On April 25, 2018, a jury in the United States District Court for the District of Connecticut acquitted a former trader at a major global banking and financial services company (the “Trader”) of conspiracy to commit commodities fraud. United States v. Flotron, 3:17-cr-00220, Jury Verdict Form (D. Conn. April 25, 2018). The U.S. Department of Justice (“DOJ”) also alleged that the Trader committed commodities fraud under 18 U.S.C. §§ 2 and 1348, and spoofing under 7 U.S.C. § 6c(a)(5)(C), but those charges were dismissed before trial on grounds of improper venue. This trial was the first of its kind for criminal spoofing charges. A civil case against the Trader, filed by the U.S. Commodity Futures Trading Commission (“CFTC”), remains pending. See United States v. Flotron, 3:18-cv-00158, Complaint (D. Conn. Jan. 26, 2018).
As we have reported in prior newsletters, see, e.g., Shearman & Sterling LLP, DOJ and CFTC Recent Actions Highlight their Increased Focus on “Spoofing”, Need-to-Know Litigation Weekly, Feb. 6, 2018, spoofing is a practice by which a trader places bids with the intent of cancelling those bids before they are filled, thereby manipulating (i.e., inflating) prevailing market prices. According to the DOJ, the Trader traded in precious metals futures on the Commodity Exchange, Inc. (“COMEX”) and had access to automated trading software with the ability to place, modify, and cancel multiple orders simultaneously. The DOJ contended that, from July 2008 through November 2013, the Trader and certain of his coworkers conspired to place large orders to buy (or sell) precious metals futures on COMEX with the intention of cancelling those orders, while simultaneously placing smaller opposing orders in those same futures. Allegedly, the Trader and his co-conspirators’ large and fraudulent orders caused fluctuations in market prices, allowing them to reliably reap profits from their smaller orders. Both of these alleged co-conspirators testified against the Trader at trial.
The Dodd-Frank Act of 2010 makes it unlawful to place any bid or offer with the intent to cancel that bid or offer before execution. See 7 U.S.C. § 6c(a)(5)(c). Further, conspiracy to violate that section is prohibited by 18 U.S.C. § 371. At trial, the government attempted to prove that the Trader conspired to engage in spoofing through testimony by alleged co-conspirators and an analysis of certain of the Trader’s trades. The jury apparently credited the defense theory, which argued that the Government had “cherry picked” certain of the Trader’s trades, and that the Trader did not act with the requisite intent to constitute spoofing.
The jury’s verdict is notable as it highlights the difficulties prosecutors may encounter in presenting spoofing cases to a jury—a relatively recent charge that has not been time-tested at trial like other federal statutes and theories. While an acquittal certainly deals a setback to the DOJ in prosecuting spoofing cases, its impact should not be overstated. The DOJ will continue to investigate spoofing and bring criminal charges where it thinks appropriate. And this verdict is unlikely to deter regulatory agencies like the United States Securities Exchange Commission (“SEC”) and CFTC from continuing to investigate and bring enforcement cases against suspected spoofers. In the insider trading space, for example, the SEC has continued to bring enforcement cases when the DOJ has concluded that the evidence may be insufficient for a criminal case; indeed, the Trader’s parallel CFTC case is still pending.