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.

Continue Reading Spoofing Enforcement Heats Up with Recent Filing Wave and New Legal Charges

On November 17, 2016, a federal court entered a consent order that will settle the civil case the Commodity Futures Trading Commission (“CFTC”) brought against Navinder Singh Sarao and his company, Nav Sarao Futures Limited PLC, for engaging in a “spoofing” scheme and manipulating the price of the Chicago Mercantile Exchange’s E-mini S&P 500 futures near month contract (“E-mini S&P”).  On November 9, 2016, in a related criminal action, Sarao pled guilty to charges brought by the Department of Justice arising from the same conduct.  Sarao’s conduct, infamously, contributed to the “flash crash” of May 6, 2010, in which various stock market indexes plunged and then rebounded suddenly.

In the consent order and plea agreement, Sarao admits to a massive multi-year spoofing scheme involving the E-mini S&P. Spoofing is defined by the Commodity Exchange Act (“CEA”) as “bidding or offering with the intent to cancel the bid or offer before execution.”  Spoofers can profit by entering buy or sell orders that they intend to cancel, thereby creating the false appearance of market depth in a contract and artificially moving the price of that contract, and then entering into genuine trades that take advantage of the artificial price movement.  Spoofing is explicitly prohibited by the CEA, and spoofing will also typically violate the CFTC’s rules prohibiting market manipulation.

Continue Reading “Flash Crash” Derivatives Trader Settles Spoofing Case