Bridging the Week by Gary DeWaal: September 16 - 20 and September 23, 2019 (Spoofing; RICO; Appeal of Gag Order Breach; Nick Leeson Redux?)

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Published Date: September 22, 2019

The Department of Justice raised the stakes in spoofing enforcement actions by including racketeering charges in an indictment filed last week alleging spoofing by three traders over many years. The Commodity Futures Trading Commission filed parallel civil enforcement actions based on the same purported underlying incidents. Separately, the CFTC appealed something related to a federal court’s decision to hold an evidentiary hearing on October 2 regarding its alleged breach of a gag order in a recent enforcement action settlement with two food giants. However, the nature of the appeal is a secret! As a result, the following matters are covered in this week’s edition of Bridging the Week:

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According to the indictment, on thousands of occasions between March 2008 and August 2016, the three individuals and others would purportedly place bids or offers on one side of a relevant metals futures market without any intent of execution. On the other side of the market, the defendants would place genuine orders; often these genuine orders were placed as iceberg orders – exposing only a limited portion of the total order to the marketplace. The objective of the non-genuine orders, claimed the indictment, was to affect market prices in a manner likely to induce execution of the defendants’ genuine orders. Two other former JP Morgan traders – John Edmonds and Christian Trunz – were previously criminally charged for their involvement in the bank’s metals trading scheme and pleaded guilty to the charges. (Click here for background regarding Mr. Edmonds plea in the article "Three Traders Plead Guilty to Spoofing Violations" in the November 11, 2018 edition of Bridging the Week. Click here for background on Mr. Trunz's plea.)

In the indictment against the defendants, the DOJ implied that Mr. Smith and Mr. Trunz – who previously were employed by Bear Stearns – brought to JP Morgan a “new style of layering multiple Deceptive Orders at different prices in rapid succession” when JP Morgan acquired Bear Stearns in 2008.

The indictment against the three defendants also claimed that, in September 2010, Mr. Jordan intentionally provided false answers to the Commodity Futures Trading Commission during questioning by an investigator, and in October 2013, Mr. Smith gave false answers to questions from a CME Group investigator. The DOJ additionally claimed that all the defendants falsely affirmed to JP Morgan in compliance attestations that they adhered to the firm's code of conduct when they did not.

Separately, the CFTC filed a parallel civil enforcement complaint in federal court against Mr. Nowak and Mr. Smith based on the same purported incidents, charging spoofing, engaging in a manipulative or deceptive device and attempted price manipulation. The CFTC resolved a distinct administrative complaint against Mr. Trunz also based on the same allegations; Mr. Trunz admitted to the alleged misconduct in his settlement and agreed to be a cooperating witness going forward.

In 2017, Mr. Smith resolved charges brought by Comex that, in July and August 2013, he often entered and cancelled gold futures orders to discover legitimate support or resistance to order prices and not to execute orders. Mr. Smith resolved this matter without admitting or denying any allegations by agreeing to pay a US $95,000 fine and consenting to a 10-business-day all CME Group access ban. (Click here to access a copy of the relevant Comex Disciplinary Notice.)

In another CFTC action alleging spoofing, Heraeus Metals New York LLC and John Lawrence settled an administrative enforcement action brought by the CFTC. According to the CFTC, from approximately May 2017 through January 2018, Mr. Lawrence, a trader at Heraeus – a US affiliate of a global precious metals fabricator and refiner – allegedly engaged in numerous spoofing transactions involving Commodity Exchange, Inc. gold and silver futures contracts. Heraeus suspended Lawrence at the end of February 2018, after it discovered his purportedly illicit activity. To resolve this matter, Mr. Lawrence agreed to pay a fine of US $130,000 and not access US-registered markets for four months. Heraeus consented to pay a fine of US $900,000. The CFTC charged that Heraeus was liable for Mr. Lawrence’s actions as he was their agent; however, in settling with Heraeus, the CFTC acknowledged remediation actions the firm has implemented since March 2018.

Separately, COMEX resolved a disciplinary action against Mr. Lawrence by accepting payment of a fine of US $70,000 and a four-month all CME Group exchanges’ access prohibition.

Legal Weeds: The criminal indictment against the three JP Morgan traders raises the bar in DOJ enforcement actions alleging spoofing by including a RICO charge. The DOJ claimed that the defendants’ ongoing conduct constituted a “pattern of racketeering activity.” In connection with a RICO indictment, the DOJ has the authority to seek a pretrial order to temporarily seize a defendant’s assets and stop the transfer of potentially forfeitable property. Sometimes solely the threat of seizure in RICO actions prompts defendants to resolve their criminal actions early.

Notwithstanding the aggressiveness of the DOJ in orchestrating the indictments against three JP Morgan's traders, it has not faired well in recent trials alleging spoofing-related offenses. Most recently, the DOJ was unable to achieve a conviction of Jitesh Thakkar, the alleged programmer for Navinder Sarao – the purported “Flash Crash” spoofer – where it charged the defendant with conspiracy to commit spoofing and aiding and abetting spoofing. (Click here for background in the article “Mistrial Declared in Prosecution of Purported Programmer for Alleged Flash Crash Spoofer” in the April 14, 2019 edition of Bridging the Week.) Previously, Andre Flotron, a former UBS trader who had been indicted for conspiracy to defraud in connection with purported spoofing‑type trading activity involving Comex-traded precious metals futures contracts, was found not guilty by a jury hearing his case in a federal court in Connecticut. (Click here for background in the article “Former UBS Trader Found Not Guilty of Conspiracy to Defraud for Alleged Spoofing” in the April 29, 2018 edition of Bridging the Week.)

In 2015, the DOJ was successful, however, in prosecuting Michael Coscia of commodities fraud and spoofing in connection with his trading activities on CME Group exchanges and ICE Futures Europe from August through October 2011. He was sentenced to three years in prison for his violation. (Click here for background on Mr. Coscia’s conviction and subsequent appeal in the article “Federal Appeals Court Upholds Conviction and Sentencing of First Person Criminally Charged for Spoofing Under Dodd-Frank Prohibition” in the August 7, 2017 edition of Between Bridges.)

Despite the appeal, the relevant federal court said on September 19 that it will proceed with the October 2 hearing as, to date, “it has made no ruling on any procedural objections or assertions of privilege by any party.” According to the court, the proceeding on October 2 “is a civil proceeding, where . . . a variety of potential measures or remedies may be considered if supported by the record, including civil contempt, referral for a potential investigation into criminal contempt or ethical violations, vacating the consent decree, and/or setting new case management dates (including a trial date).”

The evidentiary hearing now scheduled for October 2 follows a motion made by defendants claiming that the CFTC violated a gag order included in the settlement order that had been mutually agreed by both parties to resolve a CFTC enforcement action charging the two firms with manipulating or attempting to manipulate the price of the December 2011 wheat futures contract traded on the Chicago Board of Trade and cash wheat and their agreement to pay a fine of US $16 million. The defendants claimed the CFTC immediately violated the gag order when it published a press release, a formal statement, and a statement by two commissioners contemporaneously with its August 15 publication of the consent order of settlement. (Click here for details regarding this dispute in the article “Contempt and Sanctions Hearing Against the CFTC Arising From Manipulation Complaint Settlement Delayed to October 2” in the September 2, 2019 edition of Between Bridges.)

My View: It remains entirely unclear what is going on in the post-settlement dispute between Kraft/Mondelez and the CFTC. Even the nature of the hearing on October 2 wrapped in mystery. At one point, Chairman Heath Tarbert, Commissioners Dan Berkovitz and Rostin Behnam, as well as Division of Enforcement Director James McDonald, had all been commanded to appear before the presiding judge – the Hon. John Blakey – in a hearing on September 12. That hearing was postponed to October 2, but it is not clear whether the four CFTC persons are still required to appear. All that is known is that the hearing is an evidentiary hearing apparently intended solely to determine next steps.

Although it is reasonable that the parties to this litigation would want terms of the settlement to be nonpublic in accordance with their initial agreement, it is inappropriate to maintain all records of this post-settlement dispute non-public. It’s not even clear what has been appealed, let alone why or what the arguments are for or against. 

In a free society with the primacy of the First Amendment, nothing less than full transparency regarding a challenge to the conduct of an important regulator like the CFTC should suffice.

Memory Lane: A multiyear binge of many unauthorized futures trades by another Singapore-based trader – Nick Leeson – ultimately led to the collapse of Barings Bank in 1995 – at the time, the United Kingdom’s oldest merchant bank. Mr. Leeson’s losses – often hidden in an error account – when tallied up exceeded GB £825 million (US $1.4 billion). After fleeing Singapore, Mr. Leeson was extradited back, pleaded guilty to various criminal charges, including forgery and fraud, and was sentenced to six and one half years in prison in Singapore. He ultimately was released early, and now is an author and frequent lecturer on risk, conduct, compliance, corporate governance and company culture, among other topics. A movie – Rogue Trader – starring Ewan McGregor was released in 1999 based on Mr. Leeson’s experiences. (Click here to access a trailer for Rogue Trader.) Unfortunately, there have been many other incidents of rogue trading in the intervening years throughout the world since Mr. Leeson's episode.

More Briefly:

According to the SEC, from approximately January 1, 2015, through September 30, 2018, Stifel reported only 8 million transactions of 17.8 million requested, and of the transactions it did report, 1.4 million contained inaccurate data. The SEC claimed that Stifel incurred errors because it did not have “adequate processes” to verify that information it was reporting was accurate. Stifel agree to pay the SEC US $2.7 million to resolve the agency’s charges. In agreeing to this amount, the SEC acknowledged the firm’s remediation efforts, which began prior to the SEC contacting Stifel.

Similarly, the SEC alleged that BMO, from approximately January 6, 2014, through August 13, 2018, made 4,074 submissions containing data for 5.4 million transactions – all of which were deficient in one or more ways. BMO agreed to pay US $1.95 million to resolve the SEC’s allegations. The SEC also acknowledged BMO’s remedial efforts in accepting the firm’s settlement.

Late in 2018, the SEC fined three broker dealers in excess of US $6 million for their failure to submit accurate blue sheet data records as a result of undetected coding errors. (Click here for details in the article "Undetected Coding Errors Lead to More Than US $6 Million in SEC Fines for Three Broker-Dealers for Blue Sheet Reporting Violations" in the December 16, 2018 edition of Bridging the Week.) 

In other legal and regulatory developments regarding cryptoassets:

For further information

Alleged Rogue Trader’s Unauthorized Energy Bets Result in Approximately US $320 Million Loss to Trading Firm:

Broker-Dealer Agrees to Pay US $1.1 Million for Not Timely Filing Adverse Information Regarding Terminated Employees:

CFTC Adopts Final Rule for Position Limits on Security Futures and Amendments to the Volcker Rule:

Company and Founder Sued by SEC for Illegal ICO and Acting as Unregistered Broker-Dealer:

Exchange Formally Withdraws Application to Trade Bitcoin Shares:

Federal Court to Consider Vacating CFTC Enforcement Consent Settlement During October 2 Hearing; Commission Files Stealth Appeal:

Proposed Law Amendment Would Require CFTC-Regulated Trading Facilities to Have “Unconstrained Access” to Virtual Currency Spot Market Information:

Recordkeeping and Reporting Requirements for Security-Based Swap Dealers Approved by SEC:

Three Metals Traders Indicted for Racketeering and Other Offenses for Alleged Spoofing Activities; CFTC Files Parallel Civil Charges:

Speculative Position Limits and Prearranged Trading Among Violations Charged by CME Group Exchanges:

Two Broker-Dealers Sanctioned by SEC Over US $4.5 Million for Providing Inadequate Blue Sheet Data:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of September 21, 2019. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made. Views of the author may not necessarily reflect views of Katten Muchin or any of its partners or employees.


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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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