On May 24, 2021, Milbank's White Collar Defense and Investigations Group announced the publication of "A Practice Guide on the Law of Spoofing in the Derivatives and Securities Markets," a whitepaper published by Wolters Kluwer Legal and Regulatory US.1 This Guide provides a detailed analysis of the statutory frameworks used to combat spoofing-a form of price manipulation-in the US and a comprehensive treatment of key US case law developments, spoofing enforcement actions and private litigation.
In the UK, spoofing and related forms of market manipulation have been a focus for the regulatory authorities for some time. Most recently, on May 28, 2021, the Financial Conduct Authority ("FCA") published a Market Watch newsletter which focuses on the FCA's efforts to identify market manipulation (including spoofing) and recent enforcement activity in this regard.2
In this article, we examine the prevailing regimes concerning spoofing in the US and UK, including the key similarities and differences between them.
Spoofing: the US regime
Although regulators in the US have long asserted that what we now call spoofing-bidding or offering with the intent to cancel the bid or offer before execution-undermines the integrity of the markets, it was not until the passage of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") that such conduct was outlawed by name in relation to the trading of commodities and derivatives.
The Department of Justice ("DOJ") has become more active in prosecuting spoofing since Dodd-Frank's anti-spoofing provision became effective in 2011, having commenced a total of 15 criminal cases against 20 individuals for derivatives spoofing since that time (actions against 16 of the 20 individuals were commenced in or after 2018). On the civil side, the Commodities Futures Trading Commission ("CFTC") has commenced a total of 61 spoofing enforcement actions since Dodd-Frank. As described in more detail below, this greater focus on spoofing has led to creative charging decisions by the DOJ and resulted in various judicial decisions that have made spoofing easier to prosecute.
The DOJ has been less active with respect to securities markets, as to which Dodd-Frank does not apply, having prosecuted only four individuals for securities spoofing since 2011. For its part, the Securities Exchange Commission ("SEC") has commenced a total of 13 civil enforcement actions for securities spoofing during that same period.
The US criminal regime
(i) Legal framework
Prior to the passage of Dodd-Frank, the DOJ had the ability to pursue criminal spoofing charges under various Title 18 statutes, including the wire fraud statute, 18 U.S.C. § 1343, and the commodities fraud statute, 18 U.S.C. § 1348.3 Despite the availability of these statutes, the DOJ never used them to prosecute spoofing activity pre-Dodd-Frank.
As part of Dodd-Frank, the Commodities Exchange Act ("CEA") was amended in several ways that expanded the DOJ's ability to combat spoofing. The DOJ can prosecute spoofing under the following provisions of the CEA:
- CEA § 4c(a)(5)(C) is the specific anti-spoofing provision. This provision prohibits "any trading, practice, or conduct on or subject to the rules of a registered entity that.is of the character of, or is commonly known to the trade as 'spoofing' (bidding or offering with the intent to cancel the bid or offer before execution)." 7 U.S.C. § 6c(a)(5).
- CEA § 6(c)(1) is a securities-style anti-manipulation provision modeled after § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). This provision makes it "unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance, in a contravention of such rules and regulations as the Commission shall promulgate." 7 U.S.C. § 9(1) (2012).
- CEA § 6(c)(3) is an updated version of one of the CEA's pre-Dodd-Frank anti-manipulation provisions. This provision makes it "unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of" a swap, commodity, or future. 7 U.S.C. § 9(3).
- CEA § 9(a)(2), which existed prior to, and was not amended by, Dodd-Frank, makes it unlawful "for [a]ny person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, or of any swap . . . ." 7 U.S.C. § 13(a)(2).
The DOJ can bring criminal cases for "knowing" violations of the above provisions of the CEA, each of which has a five-year limitation period.4 If convicted, an individual defendant faces a statutory maximum of ten years' imprisonment and a $1 million fine.5
Since the enactment of Dodd-Frank, the DOJ has invoked the specific anti-spoofing provision, as well as other provisions of the CEA, to combat spoofing. But it has not stopped there. The DOJ has also begun to use the wire and commodities fraud statutes to prosecute spoofing cases.6 Courts have affirmed-after significant challenges by defendants-that spoofing can constitute a "scheme to defraud" within the meaning of these Title 18 statutes.7 The DOJ has also recently prosecuted spoofing conduct as bank fraud under 18 U.S.C. § 1344 and RICO conspiracy under 18 U.S.C. § 1962(d).8 Challenges to the application of those statutes to spoofing conduct are currently pending.
(ii) Current practice
After Dodd-Frank, the DOJ was slow to start prosecuting individuals or organizations under the new anti-spoofing provision. From 2011 to 2017, the DOJ only charged four individuals for spoofing in relation to futures contracts. The first such charge was in 2014 against Michael Coscia, the then-owner of Partner Energy Trading LLC, a high frequency trading company.9 Mr Coscia went to trial and was convicted on all counts in 2015.10
In 2018 and 2019, the DOJ quadrupled its efforts, charging 16 individuals for criminal spoofing violations in relation to futures contracts.11 Of the 20 individuals charged since 2011, eight have pled guilty (often agreeing to cooperate with the government);12 three went to trial and were convicted;13 two went to trial and were exonerated;14 one is a fugitive;15 and six have pled not guilty and are at various stages of pretrial proceedings.16 Three of the individuals who pled guilty or were convicted have been sentenced. The two individuals who pled guilty received sentences of time-served (one for 120 days and the other for 302 days),17 while Mr. Coscia, who was convicted after trial, was sentenced to three years' imprisonment and two years of supervised release.18 None of the three sentenced individuals were assessed criminal fines, but one was required to forfeit $12.9 million in criminal proceeds.19
The DOJ has also ramped up its prosecution of organizations for spoofing violations in recent years (nearly all in relation to futures contracts). Since 2019, five organizations have entered into deferred prosecution agreements ("DPAs") or non-prosecution agreements ("NPAs") with the DOJ, with monetary sanctions ranging from $1 million to $920.2 million.20
The DOJ also prosecutes individuals and organizations for spoofing in relation to securities trading, though it has been much less active in this space relative to the futures markets. Since 2011, the DOJ has proceeded against four individuals and one organization.21 The individuals were charged with conspiracy to commit securities fraud in violation of 18 U.S.C. §§ 371 and/or 1349; securities fraud in violation of 18 U.S.C. § 1348; and/or securities fraud in violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b). Two of the four individuals pled guilty and were sentenced-one was sentenced to five years' probation and a $10,000 fine,22 and the other was sentenced to 18 months' imprisonment and one year of supervised release.23 The criminal charges against the remaining two individuals are pending. The organization entered into one of the DPAs discussed above since it committed spoofing violations in both the securities and futures markets.
The US civil/regulatory regime
(i) CFTC legal framework
The CFTC is responsible for the civil enforcement of the CEA. Before Dodd-Frank, CEA §§ 6(c) and 9(a)(2) were the primary enforcement mechanisms used by the CFTC to police spoofing. Under CEA § 6(c), the CFTC had the power to bring an administrative enforcement action against traders who, among other things, "manipulat[ed] or attempt[ed] to manipulate.the market price" of commodities or commodities futures contracts. 7 U.S.C. § 9 (2009). CEA § 9(a)(2)-a criminal provision of the statute that was civilly enforceable by the CFTC-made it unlawful to "manipulate or attempt to manipulate the price" of commodities or commodities futures contracts. 7 U.S.C. § 13(a)(2) (2009). Given the requisite elements, it was difficult for the CFTC to prove manipulation under these pre-Dodd-Frank provisions.24 In fact, the CFTC successfully litigated only one contested spoofing matter to final judgment prior to Dodd-Frank.25
Dodd-Frank amended the CEA in several ways relevant to spoofing. The following provisions are the primary mechanisms by which the CFTC currently combats spoofing by way of civil enforcement action:
- CEA § 4c(a)(5)(C) is the CEA's specific anti-spoofing
provision. 7 U.S.C. § 6c(a)(5). As noted, the DOJ can use this
provision to bring criminal actions against individuals and
organizations. The CFTC also has the power to enforce this
provision in civil enforcement actions.26 The CFTC has
provided "four non-exclusive examples of possible
situations" that may amount to spoofing in the civil
context. These include:
- "Submitting or cancelling bids or offers to overload the quotation system of a registered entity";
- "Submitting or cancelling bids or offers to delay another person's execution of trades";
- "Submitting or cancelling multiple bids or offers to create an appearance of false market depth"; and
- "Submitting or cancelling bids or offers with intent to create artificial price movements upwards or downwards."27
- Dodd-Frank also added a securities-style anti-manipulation provision, which is in addition to CEA § 6(c)'s pre-existing anti-manipulation provision (described above at page 2). See CEA § 6(c)(1), 7 U.S.C. § 9(1) (2012). Like the anti-spoofing provision, CEA § 6(c)(1) can be enforced civilly by the CFTC or criminally by the DOJ.
- CEA § 6(c)(3) incorporates the old four-part price manipulation test from cases that arose under pre-Dodd-Frank §§ 6(c) and 9(a)(2). Like the anti-spoofing provision and CEA § 6(c)(1), CEA § 6(c)(3) can be enforced civilly by the CFTC or criminally by the DOJ.
- The CEA's other anti-manipulation provision, § 9(a)(2), 7 U.S.C. § 13(a)(2), which was not modified by Dodd-Frank, can also form the basis of civil spoofing charges by the CFTC.
The CFTC can pursue civil enforcement of the above-noted statutory provisions either by way of administrative action or district court proceedings.28
(ii) CFTC current practice
Like the DOJ, the CFTC has been active in spoofing enforcement in recent years. Since 2011, the CFTC has brought 61 cases against a total of 79 defendants. Of the 61 cases, 51 were administrative proceedings and 10 were filed in federal district court. Of the 79 defendants, 36 were individuals and 43 were organizations.
Of the 79 defendants, 70 settled their cases short of trial. Charges are pending against the remaining defendants. A number of the CFTC's civil enforcement actions are stayed pending the outcome of parallel criminal cases.
Defendants found liable in an administrative action for manipulation or attempted manipulation under CEA §§ 6(c)(1) or 6(c)(3) can be barred from trading on an exchange, have their CFTC registrations suspended or revoked, and be forced to pay a penalty or restitution. The penalty for manipulation may not exceed the greater of $1 million or triple the monetary gain to the person for each violation.29 A violator also may be ordered to cease and desist all unlawful conductsup>30 Defendants found liable for manipulation or attempted manipulation in district court can be subject to an injunction, forced to pay disgorgement, restitution, and a penalty. The maximum penalty is the same as administrative proceedings.31
Defendants found liable in an administrative action under the CEA's anti-spoofing provision can also be barred from trading on an exchange, have their CFTC registrations revoked, and be forced to pay a monetary penalty or restitution. The penalty may not exceed the greater of $140,000 or triple the monetary gain to the person for each violation.32 The violator may also be ordered to cease and desist any future similar conduct.33 A person found civilly liable for spoofing in a district court proceeding can be subject to an injunction, and be forced to pay disgorgement, restitution, and/or a civil monetary penalty. The maximum penalty is the same as in administrative proceedings.34
In the CFTC enforcement actions brought against individuals since 2011, the monetary penalties have ranged from $100,000 to $38.6 million, with an average of approximately $2.4 million per individual and a median of $425,000. In CFTC enforcement actions brought against organizations, the monetary penalties have ranged from $73,600 to $920.2 million, with an average of approximately $31.0 million per organization and a median of $1.5 million.
For conduct occurring on or after July 15, 2011, the CFTC has charged nearly all defendants with spoofing in violation of CEA § 4c(a)(5)(C), 7 U.S.C. § 6c(a)(5)(C). Fewer, but still a substantial number of defendants, were charged with violating CEA §§ 6(c)(1), 6(c)(3) and 9(a)(2) (all described above).
(iii) SEC legal framework
Unlike the CEA, the securities statutes do not prohibit spoofing by name. As such, the SEC has taken aim at spoofing related to securities in civil (administrative or district court) actions under more general anti-fraud and anti-manipulation statutes. Such cases typically proceed under §§ 9(a)(2) and 10(b) of the Exchange Act35 and § 17(a) of the Securities Act of 1933 (the "Securities Act").36
- Section 10(b) of the Exchange Act prohibits "manipulative or deceptive device[s] or contrivance[s]" in violation of SEC rules such as Rule 10b-5. As the Supreme Court has noted, "manipulation" under § 10(b) is a "term of art when used in connection with securities markets."37 It "connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities."38 To the extent that spoofing artificially affects securities' pricing or deceives market participants, it may amount to a violation of Section 10(b) and Rule 10b-5. The same holds true with respect to Securities Act § 17(a) since the elements are, in large part, the same as those under § 10(b) of the Exchange Act.
- Exchange Act § 9(a)(2) makes it unlawful "[t]o effect.a series of transactions.creating actual or apparent active trading in [a security], or raising or depressing the price [of a security], for the purpose of inducing the purchase or sale of such security by others." The SEC takes the position that cancelled or unconsummated orders can be a "transaction" that "create[es] actual or apparent active trading."39
(iv) SEC current practice
Since 2011, the SEC has brought 13 spoofing cases against a total of 56 defendants for alleged spoofing in relation to securities. Forty-four defendants were individuals and 12 defendants were organizations. Three defendants were found liable after trial, 27 settled their matters prior to trial, and the proceedings against the remaining 26 are pending. Notably, with the exception of one case, all of the SEC's modern spoofing cases were settled before engaging in full-scale litigation. The only case to go to trial, SEC v. Lek Securities Corp., et al, No. 17-CV-1789 (D.N.J.), ended in a finding of liability in November 2019.
Civil monetary penalties can be imposed on a defendant found liable in an administrative proceeding for violating Exchange Act §§ 9(a)(2) and 10(b). See 15 U.S.C. §§ 78u-2(a)(2) and 78u3. For each act or omission, the maximum penalty ranges from $5,000 (or $50,000 for a company) to $100,000 (or $500,000 for a company). Where the penalty falls on the spectrum is dependent on the level of intent and impact on actual or potential victims.40 Other administrative remedies can include both temporary and permanent cease and desist orders, disgorgement, and orders barring persons from serving as an officer or director of an issuer of registered securities.41
Defendants can also be found civilly liable in federal district courts. The maximum penalties are the same as in administrative proceedings.42 Both civil and administrative actions brought by the SEC must be commenced within five years from the date when the claim first accrued.43
In the spoofing cases brought by the SEC against organizations since 2011, monetary sanctions ranged from $250,000 to $35 million, with an average of approximately $4.46 million per organization and a median of $876,842. In the cases brought against individuals, sanctions ranged from $75,000 to $17.1 million, with an average of approximately $2.14 million per individual and a median of $417,608.
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2 Available at https://www.fca.org.uk/publications/newsletters/market-watch-67.
3 Prior to the 2009 passage of the Fraud Enforcement and Recovery Act, Pub. L. No. 111-21, 123 Stat. 1617 (2009), 18 U.S.C. § 1348 prohibited only securities fraud. It now prohibits both securities fraud and commodities fraud. See 18 U.S.C. § 1348 (2012).
4 7 U.S.C. § 13(a)(2); 18 U.S.C. § 3282.
5 7 U.S.C. § 13(a)(2).
6 See, e.g., United States v. Bases, No. 18-Cr-00048 (N.D. Ill.); United States v. Vorley, No. 18-Cr-00035 (N.D. Ill.); United States v. Coscia, No. 14-Cr-00551 (N.D. Ill.).
7 See United States v. Coscia, 866 F.3d 782 (7th Cir. 2017); Order, United States v. Vorley, No. 18-cr-00035 (N.D. Ill. Jul. 21, 2020), ECF No. 254.
8 See United States v. Smith, 19-Cr-00669 (N.D. Ill.).
9 Coscia, No. 14-Cr-00551 (N.D. Ill. Oct. 1, 2014) (indictment filed). See also the FCA Final Notice dated 3 July 2013 in relation to Mr Coscia (available at https://www.fca.org.uk/publication/final-notices/coscia.pdf) (as summarised in the Appendix).
10 Id.; Greg Trotter, Trader Michael Coscia 1st in nation to be sentenced under 'anti-spoofing' law, CHICAGO TRIBUNE (July 13, 2016), https://www.chicagotribune.com/business/ct-spoofing-trial-sentencing-0714-biz-20160713-story.html.
11 In addition to Mr Coscia, see United States v. Smith, No. 19-Cr-669 (N.D. Ill. Aug. 22, 2019) (indictment filed; superseding indictment filed on Nov. 14, 2019); United States v. Trunz, No. 19-Cr-00375 (E.D.N.Y. Aug. 20, 2019) (information filed); United States v. Flaum, No. 19-Cr-338 (E.D.N.Y. July 25, 2019) (information filed); United States v. Edmonds, No. 18-Cr-239 (D. Conn. Oct. 9, 2018) (information filed); United States v. Gandhi, No. 18-Cr-609 (S.D. Tex. Oct. 11, 2018) (information filed); United States v. Mohan, No. 418-Cr-00610 (S.D. Tex. Oct. 11, 2018) (information filed); United States v. Mao, No. 18-Cr-00606 (S.D. Tex. Oct. 10, 2018) (indictment filed); United States v. Thakkar, No. 18-Cr-00036 (N.D. Ill. Feb. 14, 2018) (indictment filed); United States v. Vorley, No. 18-Cr-00035 (N.D. Ill. Jan. 19, 2018) (complaint filed; indictment filed July 24, 2018); United States v. Bases, No. 18-Cr-00048, (N.D. Ill. Jan. 25, 2018) (complaint filed; indicted on July 18, 2018); United States v. Flotron, No. 17-Cr-00220 (D. Conn. Sept. 26, 2017) (indictment filed; superseding indictment filed on Jan. 30, 2018); United States v. Zhao, No. 28-Cr-00024 (N.D. Ill. Jan. 11, 2018 (complaint filed; information filed on Dec. 18, 2018); United States v. Liew, No. 17-Cr-00001 (N.D. Ill. Jan. 3, 2017) (criminal complaint filed; information filed on May 24, 2017); United States v. Sarao, No. 15-Cr-00075 (N.D. Ill. Feb. 11, 2015) (criminal complaint filed; informed filed on Sept. 2, 2015).
12 Defendants Flaum, Trunz, Gandhi, Mohan, Edmonds, Sarao, Zhao, and Liew pled guilty. Flaum, No. 19-Cr-338 (E.D.N.Y. Julu 25, 2019); Trunz, No. 19-Cr-00375 (E.D.N.Y. Aug. 20, 2019); Gandhi, No. 18-Cr-609 (S.D. Tex. Nov. 2, 2018); Mohan, No. 418-Cr-00610 (S.D. Tex. Nov. 6, 2018); Edmonds, No. 18-Cr-239 (D. Conn. Oct. 9, 2018); Sarao, No. 15-Cr-00075 (N.D. Ill. Nov. 9, 2016); Zhao, No. 28-Cr-00024 (N.D. Ill. Dec. 26, 2018); Liew, No. 17-Cr-00001 (N.D. Ill. June 1, 2017).
13 Mr Coscia was convicted in 2015. See Coscia, No. 14-Cr-00551 (N.D. Ill.). In September 2020, Messrs Vorley and Chanu were convicted (though not on all counts) of wire fraud in connection with spoofing in relation to precious metals futures. See United States v. Vorley, No. 18-Cr-00035 (N.D. Ill.).
14 Andre Flotron was acquitted by a Connecticut jury in May 2018. See United States v. Flotron, No. 17-Cr-00220 (D. Conn.). Jitesh Thakkar was fully exonerated as a result of the district court's judgment of acquittal on one count and the government's decision to dismiss the remaining charges with prejudice after a hung jury. United States v. Thakkar, No. 18-Cr-00036 (N.D. Ill.).
15 The only docket entries in United States v. Mao, No. 18-Cr-00606 (S.D. Tex.), indicate that Mr Mao, a Chinese national, was indicted on Oct. 10, 2018, at which time a bench warrant for his arrest was issued.
16 Defendants Smith, Nowak, Ruffo, Jordan, Bases, and Pacilio pled not guilty and are litigating their cases. See United States v. Smith, No. 19-Cr-669 (N.D. Ill.); United States v. Bases, No. 18-Cr-00048 (N.D. Ill.)
17 See United States v. Sarao, No. 15-Cr-00075 (N.D. Ill. Sept. 2, 2015); United States v. Zhao, No. 18-Cr-00024 (N.D. Ill. Dec. 18, 2018).
18 See Judgment in a Criminal Case, United States v. Coscia, No. 14-Cr-00551 (N.D. Ill. July 14, 2016), ECF No. 159.
19 See Judgment in a Criminal Case, United States v. Sarao, No. 15-Cr-00075 (N.D. Ill. Jan. 29, 2020), ECF No. 119.
20 The DOJ entered into DPAs with JPMorgan Chase & Co., Bank of Nova Scotia, Propex Derivatives Pty Ltd, and Tower Research Capital LLC, and a NPA with Merrill Lynch Commodities, Inc.
21 See United States v. Wang, No. 19-Cr-6485 (D. Mass. Oct. 14, 2019) (complaint filed); United States v. Taub, No. 16-Cr-8190 (D.N.J. Feb. 21, 2018) (indictment filed); United States v. Milrud, No. 15-Cr-455 (D.N.J. Sept. 1, 2015) (information filed).
22 See Judgment in a Criminal Case, United States v. Milrud, No. 15-Cr-00455 (D.N.J. Apr. 24, 2020), ECF No. 45.
23 See Judgment in a Criminal Case, United States v. Taub, No. 18-Cr-00079 (D.N.J. Dec. 22, 2020), ECF No. 61.
24 To prove manipulation under the CEA prior to Dodd-Frank, the government was required to establish that (1) the accused had the ability to influence market prices; (2) he or she specifically intended to do so; (3) artificial prices existed; and (4) the accused caused the artificial prices. See, e.g., In re Amaranth Natural Gas Commodities Litig., 730 F.3d 170, 173 (2d Cir. 2013).
25 In the Matter of Anthony J. DiPlacido, CFTC No. 01-23, 2008 WL 4821204 (Nov. 5, 2008).
26 The CFTC can bring either an administrative proceeding or district court action for alleged violations of the specific anti-spoofing provision pursuant to CEA § 6c (district court actions) and CEA §§ 6(c), 6(d), 8a (administrative proceedings). The statute of limitations for both district court and administrative enforcement actions is five years. See 28 U.S.C. § 2462.
27 See CFTC, Antidisruptive Practices Authority, 78 Fed. Reg. at 31892 (May 28, 2013).
28 Both the CFTC and SEC have the authority to decide whether to bring an action in federal district court or before an administrative law judge. Administrative cases are typically faster and less expensive for agencies to litigate as compared to cases in district court.
29 See 7 U.S.C. § 9(10)(C)(ii).
30 See CEA §§ 6(c)(4), 6(c)(10), 6(d), 7 U.S.C. §§ 9(4), 9(10), 13b.
31 See 7 U.S.C. § 13a-1(d)(1)(B).
32 7 U.S.C. § 9(10)(C)(i).
33 See CEA §§ 6(c)(4), 6(c)(10), 6(d), 7 U.S.C. §§ 9(4), 9(10), 13b.
34 See CEA § 6c, 7 U.S.C. § 13a-1.
35 15 U.S.C. §§ 78i(a)(2) and 78j.
36 15 U.S.C. § 77q(a).
37 Santa Fe Indus. v. Green, 430 U.S. 462, 476 (1977) (citation omitted).
38 Ernst & Ernst v. Hochfelder 425 U.S. 185, 199 (1976).
39 See In re Biremis Corp., EA Release No. 68456, at *10-11 (Dec. 18, 2012).
40 See 15 U.S.C. §78u-2(b).
41 See 15 U.S.C. § 78u3.
42 See 15 U.S.C. § 78u(d)(3).
43 See 15 U.S.C. § 2462.
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