The U.S. Government’s fiscal year-end filing rush has resulted in a wave of new spoofing enforcement.  In August, the Fraud Section of the Department of Justice’s (“DOJ”) Criminal Division charged four individuals with spoofing in precious metals futures markets.  In September, the Commodity Futures Trading Commission (“CFTC”) brought overlapping charges against three of those individuals, and separately charged two trading firms and their employees.  Finally, in an independent development, the United Kingdom’s Office of Gas and Electricity Markets (“Ofgem”) announced its first-ever spoofing charges against an energy trading firm in September.

The new cases show that the DOJ’s Criminal Fraud Section and the CFTC are continuing to coordinate their enforcement activities.  On the same day, September 16, 2019, the DOJ unsealed the August indictment and the CFTC announced civil charges for the same conduct.  The agencies first unveiled their heightened coordination in this area in January 2018, when they initiated parallel spoofing takedowns that have since resulted in several guilty pleas, settlements, an acquittal (Flotron), and a hung jury (Thakkar).

In their recent filings, the agencies reveal new charging strategies.  The DOJ’s unsealed indictment includes the first-ever RICO charge for spoofing.  Both agencies are also charging attempted manipulation under the Commodity Exchange Act (“CEA”) in certain cases.  While attempted manipulation previously has been applied to spoofing, the DOJ and CFTC omitted the charge in their parallel actions in January 2018.

The new strategies may be belated responses to the DOJ’s April 2018 trial defeat in Flotron, in which the jury acquitted a trader of a single count of conspiracy to commit spoofing.  A broader menu of charges allows the DOJ to introduce a wider array of evidence at trial, and gives the jury more options to convict.

Spoofing enforcement has taken a new turn overseas as well.  On September 5, Ofgem announced its finding that Engie Global Markets (“EGM”) engaged in spoofing to manipulate wholesale gas prices between June and August 2016.  Ofgem’s press release defined spoofing as “manipulating prices by placing bids or offers to trade with no intention of executing those bids or offers in order to buy or sell at a higher or lower price and increase trading profits.”

Ofgem found that EGM’s spoofing conduct violated Article 5 (prohibition on market manipulation) of Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency.  This appears to be the first time that Ofgem has issued a fine for spoofing.

As the DOJ and CFTC continue to dedicate significant resources to spoofing enforcement, and overseas regulators, such as Ofgem, increasingly enter the mix, it is safe to assume that spoofing will continue to be a key risk area for commodities and derivatives traders and the firms and institutions that employ them.

Here is a full list of the U.S. spoofing enforcement matters filed since August 2019:

DOJ

  • On September 16, 2019, the August indictment was unsealed against traders Gregg Smith, Michael Nowak, and Christopher Jordan for alleged spoofing between May 2008 and August 2016 in precious metals futures markets. The Northern District of Illinois indictment charged fourteen counts, including conspiracy to conduct a pattern of racketeering activity (RICO), attempted price manipulation under the CEA, bank fraud, wire fraud, commodities fraud, and spoofing under the CEA.
  • The unsealed indictment also alleges the existence of eight unnamed co-conspirators; they are allegedly “supervisors, salespeople, and traders” working on a precious metals desk with defendants. And it names two more co-conspirators: Christian Trunz, who pleaded guilty to spoofing in August (below), and John Edmonds, who pleaded guilty in October 2018.
  • On August 20, 2019, Christian Trunz pleaded guilty in the Eastern District of New York to conspiracy to commit spoofing and spoofing. Trunz admitted to placing thousands of spoofing orders for precious metals futures contracts between July 2007 and August 2016, and he agreed to cooperate with the government.

CFTC

  • On October 1, 2019, the CFTC announced that it filed and settled three separate spoofing actions against Belvedere Trading LLC, Morgan Stanley Capital Group Inc., and Mitsubishi International Corporation, with combined penalties of $3 million.  In the orders, the CFTC charged the respondents with spoofing in precious metals and E-mini S&P 500 futures markets through the acts of their traders.
  • On September 30, 2019, the CFTC filed and settled charges against Hard Eight Futures, LLC and its founder, Igor Chernomzav, for spoofing and use of a manipulative and deceptive device under the CEA. The administrative orders found that, between March 2014 and March 2015, Chernomzav engaged in spoofing while trading E-mini S&P 500 futures contracts.  Hard Eight was found by the CFTC to be liable for this conduct as Chernomzav’s principal.  Hard Eight and Chernomzav will pay penalties of $1.75 million and $750,000, respectively, and Chernomzav will undergo a nine-month trading ban.
  • On September 16, 2019, the CFTC filed an enforcement action in the Northern District of Illinois against Smith and Nowak, two traders charged in the DOJ’s unsealed August indictment. The action charges spoofing, use of a manipulative and deceptive device, and attempted price manipulation under the CEA.  These charges are based on the same conduct alleged in the DOJ’s indictment.
  • Also on September 16, 2019, the CFTC filed and settled charges against Christian Trunz, who pleaded guilty to criminal spoofing charges (above). The administrative order found that Trunz committed spoofing under the CEA, and it noted that Trunz entered a non-public “formal cooperation agreement” with the CFTC’s Division of Enforcement.  In a rare move, the CFTC deferred the imposition of sanctions while Trunz cooperates pursuant to that agreement.
  • And finally on September 16, 2019, the CFTC filed and settled charges against a trader, John Lawrence, and his employer, Heraeus Metals New York. The administrative orders found that Lawrence engaged in spoofing in the silver and gold futures market from May 2017 to January 2018.  Lawrence will pay a penalty of $130,000 and undergo a four-month trading ban.  Heraeus, charged under principal-agent liability, will pay a separate penalty of $900,000.