Spoofing

Two former commodities traders at a major global bank were convicted on federal wire fraud charges late Friday in a high profile – but rare partial win– for the government in a spoofing case. We previously discussed the theory of “spoofing” advanced by the Department of Justice against commodities traders, as well as the difficulty the government has faced in obtaining convictions in such jury trials. To recap, spoofing is the trading practice of bidding or offering with the intent to cancel such bids or offers before the orders are executed. A trader engages in spoofing by placing a large number of bids or offers on one side of the market (i.e., a buy order) that the trader will almost immediately cancel, thus moving the market in a desired direction. Then, the trader places orders on the opposite side of the market (i.e., a sell order) that the trader will execute to take advantage of the artificially high or low price the spoofed orders created. Although DOJ had previously been able to prosecute spoofing as a type of market manipulation under the wire fraud statute, The Dodd-Frank Act specifically identified spoofing as an illegal act in 2010.

In the instant case, the two traders, James Vorley and Cedric Chanu, were charged in 2018 not under Dodd-Frank, but under the wire fraud statute and with conspiracy to commit wire fraud under a spoofing theory. Later, the government tacked on sixteen additional counts of wire fraud affecting a financial institution. On Friday, Vorley and Chanu were acquitted of the wire fraud conspiracy but were convicted of the substantive wire fraud charges.

The government’s case, and partial win, is notable for at least three reasons.

First, the “compromise verdict” returned by the federal jury (which was comprised of only 11 members during deliberations due to COVID-19 related concerns) may provide the traders with colorable grounds for appeal.

Second, the government’s theory of the case was that the traders’ conduct was fraudulent and based on an intent to deceive, not that the traders made any particular false statement or representation (apart from the placing of the orders themselves). The defense has indicated they will appeal, and likely this issue will be revisited on appeal.

Third, the jury’s rejection of the government’s conspiracy charges underscores once again the difficulty the government has had in bringing fully successful spoofing cases. On the other hand, the jury’s rejection of the conspiracy charges may simply represent a reasoned rejection of the government’s evidence that the two traders worked together to spoof the market. As noted in our prior article, referenced above, the last spoofing case the government tried resulted in a mistrial; before then, the government had only obtained one conviction after a jury trial for spoofing. Of course, the government has been able to recently obtain pleas from defendants in several other cases.

A year ago, we discussed the government’s continued aggressive approach to spoofing prosecutions even after the last mistrial, both against traders and financial institutions.   Incidentally, it may be that one of the reasons the government has faced difficulty in successfully prosecuting spoofing cases is that the defendants are typically employees (or former employees) of large, multinational banks, with access to sizeable resources to finance their defenses, allowing their attorneys to leave no stone unturned in attacking the government’s case. This is rarely the case when defendants proceed to trial, even white-collar defendants. Although it achieved a partial victory, the government should expect defendants who are former traders at large financial institutions to continue to mount well-financed, sophisticated defenses in future cases.

As we have seen, the government’s previous setbacks did not deter it from bringing additional spoofing cases. There is no reason to think that the split verdict in Vorley and Chanu’s case on Friday will lead DOJ to back away from investigating and prosecuting spoofing cases. Indeed, DOJ undoubtedly views this result as a resounding victory. We expect to see the government continue to pursue commodities traders and their employers for spoofing.