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.
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).
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.
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