Novel Spoofing Case Against Software Developer Ends in Mistrial

Following a week of trial proceedings in the case of defendant Jittesh Thakkar—a software programmer indicted in February 2018 on conspiracy and aiding and abetting charges related to a spoof trading scheme—the government’s case against Thakkar ended in a mistrial. The jurors could not reach a unanimous verdict on the two aiding-and-abetting spoofing counts charged in his indictment, after spending more than a day on deliberations. It was reported that ten out of the twelve jurors were in favor of acquittal.

At the heart of the aiding-and-abetting case was whether Thakkar knew that software he designed for London-based “flash crash” trader Navinder Sarao would be used to spoof or otherwise manipulate the market for E-mini S&P 500 futures contracts. As reported here last week, the government alleged that Thakkar’s software allowed Sarao to trigger a “back-of-the-book” function that kept large bids or orders he placed on one side of the market last-in-line for filling, making it easier for Sarao to cancel them once he had executed smaller, favorable trades based on the artificial price movement induced by his large orders. Sarao made over $1 million on “spoofed” trades using the customized software, for which he had paid Thakkar’s company $24,200.

The trial judge previously acquitted Thakkar mid-trial on the charge that he conspired with Sarao to spoof the market. During closing statements on the aiding and abetting charges, the government noted that Thakkar was a self-proclaimed trading technology “expert” who worked closely with Sarao to refine the software. However, Thakkar countered that as a computer programmer and businessman, he should not be held criminally responsible for Sarao’s illegal trading practices.

Forward at Your Own Risk – U.S. Supreme Court Expands the Scope of Rule 10(b)-5 Liability

By Hillary Levun and Lou R. Mejia on April 8, 2019 Posted in Financial Fraud, SEC

The U.S. Supreme Court recently handed down a win for the SEC and private securities litigants, significantly broadening the scope of primary liability under Rule 10b-(5). In Lorenzo v. SEC, the Court held that liability under Rules 10b-5(a) and (c)—which make it unlawful to employ a scheme to defraud or engage in any practice that operates as a fraud—is not limited only to those who make false or misleading statements as contemplated under sister-section Rule 10b-(5)(b), but may also extend to those who disseminate such statements made by others knowing they are false or misleading.

Background

This case arose from an SEC enforcement action brought against Francis Lorenzo, Director of Investment Banking for a New York broker-dealer. The SEC alleged that, in connection with a $15 million debt offering, Lorenzo sent emails to prospective investors that significantly overstated the value of the investment. It was undisputed that the emails were sent at the direction of Lorenzo’s boss, who supplied all the content and “approved” the messages. It was also undisputed that Lorenzo knew that statements regarding the value of the investment were false or misleading.

The SEC concluded that, by knowingly sending false statements from his email account, Lorenzo directly violated SEC Rule 10b–5 and related provisions of the securities law, including Sections 10(b) of the Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933. Rule 10b-5 makes it unlawful to: (a) employ a device, scheme, or artifice to defraud, (b) make an untrue statement of a material fact, or (c) engage in an act, practice, or course of business which does or would operate as a fraud or deceit in connection with the purchase or sale of securities.

Lorenzo appealed, contending he had no liability under Rule 10b–5 because under the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, liability for false statements was limited only to the “makers” of those statements as contemplated by Rule 10b–5(b), defined only as those with “ultimate authority” over the statements’ content and communication. One who simply prepares or publishes a statement on behalf of another, as Lorenzo saw his role, fell outside of the scope of primary liability under Janus. The D.C. Circuit agreed that since Lorenzo’s boss directed him to send the emails, supplied their content, and approved them for distribution, Lorenzo did not “make” the statements, and thus could not be held primarily liable for a Rule 10b-5(b) violation. But, the D.C. Circuit sustained the SEC’s finding of primary liability under Rules 10b-5(a) and (c) for knowingly disseminating statements he knew to be false, even though he did not “make” the statements himself.

The Supreme Court’s Ruling

On appeal to the Supreme Court, Lorenzo advanced two main theories, both of which the Supreme Court flatly rejected. Continue Reading

Bellwether Spoofing Case Goes to Trial in Chicago

By Christopher P. Eby, Gina LaMonica and Caryn Trombino on April 4, 2019 Posted in Dodd-Frank Act, DOJ

Can a software programmer be held criminally responsible for designing a program that a trader uses to “spoof” the commodity futures market? This is the question posed to the jury in U.S. v. Thakkar, 18-cr-36 (N.D. Ill.), which trial began this week in federal court. The case grew out of the manipulative trading activities of Navinder Sarao, a London-based commodities trader who “spoofed” (i.e., placed bids or offers with the intention of canceling them before execution) futures on the Chicago Mercantile Exchange (CME). Sarao’s activity allegedly contributed to the May 6, 2010, “Flash Crash” in which the Dow Jones Industrial Average dropped nearly 1,000 points within minutes. Sarao pleaded guilty to fraud and spoofing charges in November 2016.

Jittesh Thakkar, the software programmer currently on trial, was indicted in February 2018 on charges that he conspired with Sarao to commit spoofing and that he aided and abetted Sarao’s spoofing by developing a customized software program that Sarao used to execute manipulative trades. The indictment against Thakkar marks the first time the U.S. Department of Justice (DOJ) has prosecuted an individual other than a trader with a spoofing-based crime.

Higher Ed: Admissions Scandal Wake Up Call

By Kevin Feldis, Caryn Trombino and Markus Funk on March 25, 2019 Posted in Higher Education, Internal Investigations, Public Corruption

The arrests in the college admissions bribery scandal may have ushered in a new era of scrutiny by federal law enforcement. Perkins Coie attorneys anticipate questions that prosecutors, civil litigants and the public may ask in the weeks and months ahead, and offer six key foundational steps all institutions of higher learning should take immediately to evaluate their own admissions process.

Click here to read the full article.

CFTC Dips Its Toe into Anti-Corruption Space

By Matthew R. Koerner on March 11, 2019 Posted in CFTC

On March 6, 2019, the Division of Enforcement of the U.S. Commodity Futures Trading Commission (“CFTC”) issued a new Enforcement Advisory on self-reporting violations of the Commodity Exchange Act (“CEA”) involving foreign corrupt practices. Under the Advisory, the Division provided guidance that it might recommend no civil monetary penalties for certain non-registrants that voluntarily and timely self-report, fully cooperate, and appropriately remediate. The Advisory’s release was accompanied by formal remarks from CFTC Enforcement Director James McDonald at the American Bar Association’s National Institute on White Collar Crime.

Financial Crisis—Six Lessons Learned for Legal Counsel

By Adam H. Schuman on February 14, 2019 Posted in Compliance

During the financial crisis, government enforcement agencies started taking a hard look at Wall Street institutions, and these days a company must respond proactively and dynamically when addressing the challenges of government investigations and litigation. Perkins Coie’s Adam H. Schuman and Kraft Heinz’s Prasanth R. Akkapeddi detail some key takeaways for both in-house and outside counsel.

Click here to read the full article.

Revisiting Agency Liability Under the FCPA Post-Hoskins

By Marcus A. Haggard and Christopher P. Eby on February 12, 2019 Posted in DOJ, FCPA, Individual Liability, Second Circuit

In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018) the Second Circuit held that a non-resident foreign national cannot be criminally liable for aiding and abetting or conspiring to violate the FCPA unless the government can establish that such an individual acted as an agent of one of the categories of persons subject to liability as a principal.

Background

The DOJ charged Lawrence Hoskins, a British national and former Alstom UK executive based in Paris, with FCPA and money-laundering violations. The government alleged that Hoskins had approved payments to consultants that were funneled to Indonesian officials to secure a $118 million infrastructure contract with a state-owned power company. Hoskins was never physically present in the U.S., but he called and emailed alleged conspirators who themselves were present in the U.S., and Hoskins authorized payments from Alstom S.A. to the consultants, one of whom had a Maryland bank account.

Hoskins moved to dismiss charges alleging indirect FCPA violations—i.e., that he aided and abetted or conspired to violate the FCPA—arguing that he did not fall within the narrowly-circumscribed group of people for whom the FCPA prescribes liability: American companies, citizens, and their employees and agents, as well as foreign persons acting on American soil. The lower court agreed with Hoskins and dismissed Count I of the indictment. On appeal, the question for the Second Circuit was whether Hoskins could be charged as either a conspirator or an accomplice to the asserted FCPA violations, despite not falling within the categories of persons subject to liability as a principal. The Second Circuit concluded that the statute’s text, combined with its legislative history and the presumption against extraterritoriality, compelled the conclusion that foreign nationals who act abroad and lack a direct connection to one of the categories of persons subject to principal FCPA liability cannot be liable as accomplices or conspirators.

Agency Liability Post-Hoskins

Hoskins creates some uncertainty regarding FCPA prosecutions of individuals or entities who could not be charged as principals. The decision creates a stronger jurisdictional defense for companies that are subject to DOJ or SEC actions solely based on their business association with a U.S. concern. Under the Second Circuit opinion, it will take more than mere conspiracy or assistance to bring such entities within the scope of liability.

It is also likely that investigators will put more emphasis on developing evidence of agency relationships between principal violators and entities otherwise unreachable under Hoskins. Indeed, the court in Hoskins held that the government could present agency evidence and pursue Hoskins as an agent of, for example, Alstom S.A.’s U.S.-based subsidiary. Prosecutors may also attempt to broaden the traditional definitions of agency under the FCPA, particularly as agency theory becomes a critical link to reach now unreachable defendants. Continue Reading

Securities Fraud Prison Sentences Highest Among Economic Crime, U.S. Sentencing Commission Reports

By John T. Dixon on February 6, 2019 Posted in DOJ, Sentences and Fines

Federal sentencing guidelines for economic crime have long been subject to criticism due to high dollar loss amounts that can produce eye-popping prison terms.

Adding to the fodder, a new report issued by the United States Sentencing Commission found that securities and investment fraud offenders received the longest average sentences under the U.S. Sentencing Guidelines—more than twice as long as the average sentence for all economic crime offenders. The report, What Does Federal Economic Crime Really Look Like?, analyzes sentences imposed under § 2B1.1 of the Guidelines, which is the section that applies to most financial fraud cases, including those involving securities, bank, mail and wire fraud, money laundering, and conspiracy.

The report is chock full of data, but one of the Commission’s big-picture findings was that the average sentences for 29 categories of economic crime vary significantly. Not surprisingly, the report ties these variations to certain guideline enhancements, including loss amounts. For example, the report notes that in 2017, the median loss amount for securities and investment fraud was $2,105,620, a loss amount that corresponds to a 16-level increase under the Guidelines. This enhancement is substantially higher than any other specific offense type analyzed in the report. Continue Reading

SEC’s Polycom FCPA Settlement Leaves Unanswered Questions

By Alexis E. Danneman and Caryn Trombino on January 22, 2019 Posted in Compliance, DOJ, FCPA, SEC

On December 26, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with communications technology firm Polycom, Inc. (“Polycom” or the “Company”) for violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with a scheme to bribe Chinese government officials. Under the settlement, Polycom agreed to pay the SEC approximately $12.5 million in disgorgement and prejudgment interest and a civil money penalty of $3.8 million. The Polycom settlement illustrates the liability that can arise from reliance on third-party agents such as distributors, but—as explored below—also presents a missed opportunity for the SEC to provide some clarifying guidance for companies looking to avoid similar outcomes. Continue Reading