CFTC Continues to Target Small Overseas “Spoofers”

 

By Joshua Ray and Rahman Ravelli, Traders Magazine

October 12, 2020

 

Introduction

 

On September 29, 2020, the Commodity Futures Trading Commission (CFTC) announced a record-setting $920 million settlement with JP Morgan for alleged spoofing in U.S. precious metals and Treasury futures markets.  That same day, it filed an anti-spoofing enforcement action against decidedly smaller targets: Roman Banoczay, Jr. and Sr., a father-son trading duo based in Bratislava, Slovakia.[1]  While the JP Morgan settlement shows the continued reluctance of large financial institutions to challenge spoofing allegations in court, the Banoczays and other small-scale traders have significantly greater incentives to put up a fight. 

 

For one, the action against the Banoczays seeks a broad injunction that would permanently preclude them (and anyone working for them) from ever again trading futures on U.S. exchanges.[2]  Thus, if the Banoczays wish to continue participating in American futures markets, simply accepting the allegations or letting the case lapse into a default judgment is not a viable option.

 

Second, the CFTC is seeking a large financial penalty in addition to the injunction.  Whereas the penalty against JP Morgan will hardly put a dent in its overall revenue, a million+ dollar hit against a small firm like Bazur will be crippling, if not fatal.  And further, there is no guarantee that a financial resolution with the CFTC will be the end the matter (as Michael Coscia discovered in 2014 when he was indicted on spoofing charges after settling with the CFTC in connection with the same conduct a year earlier).[3]   

 

Third, the Banoczays can confront the CFTC’s case without having to travel to the U.S.  In contrast to criminal spoofing cases, which generally require a defendant to physically submit to U.S. jurisdiction before mounting a defense,[4] civil actions are much more easily opposed while the defendants remain in the (relative) safety of their home countries.

 

A Defense Blueprint

 

The cost/benefit analysis of settling spoofing charges for individuals is therefore clearly different from that of a big bank.  Since the reasons such individuals might choose to contest the CFTC’s allegations seem clear, the next consideration is what defense strategy is most likely to succeed.  As in most civil cases, such a strategy should generally begin with a carefully crafted motion to dismiss.  But defendants in spoofing cases have been, to date, uniformly unsuccessful in dismissing the allegations against them.[5]

 

So how might the Banoczays’ succeed where others failed?  One approach could be attacking the Commodity Exchange Act’s anti-spoofing provision (ASP)—which prohibits “bidding or offering with the intent to cancel the bid or offer before execution”—as impermissibly vague under the U.S. Constitution. 

 

Concededly, this tactic has been tried before.  Just last May, for example, Judge Lee of the federal court in Chicago denied a motion to dismiss on vagueness grounds filed by two former traders in United States v. Bases.[6]  Judge Lee’s reasoning was driven by the Seventh Circuit’s decision in the 2017 Coscia case.[7]  There, the court highlighted the importance of the ASP’s specific intent requirement: “The text of the [ASP] requires that an individual place orders with the ‘intent to cancel the bid or offer before execution.’  This phrase imposes clear restrictions on whom a prosecutor can charge with spoofing; prosecutors can charge only a person whom they believe a jury will find possessed the requisite specific intent to cancel orders at the time they were placed.”[8]    

 

While the Coscia decision remains good law, the fact pattern it analyzed was unique.  Unlike the Banoczays and the traders in Bases—who placed their orders manually—Coscia employed a computer trading algorithm.  Coscia’s use of an algorithm, which could place and cancel orders in under 5 milliseconds, was critically important to the Seventh Circuit’s determination that the ASP was constitutional: “[Coscia] commissioned a program designed to pump or deflate the market through the use of large orders that were specifically designed to be cancelled if they ever risked actually being filled. . . .  [This] clearly indicate[s] an intent to cancel.”[9]

 

But the same cannot be said of non-algorithmic traders.  As such, the ASP cannot constitutionally be applied to relatively slow, manual trading strategies.

 

The ASP’s Intent Element Does Not Limit Who Can Be Charged With Spoofing ...

 

Judge Lee’s Flawed Opinion ...

 

Unconstitutional Vagueness ...

 

Conclusion ...

 

more, including links, infographic, footnotes  

https://www.tradersmagazine.com/am/cftc-continues-to-target-small-overseas-spoofers/