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The DOJ recently garnered a win in its spoofing case against two precious metals traders who prosecutors alleged had engaged in widespread market manipulation and fraud through a practice known as “spoofing.” But the verdict is also in on the DOJ’s novel attempt utilize racketeering charges against traders accused of spoofing: the jury found the defendants not guilty of the alleged RICO violations. While the case highlights the DOJ’s continued crackdown on market manipulation schemes, it also illustrates the limits of the government’s reach.

Background

The DOJ’s case against the traders dates back to 2019, when prosecutors unveiled sweeping charges alleging that the traders had engaged in thousands of deceptive trading sequences for gold, silver, platinum, and palladium futures contracts between May 2008 and August 2016.  The DOJ alleged that by engaging in these practices, the traders violated the Commodity Exchange Act’s anti-spoofing provisions, which prohibit disruptive trading practices, including “bidding or offering with the intent to cancel the bid or offer before execution.” 

However, in addition to the usual spoofing and other financial crime-related offenses, the indictment charged the traders with a racketeering conspiracy.  When the indictment became public back in 2019, commentators predicted that the DOJ’s inclusion of RICO charges could make the government’s case simpler to prove.  Instead of convincing the jury through a complicated series of orders, cancellations, price movements, and trades (i.e., the typical evidence used to establish a pattern of spoofing), the path to conviction under the RICO Act was supposed to be more straightforward.  In this case, the indictment alleged that “the defendants and their co-conspirators were members of an enterprise—namely, the precious metals desk at [the bank]—and conducted the affairs of the desk through a pattern of racketeering activity, specifically, wire fraud affecting a financial institution and bank fraud.”Continue Reading DOJ Secures Spoofing Conviction, but Loses on Novel RICO Charges

On July 19, 2021, CME Group Inc. (the CME), the parent company of derivatives exchanges including the Chicago Mercantile Exchange and New York Mercantile Exchange, issued a Market Regulation Advisory Notice amending prior guidance on prohibited disruptive trading practices. The CME’s amended Advisory Notice RA2107-5 (Advisory Notice), took effect on August 2, 2021, and impacts…

The CFTC filed a record number of enforcement actions in 2019 against market participants, the majority of which involved commodities fraud, market manipulation, and spoofing.  As a result of these actions, the CFTC reports that it obtained over $1.3 billion in monetary sanctions and disgorgement in 2019—a 39% increase over the prior fiscal year.  And at this year’s ABA Derivatives & Futures Law Committee Winter Meeting, regulators from the CFTC and ICE warned market participants to expect these enforcement trends in spoofing and market manipulation to continue into 2020.

CFTC Seeks Parallel Enforcement with Market Regulators, but Coordinated Resolutions Scarce

 The CFTC’s Chief Counsel of the Division of Enforcement, Gretchen Lowe, commented that protecting market integrity continues to be a top priority at the CFTC.  She noted that Enforcement is particularly focused on spoofing and market manipulation, as well as matters involving regulatory infractions, such as registrants’ reporting obligations, failure to supervise, business conduct standards, and adequacy of remediation efforts.

Lowe also signaled that Enforcement will continue to pursue “parallel cooperative enforcement efforts” with both domestic and foreign market regulators—including SROs and criminal enforcement authorities in the spoofing context.  ICE Futures U.S. Enforcement Counsel, Frances Mendieta reinforced that the lines of communication are “very open” between ICE and the CFTC, and that the regulators may share information with each other over the course of an investigation.

However, despite such extensive interplay between the regulators, coordinated or “global” resolutions appear to be the exception, rather than the rule.  Both Lowe and Mendieta suggested that the sequential nature of the regulators’ respective investigations can make it difficult to coordinate settlements.  Consequently, while regulators seem keen to build on each other’s investigations, the resolutions often occur months, or sometimes years apart, which can leave market participants in protracted cycle of enforcement involving the exact same conduct.
Continue Reading CFTC, Market Regulators Forecast Aggressive Enforcement Trends, High Bar for Cooperation

The U.S. Commodity Futures Trading Commission’s (CFTC) Director of the Division of Swap Dealer & Intermediary Oversight (DSIO), alongside fellow panelist and National Futures Association’s (NFA) General Counsel, fielded wide-ranging questions from co-panelists and audience members alike in a discussion focused on Intermediaries & Advisors at the ABA’s Derivatives & Futures Law Committee Winter Meeting in Naples, Florida (January 23-25, 2020).  Chief among the topics addressed were views regarding DSIO and NFA’s evolving approach to swap dealer oversight, particularly on the heels of DSIO’s recently issued guidance on the Chief Compliance Officer Annual Report for futures commission merchants, swap dealers, and major swap participants.
Continue Reading DSIO and NFA Share Views on Evolving Swap Dealer Oversight

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.Continue Reading Bellwether Spoofing Case Goes to Trial in Chicago

On June 28, 2018, the U.S. Securities and Exchange Commission proposed three rule changes to the Commission’s Whistleblower Program, including one that would authorize the SEC to “downward adjust” monetary awards in large actions for which an award might “exceed an amount that is reasonably necessary to advance the program’s goals”—in the view of the Commission.  The proposed change prompted an immediate response from Commissioner Kara Stein who issued a separate Statement on Proposed Amendments to the Commission’s Whistleblower Program Rules (“Statement”) in which she highlights concerns that a move towards a more subjective standard in determining monetary awards could threaten a whistleblower’s incentive to come forward, given the added uncertainty in outcome.  Additionally, Stein questions whether the SEC has the statutory authority under the Dodd-Frank Act to alter the rules impacting awards in this way.    
Continue Reading SEC May Limit “Game Changing” Whistleblower Bounties

Perhaps no part of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has garnered as much attention as its whistleblower provisions, which pay corporate whistleblowers bounties under some circumstances, and prevent employers from retaliating against whistleblowing employees. Often times, the bounties paid to whistleblowers under Dodd-Frank warrant the most attention-grabbing headlines.  But Dodd-Frank’s…