Recently there has been an uptick of traders being accused of spoofing. Today, two former Merrill Lynch traders were convicted of criminal spoofing charges in a Chicago federal court.
Spoofing involves rapidly sending many deceptive orders that can mislead traders into thinking supply and demand have changed. This mirage of phantom trades can move prices in a direction desired by the spoofer, while causing their counterparties to lose money.
While many say the practice is nothing more than bluffing, Congress specifically outlawed the practice with the passage of Dodd – Frank. Prosecutors say that spoofing was always illegal and that Dodd Frank merely clarified existing law.
In the Merrill Lynch case discussed below, prosecutors criminally charged two traders with wire fraud and conspiracy. They say the two men sought to manipulate prices of precious metals.
Securities violations can usually be prosecuted as criminal cases, civil cases or both. When the SEC prosecutes the case, there is usually the opportunity for whistleblowers to receive a large cash reward from the SEC’s whistleblower program. That law provides cash incentives for folks with inside information about fraud to come forward and report the conduct.
Merrill Lynch Traders Convicted of Spoofing
Former traders Edward Bases and John Pacilio were found guilty of conspiracy to commit wire fraud. Prosecutors say the two traders conspired to place large but fake buy and sell orders on the Chicago Mercantile Exchange to mislead other precious metals traders.
At trial, prosecutors showed that the two men placed a genuine, partially hidden order on one side of the market that they "watched like a hawk" so they could execute the order at the price they wanted. They then launched spoof orders on the other side of the market to give the market” a false sense of supply and demand.
In the words of prosecutor Scott Armstrong, “the spoof order was just smoke and mirrors. A trick. A lie. A scam. Spoof orders pretending to be real supply and demand in the market.”
The Wall Street Journal claims that to date, 20 traders have been charged with spoofing. Those numbers only include criminal charges. The SEC and CFTC have also been aggressively prosecuting spoofing cases.
Last year the CFTC ordered JP Morgan Chase to pay a record $920 million fine in a civil spoofing case. The agency had accused the firm of manipulative and deceptive conduct and spoofing that spanned at least eight years and involved hundreds of thousands of spoof orders in precious metals and U.S. Treasury futures contracts on the Commodity Exchange, Inc., the New York Mercantile Exchange, and the Chicago Board of Trade.
In announcing the JP Morgan settlement, the CFTC said,
“Spoofing is illegal—pure and simple,” said CFTC Chairman Heath P. Tarbert. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are. Attempts to manipulate our markets won’t be tolerated. The CFTC will take all steps necessary to investigate and prosecute illegal activities that could ultimately undermine the integrity of the American free enterprise system.
“This action sends the important message that if you engage in manipulative and deceptive trade practices you will be caught, punished, and forced to give up your ill-gotten gains,” added Division of Enforcement Director James McDonald. “The CFTC is committed to working with our law enforcement and regulatory partners to eradicate this unlawful activity and to hold those responsible fully accountable.”
CFTC Whistleblower Rewards
For each trader or individual convicted of criminal spoofing, there is usually a corresponding CFTC or SEC enforcement action. Both agencies have robust whistleblower programs. Benefits available under both programs include:
- Monetary awards to eligible whistleblowers who voluntarily provide the CFTC or SEC with original information about violations of the Commodity Exchange Act (CEA)or federal securities laws that lead either agency to bring a successful enforcement action resulting in monetary sanctions exceeding $1,000,000.
- The total amount of an award for an eligible enforcement action is between 10% and 30% of the amount of monetary sanctions collected in the CFTC or SEC's enforcement action. If multiple whistleblowers are granted awards in an action, the total award amount is still limited to between 10% and 30% of the amount of the monetary sanctions collected.
- Whistleblowers have certain protections regarding confidentiality of their identity.
- Employers may not take any action to impede would-be whistleblowers from communicating directly with regulators about possible violations. This includes a prohibition on confidentiality agreement or predispute arbitration agreement with respect to such communications with the SEC or CFTC. Nor may employers retaliate against whistleblowers for reporting violations. Retaliation includes termination, demotion, suspension, threats, harassment, direct or indirect, or any other discrimination against a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower.
- A whistleblower who has been retaliated against has the right to sue an employer in federal court. In addition, both agencies also have the power to enforce the anti-retaliation provisions by bringing an enforcement action or proceeding against an offending employer.
Whistleblowers have become the eyes and ears of the government. This is especially true in anti-money laundering and spoofing cases. If you have knowledge of these behaviors, you may be entitled to a large cash reward.
To learn more, visit our SEC whistleblower rewards page. (The CFTC and SEC whistleblower reward programs are virtually identical.) Ready to see if you qualify for a reward? Contact us online, by email [hidden email] or by phone 800.669.7782.