United States: Criminal And Regulatory Enforcement Of Market Manipulation Spike

Last Updated: August 20 2019
Article by Andrew Bauer and Sina Mansouri

Despite several key setbacks in recent years, spoofing remains an enforcement priority for the Department of Justice (DOJ), Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). Undeterred by challenges within the law, the government continues to investigate and pursue spoofing-based market manipulation, securing a number of guilty pleas and non-prosecution agreements with sizeable penalties. Just last month, for instance, Cory Flaum, a former precious metals trader, admitted to CFTC findings the same day that he pled guilty to commodities price manipulation based on a pattern of spoofing for nearly a decade.

Spoofing is a form of market manipulation that involves entering a bid to buy or an offer to sell a security or commodity with the intent to cancel the bid or offer before execution.1 Section 9 of the Commodity Exchange Act (CEA) criminalizes the manipulation of the price of any commodity in interstate commerce. Section 4c(a)(2)(B) of the CEA further prohibits any price from being reported, registered or recorded that is not a bona fide price. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) amended the CEA's Section 4c(a), adding a section that specifically prohibits spoofing, and making it unlawful to engage in "bidding or offering with the intent to cancel the bid or offer before execution." In addition, self-regulatory organizations, such as FINRA and the exchanges, promulgate rules designed to guard against manipulative conduct.

The government has steadily brought spoofing charges since the 2010 enactment of Dodd-Frank. Those cases, however, have been met with limited success. Of the three spoofing cases that have gone to trial, only one ended with a conviction;2 the second resulted in an acquittal3, and most recently, the third resulted in a mistrial, and subsequently the government dismissed the charge with prejudice.4

Perhaps more so than other securities and commodities fraud, a trader's intent to engage in spoofing is difficult to establish, highlighted by the April 2018 acquittal of Andre Flotron, a former UBS trader, who stood trial for scheming to manipulate the precious metals futures market through spoofing. Flotron's case turned on whether prosecutors could show Flotron intended to conspire with others to cancel the initial orders for near-month precious metals futures contracts before allowing the opposing order to go through on the COMEX exchange.5

Flotron's defense team argued to the jury that the government offered no evidence showing that he had agreed to take part in any conspiracy, and that this case was simply "prosecution by statistics," where the government had cherry-picked a relatively few trades out of the hundreds of thousands of trades Flotron had executed while employed at UBS. The New Haven jury delivered its verdict one day after the trial concluded, finding Flotron not guilty.6

Notwithstanding the Flotron acquittal, the government has expanded its target list of those it seeks to hold accountable for spoofing, now sweeping in non-traders. Also last year, the United States Attorney's Office in Chicago charged Jitesh Thakker, a software engineer who designed a program to spoof the market.

In that case, the government alleged that Thakkar, a software developer and the owner of Edge Financial Technologies Inc., conspired with his colleagues and Navinder Sarao, a UK trader to develop an automated program that enabled traders to spoof the market. The program was allegedly designed to alter the quantity of an order placed and send it to the end of the queue so that all other orders before it would have to be filled first.7

At trial, the government argued that emails between Thakkar and Sarao showed that they met to discuss the program's function, its trigger, and when to "delete the order upon partial fill."8 Five days after that meeting, Thakkar wrote to Sarao notifying him that Thakkar and his team "have a working version of the application" and encouraged Sarao to follow the directions laid out in an accompanying document.9 Relying in part on this communication, the government argued Thakkar knowingly created the software to help enable traders to spoof.

Thakkar's defense team, honing in on the intent requirement, argued Thakkar was being accused of simply doing his job, and that the charges against him were akin to a vendor being charged for selling a phone that was later used in a drug deal. Ultimately, the jury deadlocked, and the court declared a mistrial. Two weeks later, the government moved to dismiss the indictment with prejudice.10Thakkar highlights once again the difficult hurdle prosecutors face in establishing intent to engage in spoofing.

Despite these recent challenges to proving spoofing before a jury, the uptick in spoofing-related charges has remained constant over the last several years. In Thakkar's case alone, six other traders were also charged.

Most recently, on July 25, 2019, Corey Flaum, a former precious metals trader at the New York offices of Bear Sterns and Scotia Capital, pled guilty to attempted price manipulation of precious metals futures contracts. As a part of his plea, Flaum admitted to placing thousands of orders to manipulate the prices of gold, silver, platinum, and palladium futures contracts traded on the NYMEX and COMEX exchange.11 It appears that Flaum is cooperating with an ongoing investigation into the gold, silver, platinum and palladium markets, which tends to show that more arrests will be coming soon.

Enforcement has not been limited to the criminal arena however. As a part of a broader investigation, several civil spoofing related actions against banking giants settled over the past year. Notably, Scotiabank was fined $800,000 by the CFTC in 2018 as part of a no-admit settlement resolving allegations of spoofing by its traders.12 According to the CFTC, the bank avoided a much larger penalty in part because it self-reported to the agency after discovering problematic trading activity, and in part because it terminated one of the problematic traders. By contrast, Merrill Lynch Commodities Inc. did not self-report, and therefore had to pay a combined $36.5 million for its failure to supervise its traders, under a non-prosecution agreement with DOJ and through a separate civil settlement with the CFTC.13

Given the rise in spoofing cases and investigations, banks and their management should remain vigilant by actively monitoring their traders' activities, and considering a self-report as quickly and early as possible.

Footnotes

1. Section 4c of the Commodities Exchange Act (CE Act) (7 U.S.C. § 6c(a)(5)(C)).

2.See United States v. Coscia, No. 1:14-cr-00551, (E.D. Ill. Jul. 14, 2016).

3. Jury Verdict, United States v. Flotron, No. 17-cr-220, Dkt. No. 213 (D. Conn. Apr. 25, 2018).

3. Order Dismissing Indictment with Prejudice, United States v. Thakkar, No. 18-cr-36, Dkt. No. 135 (N.D. Ill. Apr. 23, 2019).

4. Complaint, United States v. Flotron, No. 17-cr-220, Dkt. No. 1 (D. Conn. Sept. 12, 2017); Superseding Indictment, United States v. Flotron, No. 17-cr-220, Dkt. No. 58 (D. Conn. Jan. 30, 2018); Complaint, C.F.T.C. v. Flotron, No. 18-cv-158, Dkt. No. 1 (D. Conn. Jan. 26, 2018).

5. Jury Verdict, United States v. Flotron, No. 17-cr-220, Dkt. No. 213 (D. Conn. Apr. 25, 2018).

6. Complaint, United States v. Thakkar, No. 18-cr-36, Dkt. No. 1 (N.D. Ill. Jan. 19, 2018).

7. Id.

8. Sarao himself pled guilty in 2016 to wire fraud and spoofing charges in a related case. Plea Agreement, United States v. Navinder Singh Sarao, No. 15 CR 75, (N.D. Ill.), November 9, 2016.

9. Order Dismissing Indictment with Prejudice, United States v. Thakkar, No. 18-cr-36, Dkt. No. 135 (N.D. Ill. Apr. 23, 2019).

10. See Press Release, U.S. Dep't of Justice, Former Precious Metals Trader Pleads Guilty to Attempted Commodities Price Manipulation (July 25, 2019).

11. Order Instituting Proceedings Pursuant To Section 6(C) And 6(D) Of The Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, In the Mater of: The Bank of Nova Scotia, CFTC No. 18-50, Sept. 28, 2018.

12. DOJ Nonprosecution Agreement, In Re: Merrill Lynch Commodities, Inc. Criminal Investigation, June 25, 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions