Former Deutsche Bank traders push for acquittal in spoofing lawsuit
Former Deutsche Bank traders James Vorley and Cedric Chanu are pushing for acquittal in criminal proceedings charging them with wire fraud. On November 13, 2020, the duo submitted a motion for acquittal at the Illinois Northern District Court.
The document, seen by FX News Group, states that “no rational juror could conclude beyond a reasonable doubt that Mr Vorley or Mr Chanu committed wire fraud affecting a financial institution”.
First, the defendants challenge the conclusion that they knowingly engaged in a scheme to defraud by misrepresenting their subjective “intent to trade”. The government had the burden “to prove not just that the defendants engaged in ‘deceptive’ trading” but that they made “fraudulent misrepresentations and omissions when they entered orders they intended to cancel.”
But the government failed to establish that such orders contained any such representation, the former traders argue. An order communicated a willingness to trade on the terms and conditions of the order. It was good until executed or cancelled, and it could be cancelled at any time, for any reason or for no reason at all, they note.
Such an order did not represent anything about the trader’s subjective intent. Moreover, even if one were to assume that it did, there was no evidence that Mr. Vorley or Mr. Chanu knew that they were making such an implied misrepresentation at the time they placed the orders, the defendants say.
Further, the defendants challenge the conclusion that the alleged implied representation of an “intent to trade” (i.e., no current intent to cancel) would have been material to other traders on the COMEX at that time. The prosecution’s summary charts did not show the full picture of the bids and offers in the COMEX market (much less other correlated markets).
Market participants—particularly those like Citadel and Quantlab who used high-frequency trading algorithms programmed to front-run short-term market moves—may have made assumptions about supply or demand based on the appearance of orders in the visible order book, but they also knew that orders could be cancelled at any time, for any reason or no reason at all.
As such, the only thing the algorithms could have assumed about the defendants’ orders was that they existed and could be transacted upon as long as they remained on the market—all of which, the evidence showed, was 100% true and accurate. There was a complete absence of evidence that the algorithms made any trading decisions based on any supposed implied representations of a defendant’s intent, Vorley and Chanu insist.
Also, the defendants say that the evidence at trial was insufficient to establish that they had the specific intent to defraud their counterparties. At the time of the trading at issue, the COMEX exchange rules allowed traders to disguise their strategies – including by affirmatively misrepresenting the true supply and demand for futures contracts using iceberg orders and trading in a way that would have been invisible to other traders. The rules did not specifically prohibit “spoofing.”
It was not until September 28, 2012 – after the trading for which they were convicted – that they were first alerted to the new Dodd-Frank Act rule against “spoofing” and its potential implications, and even then they were told that the rules remained unclear. Prior to that date, the defendants had no reason to believe, much less know, that their visible at-risk orders on the COMEX carried with them an implied misrepresentation of their current intent to trade.
Moreover, according to the defendants, the prosecution failed to establish that the defendants’ supposed “scheme to defraud” was designed to do anything more than induce high-frequency trading algorithms to enter into transactions that they might otherwise not have, not that they sought to harm their counterparties or cause them to lose money.
And, finally, the government’s attempt to shoehorn “spoofing” into the wire fraud statute based on its novel “implied representation” theory would, if accepted, result in the wire fraud statute being unconstitutionally vague as applied in this case, Vorley and Chanu say.
According to the defendants, the Court should set aside the verdict and enter judgments of acquittal as to each of the remaining counts of the superseding indictment.
Let’s recall that, on September 25, 2020, following a two-week trial, Vorley and Chanu were convicted of three counts and seven counts, respectively, of wire fraud affecting a financial institution. As FX News Group has reported, the former traders had earlier indicated they would challenge the “guilty” verdict.
According to evidence presented at trial, Vorley and Chanu engaged in a scheme to defraud other traders on the Commodity Exchange Inc., which was an exchange run by the CME Group. The defendants defrauded other traders by placing fraudulent orders that they did not intend to execute in order to create the appearance of false supply and demand and to induce other traders to trade at prices, quantities, and times that they otherwise would not have traded.
Specifically, the evidence showed that the defendants engaged in the practice of “spoofing,” which means that they placed orders on the exchange which, at the time the orders were placed, they did not intend to execute, all for the purpose of deceiving other market participants.