DOJ urges Court to uphold wire fraud convictions of ex-Deutsche Bank traders
Several months after former Deutsche Bank traders Cedric Chanu and James Vorley appealed from their conviction, the Department of Justice (DOJ) filed its response brief in the United States Court of Appeals for the Seventh Circuit.
Let’s recall that, according to the indictment, Cedric Chanu and James Vorley manipulated the gold and silver futures market on the Chicago-based COMEX exchange by placing large visible “spoof” orders for futures contracts and then quickly canceling them before they could be filled. Because these orders appeared to signal genuine market interest, they often drove prices up or down, enabling the defendants to trade more easily or more profitably on the opposite side of the market.
The traders were convicted on September 25, 2020. They were sentenced to 12 months and one day in prison for a scheme to commit wire fraud affecting a financial institution.
The response brief filed by the DOJ on December 17, 2021 says that the defendants’ scheme fell well within the established definition of a “scheme or artifice to defraud,” and the Court of Appeals should uphold their convictions for wire fraud affecting a financial institution.
The Government argues that scheme to defraud involved deceptive acts—including implied representations and material omissions—that satisfied the wire fraud statute. Chanu and Vorley placed large visible spoof orders on COMEX with the express purpose of manipulating the market and filling iceberg orders on the opposite side of the buy-sell divide. Their orders impliedly represented a good-faith intent to trade, as required by the exchange’s rules. Yet the defendants omitted the material fact that they intended to cancel those orders after they affected the market, but before they could be executed.
Chanu and Vorley contend that their conduct was not fraudulent because orders on COMEX “do not represent anything about a trader’s subjective intent or how long [the orders] will remain on the market.” They argue that “any undisclosed ‘intent to cancel’ does not render the order a misleading half-truth” or “false” so long as the trader is willing to trade on the order “if it is executed before being withdrawn.”
The DOJ says this argument is wrong for several reasons.
First, the evidence at trial establish that COMEX orders carried the “implied representation” that they were made with a good-faith intent to trade. Indeed, a CME Group employee testified at trial that exchange rules required orders to be for “the purpose of executing a bona fide transaction” and prohibited placing orders that traders “intended to cancel.”
The DOJ agrees with the defendants that simply placing an order does not necessarily represent that the order will not be canceled. But it does implicitly indicate an intent to trade. A buy order, for example, indicates a desire to buy. It is misleading for a trader to place a buy order while omitting or concealing the fact he actually intends to drive up the price, cancel the buy order before execution, and make a profit on a pending sell order.
Second, the DOJ argues that by focusing solely on the act of placing an order, Chanu and Vorley ignore the deception involved in their broader scheme. The wire fraud charges were not based solely on the defendants’ placement of orders with the intent to cancel.
The superseding indictment alleged that the traders used these orders “to create and communicate false and misleading information regarding supply or demand,” to “manipulate and move commodity futures prices” upward and downward, and to “move the prevailing price” to help fill their iceberg orders on the opposite side of the market.
The evidence bore out these allegations, showing that Chanu and Vorley placed and quickly canceled large visible orders, which helped them to fill their opposite-side iceberg orders. The DOJ says that it was this broader scheme to manipulate the market, not just the placement of orders with intent to cancel, that involved material misrepresentations, omissions, and half-truths.
Further, the DOJ says that the defendants are incorrect that affirming their convictions would “threaten[ ] to criminalize routine business practices” and require traders to disclose “their subjective strategy or reason for placing an order.” A material misrepresentation or omission is only one element of wire fraud, and a trader could not be convicted under § 1343 simply for placing an order without “subjectively want[ing] to close the deal on the stated terms.” The Government notes that where, as here, a defendant makes a material “implied representation,” or a material “omission . . . intended to induce a false belief and action,” as part of a larger scheme to defraud another person of money or property, the wire fraud statute applies.
At the very least, the defendants cannot claim that their spoofing conduct was a “routine business practice,” considering that it was prohibited by exchange rules and is now specifically prohibited by law.
According to the DOJ, Chanu and Vorley incorrectly contend that an “undisclosed ‘intent to cancel’ cannot be deemed material” because concealing one’s market intentions “is not uncommon in a competitive trading environment.”
The DOJ notes that the evidence showed that the defendants’ spoof orders affected the market. Across the 61 episodes highlighted at trial, the iceberg orders filled “about ten times faster” when visible orders were active on the other side of the transaction.
After Edward Bases drove up gold futures by nearly two dollars and mentioned how “easy it is to manipulate [the market] soemtimes,” Chanu said it was “BRILLIANT” that Bases “tricked . . . the algorythm.” Liew testified that he saw the “market react” to Chanu’s and Vorley’s spoof orders, that “there are occasions that [spoofing] works,” and that he placed spoof orders “close” to the market price to “impact” the market.
Representatives from two victim companies, Citadel Securities and Quantlab Financial, testified that their trading algorithms considered orders (particularly large orders) in the order books’ top levels when making trading decisions. They also testified that those companies understood bids and offers on COMEX to be “orders that are intended to trade” or that reflected “genuine interest” in trading.
And the government’s expert testified that markets respond to spoofing because other market participants “are unable to distinguish between an order that is part of a spoofing strategy and an order that reflects a real interest in participating in the market.”
Finally, Chanu’s and Vorley’s misrepresentations went to an essential element of the bargain, the DOJ says. Their deceptive conduct created a false appearance of supply and demand and affected the price of futures contracts. Price is always an essential element of a bargain, the DOJ concludes.