DOJ Archives

DOJ Drops Insider Trading Charges After Guilty Plea Found Insufficient

Last week, the Southern District of New York dropped its prosecution of Richard Lee, a former portfolio manager at SAC Capital who, in 2013, entered a guilty plea to trading on material nonpublic information that he gained from corporate insiders. The court recently ruled that Mr. Lee’s guilty plea must be vacated to conform with the ruling in United States v. Newman, 773 F.3d 438, 450-51 (2d Cir. 2014), abrogated on other grounds by Salman v. United States, 137 S. Ct. 420 (2016). Newman held that a tippee who traded on material nonpublic information must have knowledge that the insider acted for personal benefit in disclosing the information. Thus, in 2017, Mr. Lee moved to withdraw his guilty plea on the grounds that (1) he was innocent; (2) had he known additional information, he would not have pleaded guilty; and (3) his guilty plea was insufficient in light of Newman. Rejecting the first two, the court agreed with Mr. Lee that his guilty plea was insufficient under Newman.

Concurrent to his 2013 guilty plea with the DOJ, Mr. Lee also reached an agreement with the SEC. SEC v. Lee, 13-CV-05185 (RMB) (S.D.N.Y.). On September 12, 2013, the Court in that matter entered a judgment against Lee, enjoining him from future violations of the securities laws, and ordered him to pay disgorgement of $130,144.91, prejudgment interest of $57,777.23, and a civil penalty of $130,144.91. Mr. Lee was also barred from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical ratings agency.

Prosecutors filed the request to dismiss on the basis that the evidence is now 10 years old and that Mr. Lee settled with the SEC. More specifically, the prosecutors explained that dismissing the pending charges was “in the public interest,” considering that “(1) the amount of time that has passed since the trades at issue and the resulting difficulty in securing evidence related to elements of the charged offenses; and (2) the SEC’s judgment and bar against Lee.”

DOJ and CFTC Bring Actions Against Precious Metals Traders

Recently, the Department of Justice indicted three precious metals traders in the Northern District of Illinois, charging each them with violating the Racketeer Influenced and Corrupt Organization Act (“RICO”), committing wire and bank fraud, and conspiring to commit price manipulation, bank fraud, wire fraud, commodities fraud, and “spoofing.” Two of those traders were also charged with committing commodities fraud, spoofing, and attempted price manipulation and were named as defendants in a civil suit brought by the CFTC in the same court, alleging violations of the Commodity Exchange Act and CFTC Regulations.

Both the indictment and the civil complaint contend that over the course of approximately seven years, the defendants intentionally manipulated the price of precious metals futures contracts by “spoofing,” or “placing orders to buy or sell futures contracts with the intent to cancel those orders before execution.” Specifically, both the indictment and the CFTC complaint detailed numerous instances in which the defendants allegedly placed “genuine orders” to either buy or sell futures contracts that they intended to execute, some of which were “iceberg” orders placed without publically displaying their full size. According to the indictment and complaint, after such orders were placed, defendants then quickly placed one or more opposite orders, sometimes “layering [them] at different prices in rapid succession” in order to give the impression that demand for such contracts was rising or falling, depending on the nature of the trader’s genuine orders. Once genuine orders were fulfilled, defendants would allegedly cancel the opposite orders prior to execution. The DOJ and CFTC contend that such conduct allowed the defendants “to generate trading profits and avoid losses for themselves” and others, including their employer and its precious metals desk.

According to the indictment, which also relied upon electronic chat conversations between defendants and other co-conspirators (both named and unnamed) and the submission of allegedly false annual compliance certifications, these actions constituted RICO violations as well as fraud. Likewise, the civil complaint alleged that such actions violated the Commodity Exchange Act’s prohibition on spoofing, and seeks monetary penalties, injunctions, and trading and registration prohibitions.

DOJ and SEC Announce Charges Connected to Hack of SEC’s EDGAR System

Last week, the Department of Justice (“DOJ”) and the Securities & Exchange Commission (“SEC”) announced charges connected to a large-scale, international conspiracy to hack into the SEC’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system and profit by trading on stolen material, non-public information. The conduct underlying these cases was one of the principal reasons that the SEC created its Division of Enforcement “Cyber Unit” to target cyber-related securities fraud violations.

In a 16-count indictment unsealed in the United States District Court for the District of New Jersey, two Ukrainian citizens, Artem Radchenko and Oleksander Ieremenko, were charged with securities fraud conspiracy, wire fraud conspiracy, computer fraud conspiracy, wire fraud, and computer fraud. The SEC’s complaint charged nine defendants – Ieremenko, six traders in California, Ukraine, and Russian, and two entities – with antifraud violations of the federal securities laws.

The charging documents allege that Ieremenko and Radchenko hacked into the EDGAR system and stole thousands of files, including annual and quarterly earnings reports containing non-public financial information. The defendants gained access to the SEC’s networks by using a series of targeted cyberattacks, including directory traversal attacks, phishing attacks, and infecting computers with malware. The defendants extracted thousands of filings from the EDGAR system to a server they controlled in Lithuania. The defendants then profited by selling access to the stolen, confidential information and by trading on the stolen information prior to its distribution to the public. In total, the defendants and their co-conspirators are alleged to have traded before at least 157 separate earnings releases, and they generated over $4 million in illegal proceeds.

Some of the individuals charged in these cases were previously charged in connection with a similar scheme to hack into the computer systems of multiple newswire organizations and steal press releases containing financial information that had not yet been released to the public. Several of the same methods used to hack the newswire organizations were also employed to hack the EDGAR system.

The criminal and civil charges in these cases are a reminder that both DOJ and the SEC have prioritized combatting cybercrime and, in particular, network intrusions. They also serve as a stark reminder that any organization, even a U.S. government agency, can be targeted and victimized by cybercriminals. Companies and firms would be wise to examine the techniques used by the defendants in these cases and ensure that their own cyber defenses are sufficient to protect against and thwart similar attacks. For additional guidance, companies and firms can look to SEC guidance and actions issued since the creation of the SEC’s Cyber Unit.

Department of Justice Announces Important Revisions to the Yates Memo

Deputy Attorney General Rod Rosenstein recently announced significant changes to the Department of Justice’s corporate enforcement policy regarding individual accountability, previously announced in the 2015 Yates Memo. The revised policy no longer requires companies who are the target of DOJ investigations to identify all parties involved in potential misconduct before they can be eligible to receive any cooperation credit. This alert examines the updated policy, which should provide companies with greater flexibility in conducting investigations and negotiating dispositions with DOJ in both criminal and civil cases.

Read the full alert.

Department of Justice Announces New Policy on Coordination of Enforcement Actions and Corporate Penalties

The Department of Justice has established a new policy that requires its attorneys to coordinate with one another and with other enforcement authorities when imposing multiple penalties for the same conduct. This policy is likely to protect companies from unfair outcomes resulting from a lack of coordination among the DOJ and other authorities.

I authored an alert that provides an overview of the new policy and discusses the potential impact on companies affected.

Click here to read the alert.

The Government Suffers a Spoofing Setback

On April 25, 2018, a New Haven federal jury acquitted a former trader with a global bank accused of scheming to manipulate the precious metals futures markets with “spoofing,” a trading tactic that involves the use of allegedly deceptive bids or offers to feign the appearance of supply or demand. This appears to be one of the first setbacks for the Department of Justice (“DOJ”), U.S. Commodity Futures Trading Commission (“CFTC”), and futures self-regulatory organizations since they began aggressively investigating and civilly and criminally charging futures traders with spoofing several years ago. After successfully defeating Michael Coscia’s appeal to the U.S. Court of Appeals for the Seventh Circuit, this aggression accelerated with the CFTC’s and DOJ’s coordinated charges in January against several firms and traders. This verdict, however, may cause them to re-visit their aggression and certain strategies.

While it is virtually impossible to fully comprehend the decision-making process behind a jury’s decision, several of the defense strategies apparently proved successful and may present strategies for others to apply in the future. Specifically, the defense themes included strenuously arguing that:

* The prosecution’s trading analysis was “prosecution by statistics” and that people should not be “convict[ed] with charts and graphs”; and

* The prosecution’s trading analysis amounted to an exercise in cherry-picking a few hundred trades out of more than 300,000 without presenting them in the full context.

Lastly, while the CFTC announced new advisories touting the benefits of cooperation, another defense strategy applied here involved vigorously attacking two prosecution witnesses who had “struck deals” with the government. All of these strategies proved successful as the jury returned its not guilty verdict one day after the trial concluded with closing arguments.

We will have to wait to see what, if any, impact this verdict has on other spoofing investigations and cases. In the meantime, however, the defense strategies applied here can be studied and applied to the defense of other spoofing cases being pursued by the CFTC and DOJ.

The CFTC and DOJ Crack Down Harder on Spoofing & Supervision

Last week, the Commodity Futures Trading Commission (CFTC) and Department of Justice (DOJ) filed their most significant and aggressive actions against spoofers and the firms employing them for failing to supervise. The CFTC filed settled actions against each of the global firms for supervisory violations, amongst other charges, and the CFTC charged six individuals with alleged commodities fraud and spoofing schemes. In the parallel criminal actions, the DOJ announced criminal charges against eight individuals (the six charged by the CFTC plus two others). The CFTC’s and DOJ’s coordinated and complex investigative efforts and filings indicate increased aggressiveness by both in this area. Further, these efforts represent the greatest amount of cooperation ever between the CFTC and DOJ. As reported previously in this blog post, with the affirmation of the conviction of high-frequency trader Michael Coscia, we are likely witnessing a CFTC and a DOJ emboldened to investigate and prosecute spoofing and related supervisory violations.

In terms of learning points from these actions, the CFTC continues to investigate and charge firms for failing to supervise this type of manipulative trading. This now appears to be a standard part of the CFTC’s “playbook” for these matters. Each of the firms settled to supervisory violations and as part of the CFTC’s remedies they further agreed to: continue to maintain surveillance systems to detect spoofing; ensure personnel “promptly” review reports generated by such systems and follow‑up as necessary if potential manipulative trading is identified; and maintain training programs regarding spoofing, manipulation, and attempted manipulation. Further, as part of its ongoing efforts to tout its self-reporting and cooperation programs, the CFTC acknowledged each firm’s cooperation during the investigations, and that one of the firms self-reported in response to a firm-initiated internal investigation. That said, it is difficult to interpret the benefits of this cooperation and self-reporting because the CFTC nevertheless levied significant penalties of $30 million, $15 million, and $1.6 million against the firms.

Another important point to highlight is that one of the individuals charged was a service provider who allegedly aided and abetted traders by designing software used to spoof and engage in a manipulative and deceptive scheme. According to the CFTC, this individual and his company aided and abetted the spoofing by designing a process that automatically and continuously modified the trader’s spoofing orders by one lot to move them to the back of relevant order queues (to minimize their chance of being executed) and cancelled all spoofing orders at one price level as soon as any portion of an order was executed. It appears from the parallel criminal complaint filed against this individual that the trader he is alleged to have assisted was likely Navinder Sarao, who previously pled guilty to criminal charges for engaging in manipulative conduct through spoofing-type activity involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange between April 2010 and April 2015, including illicit trading that contributed to the May 6, 2010 “Flash Crash.” He also settled a CFTC enforcement action related to the same conduct. As part of his plea, Mr. Sarao entered into a cooperation agreement with the government (previously reported here) and it appears as though these actions may be related to Mr. Sarao’s cooperation.

The DOJ’s announcement of the latest round of charges also signals a heightened focus on spoofing cases by “Main Justice” in Washington, and the Criminal Fraud Section in particular. The announcement by Acting Assistant Attorney General John P. Cronan commended no fewer than eight Fraud Section prosecutors by name (as well as a prosecutor from Connecticut). In doing so, DOJ signaled its willingness to invest substantial resources in criminal manipulative trading prosecutions that will complement and further reinforce the efforts of the CFTC and the U.S. Attorneys’ Offices in key jurisdictions, including the Northern District of Illinois (which prosecuted Mr. Coscia).

In conclusion, with the CFTC’s and DOJ’s recent spoofing and supervisory cases, they have sent several important messages. First, and least surprising, this area will remain a top priority for the CFTC and we will continue to see increased collaboration with the DOJ. Additionally, with these filings and the supervisory charges filed against other firms over the past year, it appears to now be a matter of routine that the CFTC will be pursuing any supervisory violations related to the underlying spoofing violations. A new takeaway is that the CFTC and DOJ will be investigating other entities, such as vendors, who provide services that help facilitate this violative conduct and investigating them for aiding and abetting. Finally, it is likely that the Fraud Section will take an increasingly prominent role in the DOJ’s anti-spoofing prosecutions, and will continue to develop expertise in this expanding area of criminal enforcement.

Covering SEC, CFTC, FINRA, PCAOB, States, Exchanges, & FCA Enforcement Activities

Tag: DOJ