DOJ And CFTC Recent Actions Highlight Their Increased Focus On “Spoofing”
02/06/2018On January 29, 2018, the U.S. Department of Justice (“DOJ”) and U.S. Commodity Futures Trading Commission (“CFTC”) announced settlements with three international financial institutions to resolve claims that traders at those institutions placed false bids to manipulate the precious metals markets, a process referred to as “spoofing.” Separately, the DOJ filed criminal charges, and the CFTC filed civil complaints, against seven individual traders alleged to have engaged in spoofing, and the owner of a software company alleged to have built a program that was designed to enable the practice.
CFTC Director of Enforcement James McDonald characterized spoofing as “a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology.” This conduct entails using algorithmic trading to place bids with the intention of withdrawing those bids before orders are filled in order to manipulate the market price of a security. Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division also emphasized the disruptive nature of this practice: “Conduct like this poses significant risk of eroding confidence in U.S. markets and creates an uneven playing field for legitimate traders and investors.”
In connection with each of these settlements, one financial institution was fined $30 million for spoofing and manipulation, a second financial institution was fined $15 million for spoofing and attempted manipulation, and a third financial institution was fined $1.6 million for spoofing. Director McDonald noted that the $30 million fine against the first financial institution marks the largest imposed by the CFTC to date for spoofing-related misconduct. Further, Director McDonald noted that the civil settlements between the separate banks and the CFTC “would have been substantially higher but for each banks’ substantial cooperation.”
These corporate settlements and the ongoing civil and criminal actions against individuals alleged to have engaged in or promoted illegal spoofing highlight the heightened focus on this type of market manipulation by United States regulators. Last week’s announcement—preceded by precursor enforcement actions in 2017—are intended to serve as a “strong signal” to financial institutions that U.S. regulators take spoofing activities seriously and are investing in the surveillance and enforcement tools necessary to identify and deter this high-tech crime. See, e.g., United States v. Coscia, No. 16-cr-3017 (7th Cir. Aug. 7, 2017); see also Shearman & Sterling LLP, CFTC Imposes Sanctions on a Proprietary Trading Firm for Spoofing the Market, Need-to-Know Litigation Weekly, Oct. 24, 2017, available here; Shearman & Sterling LLP, Seventh Circuit Upholds First Spoofing Conviction Against High-Frequency Trader, Need-to-Know Litigation Weekly, Aug. 15, 2017, available here.