Bloomberg Law
April 16, 2019, 8:00 AM

INSIGHT: Spoofing Programmer Mistrial Sparks Questions About Future DOJ Prosecutions

Steven  Block
Steven Block
Thompson Hine
Brian K.  Steinwascher
Brian K. Steinwascher
Thompson Hine

A federal judge in Chicago declared a mistrial April 9 when the jury was unable to reach a verdict in the criminal case of Jitesh Thakkar, a software programmer the government alleged conspired with Navinder Sarao, the UK high frequency trader who caused the notorious 2010 Wall Street “flash crash.”

The government alleged that Thakkar conspired with and assisted Sarao, who had previously pleaded guilty to wire fraud and “spoofing” charges, to create the software program that permitted Sarao to carry out his illegal trades. The government’s failure to convict Thakkar—and the jury’s 10 to 2 split in favor of acquittal—raise questions about why the government chose to prosecute this case and the future of similar charges against individuals who provide technical services to traders.

Illegal since 2010, spoofing is “the illegal practice of bidding or offering with intent to cancel before execution.” A trader engages in spoofing by placing a large number of bids or offers, which can move the market in a desired direction, while intending to cancel those orders prior to execution. The trader then places other orders that are executed to take advantage of the artificially high or low price his spoofed orders created.

A form of market manipulation, spoofing negatively impacts market participants, who end up paying an artificially high, or receiving an artificially low, price for securities while the spoofing trader profits.

Prior Spoofing Prosecutions

Prior to Thakkar’s trial, the government had successfully prosecuted several spoofing cases. For example, in 2015, the government convicted futures trader Michael Coscia, who was sentenced to three years in prison. Precious metals trader David Liew pleaded guilty to spoofing in 2017, agreed to cooperate with the government, and is awaiting sentencing. Sarao, who is cooperating with the government and testified at Thakkar’s trial, pleaded guilty in 2017.

Thakkar, by contrast, was not alleged to have engaged in any trading, spoofing or otherwise, but to have designed and created the software that allowed Sarao to enter and quickly cancel his spoofed orders.

According to the government, Thakkar knew and agreed with Sarao that the program would be used for spoofing. Thakkar’s position, on the other hand, was that the program he had developed could be used for perfectly legitimate purposes (e.g., to enter custom “fill and kill” orders on exchanges where that order type was not otherwise available).

Conspiracy Allegations

At the close of the government’s case, the court agreed with Thakkar that the government had failed to introduce sufficient evidence to support a conspiracy and dismissed that charge from the case. Left without a conspiracy charge, and having previously been denied a willful blindness (i.e., ostrich) instruction, which would have enabled the jury to find Thakkar guilty if it found it was “highly probable” that he knew his software would be used for spoofing, the government’s case was weakened considerably.

The court permitted the remaining aiding and abetting charge to proceed, while noting that the government had presented a “thin case” for that charge as well. The judge’s comments proved prescient when the jury informed the court that it was hopelessly deadlocked.

Thakkar made $24,000 for developing the software that Sarao then used to make more than $13 million in illegal trading profits. Thakkar’s counsel argued to the jury that the charges were akin to a cellphone salesman being charged with a crime for selling a phone later used in a drug deal. Though this is perhaps overly simplistic, the jury likely struggled with the fact that Thakkar was a step removed from the underlying criminal conduct.

The government has the option to retry Thakkar, but it seems unlikely (or at least imprudent) in light of the dismissal of the conspiracy charge and the deadlocked jury’s vote. U.S. District Judge Robert Gettleman has scheduled a status hearing for April 25 to determine what comes next.

Future of Spoofing Cases

The government may have chosen to prosecute Thakkar because it realizes the essential role programmers and technologists play in high frequency trading and saw strong deterrent value in charging him.

Either way, the government has made clear that spoofing prosecutions are a priority, announcing last year the largest-ever spoofing enforcement action, which involved eight individuals in six different cases.

In that announcement, the DOJ said it expects to use data analysis “to an even greater degree in order to identify fraudulent and manipulative conduct in our financial markets. “The Criminal Division’s message is clear. We are watching. We are closely monitoring the markets. and we will leave no stone unturned in our efforts to combat and eradicate illegal, fraudulent, and manipulative conduct.”

But whether the government will continue to bring spoofing cases against programmers like Thakkar is less clear. Thakkar’s case began under the prior administration, and it may not reflect current administration policy. It is also worth noting that the spoofing involved in the Thakkar and Sarao cases—the 2010 flash crash—was one of the largest and most public instances of this kind of market manipulation.

Hence, it may be that the government decided to prosecute Thakkar, despite having a weak case against him, mainly because of the notoriety of the fraud involved. Nonetheless, companies and individuals who provide technical services to the trading community should know that DOJ could look at them when traders misbehave and should be prepared to defend their actions.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Steven 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 is an associate in the firm’s Business Litigation group in New York. His practice includes conducting internal investigations and defending clients’ interests in white collar crime and complex commercial matters involving alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act, the Foreign Corrupt Practices Act, and securities laws.

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