new wire fraud theory to securities. And now that Gary Gensler, the former CFTC Chairman that oversaw the first wave of spoofing investigations, has been tapped to lead the SEC, we expect to DOJ to follow the same collaborative model it deployed with the CFTC to work closely with the SEC in tackling the securities market.
How Far Back Can the DOJ Go?
With the benefit of a 10-year statute of limitations for wire fraud charges, the DOJ can even investigate trading that predates the spoofing statute enacted in July 2011. Worse yet, the DOJ can—and often does—characterize individual episodes of trading as derivative of larger conspiracies and “fraudulent schemes.”
Using these theories, the DOJ need only identify a small segment of trading within the last 10 years to capture trading going even further back in time. Underscoring the point, most cases to date have been built around trading that predated the spoofing statute, even though many in the industry did not receive training on the statute until years after its passage and genuinely struggled to grasp its scope.
Who Has the Most to Worry About?
Beyond a new focus on securities, we also expect to see an uptick in cryptocurrency investigations. During the initial boom of cryptocurrency trading (approximately 2016 to 2018), many traders plied their craft under the misimpression that cryptocurrency markets were “unregulated.”
These markets had the look and feel of a digital Wild West, with traders freely engaging in conduct that would never pass muster in traditional markets. Many of these traders now present as low-hanging fruit for the DOJ to pluck.
Given that the DOJ has been unmoved by fair notice arguments in the futures arena, even traders who had a good-faith belief that cryptocurrency markets were unregulated should not expect a free pass. Nor will residing in foreign jurisdictions provide any shelter—to the contrary, the DOJ has aggressively targeted and extradited traders from abroad (for example, in the U.K. and Australia).
‘Oh Crap, an FBI Agent Wants to Talk With Me …'
If you receive unexpected contact from an FBI agent trying to strike up a conversation, the first step is to politely insist on having a lawyer present for any dialogue with law enforcement. (You also should speak to a lawyer before volunteering the password to your smartphone.) With that settled, what is the next step?
It is not enough just to retain an attorney with expertise in trading. That expertise is necessary but not sufficient. Search for lawyers with experience dealing with the specific prosecutorial unit—and, ideally, the specific prosecutors—involved. Ask attorneys how often —and in precisely what contexts—they have dealt with the prosecutorial unit at issue.
This is not about using connections to get a better deal (an overrated construct). It is about having counsel with the necessary experience to anticipate developments, identify inflection points, and present a credible threat to government overreach based on a track record of contested cases.
Finally, for cross-border investigations, keep in mind that many law firms have international offices that consist only of transactional lawyers, with no real expertise in dealing with U.S. government investigations. This can create more problems than it solves. Ideally, your counsel should have a former U.S. prosecutor with “boots on the ground” in the region in play.
If the DOJ comes calling, stay calm and check as many of these boxes as possible.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
David McGill is an attorney with Kobre & Kim LLP in Washington, D.C., and has extensive experience in disputes and investigations involving allegations of fraud, manipulation, and spoofing in high-speed trading environments.
Jonathan Cogan is an attorney with Kobre & Kim LLP in New York and represents individuals in high-stakes government enforcement investigations and trials against the DOJ, SEC, and CFTC.
Sean Buckley is an attorney with Kobre & Kim LLP in New York and a former DOJ prosecutor who represents clients in complex matters related to white-collar crime and criminal investigations, prosecutions, and regulatory enforcement actions.
Benjamin Sauter is an attorney with Kobre & Kim LLP in New York and defends clients in the cryptocurrency and blockchain industry against high-stakes government enforcement actions.