Eight individuals who allegedly engaged in various deceptive trading practices on commodities markets in the United States have been publicly charged with federal crimes. Seven of the eight individuals were charged with the crime of spoofing, an illegal trading practice that can be used to manipulate the commodities markets. Spoofing refers to the illegal practice of placing an order for a futures contract that the trader never intended to be executed in the first place. These spoofed orders are often canceled almost immediately after they are placed – frequently within seconds – and therefore are never filled. Spoofed orders alter the appearance of supply and demand, and manipulate otherwise efficient markets. The intended effect of spoofing is to entice other traders to base their investment decisions on that false perception of supply and demand. The Department and its law enforcement partners have developed the ability to identify spoofing patterns through sophisticated analysis of market-level data. Other than the individuals identified in these cases, only three other individuals have ever been publicly charged with the crime of spoofing. Of those identified, five were traders employed by global financial institutions, two were traders at large commodities trading firms, and one was the owner of a technology consulting firm.
The enforcement actions were announced by Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division, Deputy Assistant Director Chris Hacker of the FBI’s Criminal Investigative Division and Director James McDonald of the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Enforcement.
The charges announced aggressively target, among other things, the practice of spoofing, which was allegedly employed in various forms by these defendants and/or their co-conspirators to manipulate the market for futures contracts traded on the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), and the Commodity Exchange Inc. (COMEX). The defendants and their co-conspirators are alleged to have defrauded market participants and manipulated these markets by placing hundreds, and in some cases, thousands of orders that they did not intend to trade, or “spoof orders,” to create the appearance of substantial false supply and demand and to induce other market participants to trade at prices, quantities, and times that they otherwise would not have traded. According to the charging documents, the spoof orders often had the effect of artificially depressing or artificially inflating the prices of futures contracts traded on CME, CBOT, and COMEX. In order to take advantage of the artificial price levels created by their spoof orders, the defendants and/or their co-conspirators are alleged to have executed real, genuine orders to buy (at the artificially low prices) or to sell (at the artificially high prices) in order to generate trading profits or to illicitly mitigate other trading losses.
“As alleged, the defendants in these cases engaged in sophisticated schemes or trading practices aimed at defrauding individuals and entities trading on U.S. futures exchanges,” said Acting Assistant Attorney General Cronan. “Conduct like this poses significant risk of eroding confidence in U.S. markets and creates an uneven playing field for legitimate traders and investors. The Department and our law enforcement partners will use all of the tools at our disposal, including cutting-edge data analysis, to detect these types of schemes and to bring those who engage in them to justice. Protecting the integrity of our markets remains a significant priority in our fight against economic crime.”
“The FBI has taken enforcement action against multiple commodities traders who, for their own personal gain, were spoofing trades through electronic trading platforms,” said Deputy Assistant Director Chris Hacker. “Their deceptive trading artificially affected the perception of supply and demand in the market and took away a level playing field for investors. We ask for those who observe indicators of this type of fraud to come forward to law enforcement so that we can stop those who attempt to exploit our financial system.”
“Spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology,” said Director McDonald. “The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets. At the CFTC, we are committed to facilitating these market-enhancing developments. But at the same time, we recognize that these new developments also present new opportunities for bad actors. We are equally committed to identifying and punishing these bad actors. The CFTC’s enforcement program is built around the twin goals of holding wrongdoers accountable and deterring future misconduct. We believe these goals are best achieved when we hold accountable not just companies, but also the individuals involved. As these cases show, we will work hard to identify and prosecute the individual traders who engage in spoofing, but we will also seek to find and hold accountable those who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing. These cases should send a strong signal that we at the CFTC are committed to identifying individuals responsible for unlawful activity and holding them accountable.”
Northern District of Illinois
Six individuals have been charged in four cases with spoofing and/or manipulative conduct charged in the Northern District of Illinois including:
- James Vorley, 37, of the United Kingdom, and Cedric Chanu, 39, a French citizen, are charged in a criminal complaint with conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX while they were employed as precious metals traders at a leading global financial institution. Vorley was based in London, United Kingdom and Chanu was based in London, and the Republic of Singapore.
- Edward Bases, 55, of New Canaan, Connecticut, and John Pacilio, 53, of Southport, Connecticut, are charged in a criminal complaint with commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX when they were employed as precious metals traders at a leading global financial institution. Bases is also charged with spoofing offenses. Bases and Pacilio were based in New York City.
- Jitesh Thakkar, 41, of Naperville, Illinois, is charged in a criminal complaint with conspiracy and spoofing offenses alleging that Thakkar developed a software program that was used by Thakkar’s co-conspirator to engage in spoofing through the placement of thousands of orders on the CME when Thakkar was the founder and principal of Edge Financial Technologies Inc. (“Edge”), an information technology consulting firm located in Chicago, Illinois.
- Jiongsheng (“Jim”) Zhao, 30, of Australia, is charged in a criminal complaint with wire fraud, commodities fraud, making false statements to the CME, and spoofing offenses when he was a trader at a proprietary trading firm located in Sydney, Australia. According to the complaint, data analysis identified hundreds of instances of spoofing by Zhao on the CME between approximately July 2012 and March 2016. Additionally, the complaint alleges that Zhao made false written statements to the CME after being confronted with allegations of his disruptive trading practices.
District of Connecticut
- Andre Flotron, 53, a Swiss national currently residing in Wayne, New Jersey, has been charged in an indictment in the District of Connecticut with conspiracy to commit spoofing, wire fraud, and commodities fraud when he was a UBS AG precious metals trader at UBS’s trading desks in Stamford, Connecticut and Zurich, Switzerland. The indictment also alleges that Flotron trained and instructed another UBS trader in the practice of using spoof orders.
Southern District of Texas
- Krishna Mohan, 33, of New York, New York, is charged in a criminal complaint filed in the Southern District of Texas with commodities fraud and spoofing offenses when he was employed as a programmer and trader at a proprietary trading firm in Chicago, Illinois. According to the complaint, data analysis identified that Mohan engaged in a pattern of spoofing over a thousand times in a two-month period.
The enforcement actions were led and coordinated by the Criminal Division Fraud Section’s Securities and Financial Fraud Unit and the U.S. Attorney’s Office for the District of Connecticut, in conjunction with special agents from FBI Offices in New York, Chicago, Connecticut, and Houston, and with invaluable assistance from the Fraud Section’s partners at the U.S. Attorney’s Office for the Northern District of Illinois, the U.S. Attorney’s Office for the Southern District of Texas, the U.S. Postal Inspection Service and the CFTC’s Division of Enforcement. The cases are being prosecuted by Assistant Chiefs Nicholas Surmacz and Carol Sipperly and Trial Attorneys Michael O’Neill, Matthew Sullivan, Jeffrey Le Riche, Michael Rinaldi, Cory Jacobs, and Mark Cipolletti of the Fraud Section’s Securities and Financial Fraud Unit, along with Assistant U.S. Attorney Avi Perry of the U.S. Attorney’s Office for the District of Connecticut.
How Does Spoofing of the Financial Markets by Criminals Work?
Acting Assistant Attorney General John P. Cronan stated that this is largest futures market criminal enforcement action in Department history. In six cases across three federal districts, we have charged eight individuals in connection with their alleged roles in manipulating futures markets for precious metals, as well as futures markets for S&P 500, Dow Jones Industrial Average, and NASDAQ E-mini futures contracts. He continued:
The alleged conduct in these cases once again reflects a disturbing and reckless trend of individuals and companies seeking to put illicit gains and profits above honest and law abiding conduct – and by doing so, harming innocent investors and putting the very integrity of our financial markets at risk.
Spoofing refers to the illegal practice of placing an order for a futures contract that the trader never intended to be executed in the first place. These spoofed orders are often cancelled almost immediately after they are placed – frequently within seconds – and therefore are never filled.
Spoofed orders alter the appearance of supply and demand, and manipulate otherwise efficient markets. The intended effect of spoofing is to entice other traders to base their investment decisions on that false perception of supply and demand.
The alleged conduct in the cases announced today was identified and investigated through a variety of methods, including traditional law enforcement techniques, cooperation by relevant corporate actors, and, importantly, data analysis.
Let me say a word about that data analysis. The Department and its law enforcement partners have developed the ability to identify spoofing patterns through sophisticated analysis of market-level data.
Going forward, we expect to use data analysis to an even greater degree in order to identify fraudulent and manipulative conduct in our financial markets.
The Criminal Division’s message is clear. We are watching. We are closely monitoring the markets. And we will leave no stone unturned in our efforts to combat and eradicate illegal, fraudulent, and manipulative market conduct.
Our country’s markets are trusted globally, attracting investors from throughout the United States and around the world – and they must remain trusted. If investors lose trust and faith in our markets, our country suffers.
I will now briefly discuss the criminal prosecutions announced today. The first four I will mention were filed in the Northern District of Illinois.
The first case alleges that two precious metals traders – James Vorley of the United Kingdom and Cedric Chanu, a French citizen – participated in a scheme to commit spoofing, wire fraud, and commodities fraud by placing thousands of orders in connection with over one hundred instances of coordinated spoofing between approximately 2008 and 2015.
The second case charges Jitesh Thakkar with spoofing offenses involving the market for E-mini futures contracts.
An E-Mini futures contract is a stock market index contract that represents an agreement to buy or sell the future cash value of the S&P 500, NASDAQ, or Dow – depending on which E-Mini futures product is being traded.
As alleged in the criminal complaint, Thakkar is the founder and principal of Edge Financial Technologies, Inc., a Chicago-based information technology consulting firm that specialized in creating custom computer programs for sophisticated commodities traders.
Thakkar allegedly was involved in creating a software program that was used by his co-conspirator to engage in spoofing through the placement of thousands of S&P 500 E-mini futures contract orders. This automated trading program was allegedly designed to prevent certain spoof orders from actually being executed by automatically moving the spoof orders to the back of the order queue.
The third case charges Jiongshen Zhao with various spoofing and fraud offenses, along with making false statements to a registered entity, the Chicago Mercantile Exchange.
As alleged, Zhao – a trader at a proprietary trading firm located in Sydney, Australia – manipulated the S&P 500 E-Mini futures market in hundreds of individual episodes between approximately 2012 and 2016, by employing an illegal spoofing strategy.
The fourth case charges Edward Bases and John Pacilio with substantive commodities fraud offenses, and Bases with substantive spoofing offenses, involving the precious metals futures markets.
According to electronic chats cited in the criminal complaint, both defendants allegedly bragged about their ability to “manipulate” and “spoof” the market to their illicit advantage.
We also are announcing today charges that were previously filed in the District of Connecticut against an alleged precious metals futures trader for UBS AG named Andre Flotron. Flotron allegedly conspired with other UBS precious metal traders to engage in spoofing between approximately 2008 and 2013.
Lastly, Krishna Mohan, allegedly a commodities trader at a proprietary electronic trading firm with locations around the world, was charged in the Southern District of Texas with commodities fraud and spoofing offenses.
Mohan allegedly engaged in manipulating Dow and NASDAQ E-Mini futures in hundreds of episodes by employing an illegal spoofing strategy that involved placing orders on both sides of the market.
January 30, 2018 in AML, Financial Regulation | Permalink
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