On February 28, 2019, the United States District Court in the Northern District of California entered a judgment of acquittal as to all counts alleging that Robert Bogucki, a foreign currency exchange (FX) broker at a large international bank, engaged in wire fraud and conspiracy to commit wire fraud related to $8 billion in FX options. The Court held that the United States Department of Justice (DOJ or the Government) failed to demonstrate that Bogucki owed a fiduciary duty of trust to his counterparty and distinguished Bogucki’ actions from “front-running,” an illegal practice in which a broker uses knowledge gleaned from his client to manipulate market prices in his favor before executing the client’s order.1 Bogucki’s acquittal suggests that the Government will have to be more careful in distinguishing legitimate, arms-length FX transactions fromprohibited behavior. The Bogucki decision further establishes the boundaries between legal and illegal trading practices in the context of FX front-running, pre-positioning, and pre-hedging, especially in light of the recent Johnson2 decision and the Commodity Exchange Act of 1936 (CEA).3

(1) Summary

In United States v. Bogucki4, a criminal proceeding in the United States District Court of the Northern District of California, Judge Charles R. Breyer acquitted defendant Robert Bogucki on February 28, 2019, on all counts related to wire fraud affecting a financial institution5 and conspiracy to commit wire fraud affecting a financial institution.6 The Court’s acquittal of Bogucki calls into question whether and under what circumstances federal wire fraud statutes7 can be used to prosecute “front-running,” a trading strategy that is also prohibited under the CEA8 and the Commodity Futures Trading Commission’s (CFTC) regulations9 if a broker engages in fraud and manipulation.10

(2) The DOJ Declination Letter

Prior to the Court’s ruling in Bogucki, on February 28, 2018, the Government issued a letter declining to prosecute Bogucki’s employer, an international investment bank and financial services provider (the Bank), for its role in the alleged front-running scheme FX transactions with its counterparty.11 The Declination Letter required the Bank to disgorge $12,896,011 to the U.S. Treasury for allegations involving fraud and market manipulation.12 The Bank also agreed to pay restitution to its counterparty.

Importantly, the DOJ also noted the Bank’s self-disclosure, internal investigation, cooperation, continued compliance, remediation, and further cooperation as key factors in declining to further prosecute the Bank. The DOJ, however, directed the Bank to implement enhanced compliance policies and procedures to safeguard client confidential business information, maintain documentation related to such confidential information, and “address appropriate conduct in responding to potential conflicts of interest with clients that place orders for execution by [the Bank].”13

(3) The Bogucki criminal matter

Separate from its agreement with the Bank, the DOJ brought a criminal action against Bogucki.14 The DOJ alleged that Bogucki and an unnamed co-conspirator operated a scheme to defraud the Bank’s counterparty of money and property from August through October 2011. According to the Bogucki Indictment, in August 2011, the Bank’s counterparty sought the Bank’s assistance in acquiring a business headquartered in the United Kingdom. To complete the purchase, the counterparty needed to have access to a considerable sum of British pounds. Accordingly, the counterparty consulted with the Bank to purchase FX options that would allow the counterparty to procure sufficient pounds to execute its planned transaction in the UK.15

The Bank’s counterparty ultimately did not need the FX options to complete its acquisition. The Bogucki Indictment states that in September 2011 the counterparty decided to “unwind” the FX options by selling them back in the FX market in several tranches. Armed with the confidential information that the Bank’s counterparty planned to sell its FX options, Bogucki engaged in trading activity to reduce the value of the counterparty’s FX options in advance of the counterparty’s sale. Bogucki assured the Bank’s counterparty that he and the Bank would help the counterparty maximize the value the counterparty’s FX options. However, as alleged in the Bogucki Indictment, from September 27–30, 2011, Bogucki engineered an extensive effort to sell the Bank’s FX options to depress the value of the counterparty’s positions and create a short position for the Bank. As the counterparty unwound its FX options in an increasingly inhospitable market, Bogucki claimed that he continued to act in the counterparty’s interest to improve the value of the counterparty’s positions. The Government alleged that “[t]he scheme led [the counterparty] to lose millions of dollars in the value of the cable options it had originally purchased and enabled [the Bank] to make millions of dollars by acquiring the options from [the counterparty] at a discounted and favorable price.”16

The Government argued that Bogucki defrauded the Bank’s counterparty by abusing access to confidential client information and by making materially false statements to the counterparty’s traders in order to advance the Bank’s interests. The Government presented two alternative theories of guilt through wire fraud: (1) misappropriation of confidential information in violation of trust and confidence, or (2) depriving the Bank’s counterparty of its property through material misrepresentations and halftruths. The Court rejected both of these theories, leading to Bogucki’s acquittal.

(a) Misappropriation of confidential information

Despite finding that Bogucki repeatedly misled the Bank’s counterparty, the Court ultimately concluded that the Government failed to adduce sufficient evidence to substantiate the wire fraud claims against Bogucki.17The Government argued that Bogucki frequently deceived the Bank’s counterparty about the Bank’s positions vis-à-vis the counterparty’s FX transactions. According to the Government, Bogucki’s false statements met the materiality threshold because they influenced or were capable of influencing the Bank’s counterparty to part with its money or property.

The Court, however, viewed Bogucki’s statements in a different light. While Bogucki exaggerated, omitted, and misstated information concerning the Bank’s interest in FX transactions involving the counterparty, there was no evidence that Bogucki’s representations affected the counterparty’s FX trading behavior. In fact, a trader for the counterparty testified that he knew that Bogucki was simply posturing during their exchanges. Moreover, the counterparty’s trader admitted that he too “BS-ed” and bluffed about FX prices and positions when he transacted with Bogucki. The evidence showed that neither party was entirely forthright, nor did they expect full transparency in their negotiations.

On the contrary, the Bank’s counterparty was a sophisticated market participant that viewed Bogucki as a self-interested, arms-length counterparty.18 The counterparty understood that banks jockey to change their positions shortly before executing FX transactions, a legitimate practice colloquially referred to as “hedging” or “pre-positioning.” The record evidence suggested that the counterparty had no reason to believe that Bogucki was not hedging or pre-positioning. Ultimately, the Government could not demonstrate that Bogucki’s statements induced the counterparty to enter into FX transactions if the counterparty’s traders suspected all along that Bogucki was not being entirely honest with them. In the Court’s view, Bogucki’s communications were not material.

(b) Material misrepresentations and duty to disclose

Alternatively, the Government claimed that Bogucki and the Bank owed the Bank’s counterparty a fiduciary duty of trust and confidence, a duty that Bogucki allegedly breached.19 But that theory also was belied by the evidence.20 The Bank and its counterparty entered into FX transactions pursuant to the industry standard International Swaps and Derivatives Association (ISDA) Master Agreement, which clearly established that the Bank and the counterparty did not have a fiduciary relationship and in fact acted on an arms’-length basis and stated that the parties “entered into ‘each transaction as principal and not as agent or in another capacity, fiduciary or otherwise).'”21 Thus the ISDA Master Agreement expressly stated that the Bank and its counterparty were independent principals and therefore there was no fiduciary duty owed.

The Court was not persuaded that the Bank owed its counterparty a duty of trust based on the fact that the Bank was privy to confidential information pertaining to the counterparty. Although the counterparty shared sensitive information with the Bank, the counterparty neither asked the Bank to execute a non-disclosure or confidentiality agreement, nor did it attempt to limit the Bank’s trading activity. This was consistent with the notion that the counterparty and the Bank operated as independent counterparties engaging in FX transactions for their own benefit. The Court specifically distinguished these facts from the Johnson case where the duty of confidentiality was found between the trader and the counterparty.22

The Court ultimately held that the Government could not satisfy the materiality element of wire fraud because the evidence indicated that Bogucki’s statements did not and were not capable of inducing the Bank’s counterparty to engage in FX transactions. The counterparty suspected that Bogucki postured, bluffed, and exaggerated to benefit his employer. The counterparty also understood that Bogucki and the Bank were not bound by a fiduciary duty. There was simply no support for the Government’s contention that Bogucki’s representations, false or not, rose to the level of materiality needed to convince the counterparty to part with its money or property in pursuit of an FX scheme. Absent the materiality element, the Court was forced to acquit Bogucki on all wire fraud charges.

(4) Takeaways from Bogucki

The Bogucki decision illustrates that the Government must be careful to distinguish permissible hedging and pre-positioning from illegal front-running. Under the Johnson or EOX Holdings precedent, if a broker tried to deceive their counterparty or used confidential information, those facts were often enough to bring a front-running or insider trading case against that broker.23 The Bogucki case, however, suggests that a more exacting analysis is required to determine the materiality of the broker’s representations or the scope of duty owed by a broker to its counterparty under ISDA-documented transactions. The holding in Bogucki indicates that, in the absence of other documentation, an ISDA-documented transaction itself does not establish a fiduciary relationship between the counterparties.

Additionally, it is notable that the CFTC did not bring its own enforcement case against Bogucki or his employer. This may reflect the simple fact that the DOJ had already exacted a large penalty from the Bank, or it may indicate an evolution in the CFTC’s approach to front-running and insider trading and that it is simply easier to bring a case under the wire fraud authorities than under the CEA and the CFTC regulations. The CFTC has been sharply criticized by the industry for bringing insider trading cases into the realm of commodities trading, arguably ignoring the reality and ubiquity of legal pre-hedges. It remains to be seen whether the CFTC will take a consistent approach to analyzing these cases in the future in the context of its enforcement authority.