Jitesh Thakkar, who was criminally charged in early-2018 with conspiracy to commit spoofing and aiding and abetting spoofing in connection with his alleged development of a computer program – “NavTrader” – used by Navinder Sarao in connection with Mr. Sarao’s spoofing activities will stand trial this week in a federal district court in Chicago.

The trial will occur after Mr. Thakkar prevailed last week in a motion to preclude the government from suggesting to the jury that they could convict Mr. Thakkar if they found he had a strong suspicion that NavTrader would be used for spoofing, but he purposely avoided confirming that fact. Instead, the government will have to show Mr. Thakkar possessed knowledge of Mr. Sarao’s illicit purpose beyond a reasonable doubt. (The instruction proposed by the government is known as an “ostrich instruction.”)

According to court papers filed on behalf of Mr. Thakkar, the government first proposed the court’s use of an ostrich instruction on March 22, 2019 – six days before jury selection was to commence in connection with the defendant’s trial. Mr. Thakkar’s court papers alleged this was because of “the government’s realization that they don’t have sufficient evidence to prove Jitesh’s knowledge beyond a reasonable doubt.”

Initially, both the government and Mr. Thakkar were required to file proposed jury instructions with the court by December 7, 2018; the jury instructions proposed by the government at the time did not contain the ostrich instruction. Last week, the court rejected the government’s proposal for an ostrich instruction without a written decision.

Mr. Sarao pleaded guilty in November 2018 to criminal charges brought against him by the Department of Justice for engaging in manipulative conduct through spoofing-type activity involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange between April 2010 and April 2015, including illicit trading that allegedly contributed to the May 6, 2010, “Flash Crash.” On the same day, the Commodity Futures Trading Commission announced that Mr. Sarao settled civil charges it had brought against him and Nav Sarao Futures Limited PLC, a company he controlled, related to the same essential conduct. (Click here for background regarding Mr. Sarao’s settlements and initial charges against him in the article “Alleged Flash Crash Spoofer Pleads Guilty to Criminal Charges and Agrees to Resolve CFTC Civil Complaint by Paying Over $38.6 Million in Penalties” in the November 13, 2016 edition of Bridging the Week.)

Mr. Thakkar, along with Edge Financial Technologies, Inc. – a company Mr. Thakkar founded and for which he served as president – was also civilly charged by the CFTC with spoofing and engaging in a manipulative and deceptive scheme for designing software that was used by Mr. Sarao to engage in spoofing activities. This case was stayed in December 2018 pending resolution of Mr. Thakkar’s criminal case. (Click here for more details regarding the criminal and civil complaints involving Mr. Thakkar in the article “CFTC Names Four Banking Organization Companies, a Trading Software Design Company and Six Individuals in Spoofing-Related Cases; the Same Six Individuals Criminally Charged Plus Two More” in the February 4, 2018 edition of Bridging the Week.)

Mr. Thakkar made a motion to dismiss the criminal complaint against him in May 2018. This motion was denied in August 2018 in a summary order. (Click here for additional information regarding Mr. Thakkar’s motion to dismiss in the article “Programmer Moves to Dismiss Criminal Charges for Allegedly Aiding and Abetting Trader’s Spoofing Violations” in the June 3, 2018 edition of Bridging the Week.)

In other legal developments involving allegations of spoofing:

  • Department of Justice Rejects Amicus Claims That Spoofing Can’t Be Prosecuted Alleging Wire Fraud: The Department of Justice urged a court to reject arguments that wire fraud charges were inappropriate substitutes for allegations of express spoofing law violations. These positions had been taken in two friends of the court briefs filed in connection with the criminal case against James Vorley and Cedric Chanu related to the defendants’ purported spoofing. The two amicus briefs – one filed by FIA and the other collectively by the US Chamber of Commerce, the Bank Policy Institute and the Securities Industry and Financial Markets Association – argued that charges against the defendants for wire fraud (and not spoofing) prompted concern by the business community because they implied that orders entered without an intent of execution for any reason constituted fraudulent statements to the marketplace. However, the DoJ said the amicus’ arguments were “meritless,” because whether the fraudulent orders were materially false or fraudulent is “a question properly reserved for resolution by a jury after the presentation of evidence.” Moreover, noted the DoJ, the amicus’ position is inconsistent with a prior federal appeals court decision that rejected a convicted spoofer’s view that “because his orders were fully executable and subject to legitimate market risk, they were not, as a matter of law, fraudulent.”

Mr. Vorley and Mr. Chanu were named in criminal complaints filed in a US federal court in Chicago related to alleged spoofing trading activities on the Commodity Exchange, Inc. from at least December 2009 through November 2011. (Click here for details regarding the charges against Mr. Vorley and Mr. Chanu in the article “Alleged Spoofer Exonerated in Criminal Trial Agrees in Principle to CFTC Settlement; Two More Purported Spoofers Criminally Charged” in the August 5, 2018 edition of Bridging the Week. Click here for background regarding the two amicus briefs filed on behalf of the defendants in the article “Government Argues New Trial for Convicted Spoofer Not Justified by Data Available Before Trial End” in the February 24, 2019 edition of Bridging the Week.)

  • Broker-Dealer Loses Effort to Dismiss Cross-Market Spoofing Charge: A federal court in New York rejected a motion for summary judgment by Lek Securities Corp. and Samuel Lek in connection with a Securities and Exchange Commission enforcement action against them for purportedly facilitating manipulative trading activity by a customer, Avalon FA Ltd, a non-US entity, and its two control persons. At the time of the lawsuit, Mr. Lek was the chief executive officer and a 70 percent owner of Lek Securities.

According to the SEC’s complaint filed in March 2017, Avalon engaged in two types of manipulative conduct: layering and cross-market manipulation involving equities and related options from December 2010 through at least September 2016.

The Lek defendants principally argued that the record failed to provide sufficient evidence supporting a violation by the Avalon defendants, and that, in any case, there was not sufficient evidence to show they aided and abetted Avalon’s alleged violations. The court rejected these positions, ruling they were “material factual disputes that are inappropriate for resolution on summary judgment.” (Click here for background regarding the SEC’s enforcement action against the Lek defendants in the article “US Broker-Dealer, Its CEO and a Non-US Client Sued by SEC for Layering and Other Manipulative Schemes” in the March 12, 2017 edition of Bridging the Week.)

  • Japanese Regulator Recommends Sanctioning Global Investment Bank for Spoofing: The Securities and Exchange Surveillance Commission of Japan recommended that Citigroup Global Markets Limited be fined Japanese ¥133.4 million (approximately US $1.2 million) for purportedly engaging in spoofing-type trading activities involving December 2018 Government Bond Futures on the Osaka Exchange during two time periods in October 2018. According to SESC, the firm allegedly entered orders for a large quantity of the relevant futures contracts on one side of the market without the intent to achieve execution to induce other market participants to place same direction orders. This would help the firm execute its smaller quantity of resting orders on the other side of the market, said SESC. The SESC claimed that once the firm’s small quantity orders were executed, it cancelled its larger orders. SESC’s recommendation was to the Financial Services Agency.

My View: The Thakkar case is important because it represents an attempted extension of both the DOJ’s and CFTC’s reach in spoofing cases to the alleged provider of programming used by the primary person accused of spoofing. In this case, Mr. Thakkar claims that not only was he not the person who developed the NavTrader program used by Mr. Sarao, but he never was aware of the purpose for which Mr. Sarao proposed to use NavTrader. Instead, he claims he took Mr. Sarao’s order to develop NavTrader and passed it along to three programmers – none of whom have been sued by the DoJ or the CFTC. Moreover, Mr. Thakkar said that Mr. Sarao never explained his strategy, which Mr. Thakkar did not consider atypical, because it was part of Mr. Sarao’s “secret sauce” for trading.

The court’s rejection of the ostrich instruction proposed by DoJ indicates that the government will have to show that Mr. Thakkar had actual knowledge of Mr. Sarao’s illicit purpose for using NavTrader. A suspicion or a conjecture of potential wrongful use by Mr. Sarao will not be enough. This outcome should provide some interim comfort to programmers whose software may later be used by a trader without their knowledge for illicit purposes. However, it will be important to see how the facts play out in this case and the ultimate outcome before coming to any final conclusions. A principle of absolute liability should not be applied against programmers if their algorithmic creations are intended to be used by traders and are, in fact, actually used for illegal purposes without their knowledge.