The Justice Department continues to pursue criminal spoofing charges against traders, notwithstanding a recent setback in a high-profile trial, as several developments this summer demonstrate.
On July 25, 2019, a commodities trader who was formerly employed by large investment banks pleaded guilty to one count of attempted price manipulation of commodities. The criminal information charged the trader with engaging in commodities fraud in the form of spoofing from 2007 to 2016. And on Aug. 20, 2019, a former precious metals trader pleaded guilty to conspiracy and spoofing charges based on trading that also occurred from 2007 to 2016.
Separately, on Sept. 16, 2019, the government charged three other commodities traders from that same firm with racketeering conspiracy based on alleged spoofing that occurred between 2008 and 2016.
In addition, on June 25, 2019, an international commodities brokerage firm entered into a nonprosecution agreement with the government based on spoofing committed in the commodities markets from 2008 to 2014. As part of that agreement, the firm admitted to the criminal conduct at issue and agreed to pay a $25 million fine.
As we explained in a prior Insight, spoofing, which the Dodd-Frank Act defines as “the illegal practice of bidding or offering with intent to cancel before execution,” has been illegal since 2010.
In short, spoofing involves placing one or more smaller bids or offers on one side of the market while simultaneously placing larger bids or offers on the opposite side, with the hope that the larger bids will advantageously affect the smaller ones. The trader then cancels the larger bids only after inducing other market participants to fill the smaller orders. This is precisely what these commodities traders and brokerage firm were accused of doing.
In our prior article, we discussed the DOJ’s inability to secure a guilty verdict in a recent trial in which the government had brought spoofing charges not against a trader or broker, but rather a software developer, Jitesh Thakkar, who had created software used by traders to engage in spoofing. We noted that the government’s decision to prosecute Thakkar was aggressive and based on a relatively weak legal theory, and we questioned whether the government would continue to pursue such an aggressive prosecutorial approach in spoofing cases going forward.
DOJ Looking at Individuals, Companies
However, the recent pleas secured by the government against the individual traders, the nonprosecution agreement and fine agreed to by the brokerage firm, and the recent filing of RICO charges against three other traders, suggest that the DOJ has not backed away from pursuing criminal spoofing charges against both individuals and companies after its inability to secure a criminal conviction at trial against Thakkar.
Notably, the conduct at issue in these recent cases was over a decade old, suggesting that the government is taking a historical look-back to find criminal conduct in old trading data. That said, these cases involve spoofing conduct by actual traders as opposed to a “gatekeeper” a step removed from trading, like software developer Thakkar.
The DOJ’s continued focus on prosecuting traders and their respective firms for spoofing will likely proceed unabated as long as the government continues to secure guilty pleas and corporate resolutions. Prosecutors were no doubt buoyed by the substantial fine and publicity that accompanied the non-prosecution agreement with the brokerage firm.
Currently, the DOJ’s run of spoofing prosecutions has been limited to districts associated with commodities and other trading, namely federal courts in Chicago, New York City and Connecticut. But given that the DOJ’s Fraud Section, which operates out of Washington, D.C., but has nationwide investigative authority, is heavily involved in these prosecutions, traders and firms located anywhere should expect increased scrutiny, and with it a greater likelihood of prosecution.
Additionally, the U.S. Commodity Futures Trading Commission (CFTC) has moved forward with its own civil enforcement proceedings against commodities traders for spoofing, both in cases in which the DOJ has sought criminal charges and those where it has not.
Most recently, the CFTC settled an enforcement action against a Chicago-based self-employed trader and floor broker registered with the CFTC since 1994, based on allegations that he engaged in spoofing while trading on the Chicago Mercantile Exchange from April 2014 to February 2018. The trader agreed to a settlement on July 31, 2019, without admitting to or denying the allegations. The terms of the settlement require the trader pay a $150,000 fine to the CFTC and prohibit him from engaging in any commodities trading for three months.
The recent DOJ and CFTC actions illustrate that the DOJ’s defeat in the Thakkar case does not signal the end of spoofing charges. Traders and their firms should be cognizant of the serious potential ramifications of spoofing, even when the alleged conduct may have occurred in the past.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Sarah M. Hall, a senior counsel in the Thompson Hine’s Washington, D.C., office, is an experienced former federal prosecutor with significant experience prosecuting white collar crime. At the firm, she defends individuals and companies in federal criminal investigations and conducts internal investigations for corporate clients on a wide variety of subject matters including fraud, FCPA violations and #MeToo sexual harassment allegations.
Steven A. Block is a partner in Thompson Hine’s White Collar Criminal Practice, Internal Investigations & Government Enforcement practice in Chicago. With significant investigative and trial experience as a federal and state prosecutor, he focuses on internal investigations and white collar criminal and regulatory matters.
Brian K. Steinwascher, an associate in the firm’s Business Litigation group in New York, focuses on white collar defense, internal investigations, and health care fraud.