Market Integrity Enforcement Update

Mary Donohue

Associate Editor

Loyola University Chicago School of Law, JD 2020

In addition to enforcement agencies attempting to tame the seemingly untameable world of cryptocurrency trading, agencies continue to tackle issues of market manipulation, including spoofing, as well as push into investigating international corruption in an effort to maintain economic and market integrity. As new developments emerge, compliance directors and operations associates will hopefully gain more guidance on coaching traders on exchange rules.

Thakkar Case Introduces Liability of Trading Software Developers

In early 2018, Jitesh Thakkar (Thakkar) was criminally charged with conspiracy to commit spoofing and aiding and abetting spoofing in connection with his development of a computer program, “NavTrader,” used by Navinder Sarao in connection with Mr. Sarao’s spoofing activities. The indictment alleges that between October 2011 and April 2015, Thakkar and his co-conspirators engaged in a conspiracy to engage in spoofing, the category of bidding and offering with the intent at the time of the bid or offer to cancel the bid or offer before execution, through the placement of thousands of orders on the Chicago Mercantile Exchange (“CME”). The indictment alleges that the group delivered a customized trading software that was used by Thakkar’s co-conspirator to engage in spoofing, including in the market for E-Mini S&P 500 futures contracts on the CME, in addition to charging Thakkar for engaging in this behavior on or about February 25, 2013 and March 8, 2013. On January 19, 2018, Thakkar was charged in a criminal complained with conspiracy and spoofing offenses, and was released on bond after making an initial appearance on January 29, 2018.

Mr. Thakkar, along with Edge Financial Technologies, Inc., a company that Mr. Thakkar founded, was also civilly charged by the Commodity Futures Trading Committee (CFTC) with spoofing and engaging in multiple manipulative and deceptive schemes for designing software used by Mr. Sarao to engage in spoofing activities. Gary DeWaal, of Katten Muchin Rosenman LLP, urges that this case is important because it represents an attempted extension of the Department of Justice and CFTC’s reach in spoofing cases to the provider of the programming used by the primary actor engaged in spoofing. Mr. Thakkar claims he was not alone in creating this NavTrader program used by Mr. Sarao, and that he never was aware of the purpose for which Mr. Sarao proposed to use this software. Instead, Mr. Thakkar claims he took Mr. Sarao’s order to develop the software and passed it along to three programmers, none of whom have been sued by the DoJ or CFTC. Mr. Thakkar claims that Mr. Sarao never explained his trading strategy, but this does not absolve him of liability, as this is a common practice in the trading industry to keep strategies proprietary.

Mr. DeWaal also explains that the Department of Justice will have to show that Mr. Thakkar had actual knowledge of the illicit purpose for the program, and a suspicion or conjecture of potential wrongful use will not be enough. The outcome, and this instruction, may provide relief to software developers who develop software that is later used by a trader without their actual knowledge for illicit conduct.

The Scope of Spoofing

Recently, the Department of Justice urged a court to reject arguments that wire fraud charges were inappropriate substitutes for allegations of express spoofing law violations. This position was taken in two amicus briefs filed in connection with the criminal case against James Vorley and Cedric Chanu related to the defendants’ purported spoofing. One amicus brief filed by the FIA and the other with the US Chamber of Commerce, Bank Policy Institute and the Securities Industry and Financial Markets Association, argued that the charges were for wire fraud and not spoofing, which concerns the business community as this implies that the orders entered without an intent of execution for any reason could constitute fraudulent statements to the marketplace.

CFTC Broadens Mission to Foreign Bribery and Corruption in Commodities Market

On March 6, 2019, the Division of Enforcement of the CFTC announced it will be working alongside the DOJ and SEC to investigate foreign bribery and corruption relating to the commodities markets. This move into foreign corruption enforcement, following a series of high-profile market manipulation and spoofing cases in recent years, marks the extension of the CFTC’s focus on market integrity. In addition to pursuing these market integrity cases, the Division has also displayed a commitment to broader economic concerns, such as recently establishing a task force to ensure that the CFTC registrants comply with Bank Secrecy and Anti-Money Laundering rules.

Despite the movement into enforcing market integrity in the cryptocurrency space, these cases and recent announcements are signals that these agencies will continue to investigate market manipulation and work to improve market integrity across all markets, even seeping into foreign corruption enforcement and economic concerns.