The floor of the Chicago Mercantile Exchange (CME)/New York Mercantile Exchange (Nymex) in New York City. CME Group is the world’s largest and most diverse derivatives exchange.
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Decisions expected soon by two judges could restrict federal prosecutors’ ability to criminally charge people for the futures trading tactic known as spoofing.
Spoofing is placing an order for a commodities trade with the intent to cancel that order before it is actually executed. The goal is to affect the price of the commodity and benefit from a preexisting trading position.
Prosecutors in two separate federal cases pending in Illinois have used a long-standing wire-fraud statute to charge traders. Those traders — joined by industry groups — have asked the judges to toss out the wire-fraud charges because of claims that the statute does not apply.
Rulings in prosecutors’ favor would support their efforts to charge individuals for spoofing trades dating as far back as 10 years, the statute of limitations for wire fraud that affects a financial institution. But rulings against prosecutors could ultimately restrict their ability to bring charges in such cases only for conduct that occurred more recently.
Commodities fraud and violations of the Dodd-Frank Act — which explicitly made spoofing a criminal offense — have a statute of limitations of six years and five years, respectively.
Arguments to dismiss the charges in both cases were filed last November with separate judges. Their rulings would come as the Justice Department is conducting multiple criminal investigations into big banks with the cooperation of traders who have pleaded guilty to spoofing-related crimes. The probes are part of an ongoing crackdown by the federal government, which in the past five years has brought 10 spoofing cases against 14 defendants.
One of the two Illinois cases involves two former Deutsche Bank precious metals traders, James Vorley and Cedric Chanu, who were indicted by a grand jury in Chicago in July on charges of conspiracy and wire fraud. The indictment alleges both men manipulated precious metals futures markets from around 2009 to 2011.
Vorley and Chanu filed a joint motion to dismiss their cases in November. In that motion, they claim that the trades in question did not constitute so-called materially false statements, as is required for a charge to be filed under the wire-fraud statute.
Prosecutors dispute this. They said the case should be allowed to continue, and that they plan to present evidence at trial that the defendants knew the orders “carried an implied misrepresentation as to their intent to trade the order.”
Prosecutors also claim that the two men placed these trades “precisely because the implied misrepresentations they carried could — and did, in fact— trick other traders.”
After oral arguments before the judge handling their case in January, the Futures Industry Association, U.S. Chamber of Commerce, Bank Policy Institute and the Securities Industry and Financial Markets Association filed a brief supporting the defendants’ argument.
The industry groups said in the filing that the “application of the wire fraud statute to open orders in the futures markets may adversely affect the proper and efficient functioning of those markets.”
The same groups filed a similar brief in support of efforts by defendants in the second criminal case to dismiss wire-fraud counts against them.
In that case, former Bank of America Merrill Lynch precious metals traders Edward Bases and John Pacilio are charged not only with wire fraud in connection with alleged spoofing, but also with conspiracy to commit commodities fraud and criminal commodities fraud.
Pacilio separately also faces five other counts of spoofing.
Prosecutors say the industry groups’ filings arguing against the application of the wire-fraud statutes “are replete with factual contentions that are contrary to the allegations in the Indictment, irrelevant, and unsupported.”
Prosecutors also said in court filings that the groups’ arguments “rely on a series of claims that are demonstrably wrong.”
It is possible that a judge in one of the cases will rule differently on the question of the legitimacy of using the wire fraud statute than the judge in the other case.
Regardless of how they rule, the decisions could be appealed in the 7th U.S. Circuit Court of Appeals, which handles cases arising from Illinois federal courts.
Any decision on the issue by the 7th Circuit would be binding only in that circuit, which also includes Indiana and Wisconsin. If another federal circuit court of appeals ruled differently, the issue could end up being decided by the U.S. Supreme Court.
CORRECTION: This article has been updated to reflect that the Futures Industry Association filed a brief in support of defendants’ arguments in both Illinois cases.