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Aggressive government positions expand liability for non-traders

Renato Mariotti Holly Campbell May 31, 2019

The recent case of United States v. Jitesh Thakkar demonstrated extraordinary government overreach that could result in a non-trader being liable for millions of dollars in trading losses even though the non-trader had no knowledge of the trading activity.

Jitesh Thakkar is the owner of a small software company that makes custom software for traders. Mr. Thakkar is a respected member of the industry who served on the CFTC’s Technology Advisory Committee. Mr. Thakkar’s company developed KillSwitchPlus, a product that helps firms and traders monitor and control trading activity and minimize risk.

Unfortunately for Mr. Thakkar, one of his company’s customers happened to be Navinder Sarao. After the government claimed Mr. Sarao precipitated the “Flash Crash” and charged him with wire fraud, commodities fraud, commodity price manipulation, and spoofing, Mr. Sarao pleaded guilty to wire fraud and spoofing and cooperated with the government against Mr. Thakkar. The government charged Mr. Thakkar with conspiracy to commit spoofing and with spoofing. The CFTC also filed a lawsuit against Mr. Thakkar and his company on these same allegations.

The government’s “proof” of a criminal conspiracy in this case was based almost entirely on a business contract between Mr. Thakkar’s software company and Mr. Sarao, which the government claimed contained one line that indicated an agreement to commit spoofing. The government also pointed to various innocuous communications between Mr. Thakkar and Mr. Sarao about the functions of the program, as well as Mr. Thakkar’s participation in various industry events and panels including the CFTC’s Technology Advisory Committee as evidence of criminal liability.

Despite the government’s aggressive allegations, their case fell apart at trial. During our cross examination of Mr. Sarao, he admitted that he did not think Mr. Thakkar was involved in committing a crime and “did not consider that we were colluding to commit crimes.” Because of that testimony, the judge acquitted Mr. Thakkar on the conspiracy count on our motion, finding that no reasonable juror could find him guilty beyond a reasonable doubt. Ten out of twelve jurors voted to acquit Mr. Thakkar on the two remaining aiding and abetting counts, but the jury deadlocked. The government dismissed the remaining charges shortly thereafter.

While the government failed in this particular prosecution, the positions it took along the way revealed substantial prosecutorial overreach that has very significant future implications. Specifically, the government believes non-traders can be responsible for the trading decisions of traders who use their products and services. The government took the position that non-traders can be responsible for millions of dollars’ worth of losses as the result of trading activity, even if their gain was miniscule by comparison. Most alarmingly, in the absence of actual knowledge by the non-trader, the government argued that the non-trader could be criminally liable because he should have known that his customer would engage in wrongdoing due to knowledge gleaned from participation in industry events and compliance panels.

The crux of the government’s theory in United States v. Thakkar was that a non-trader can be criminally responsible for the spoofing of his customer, even though the anti-spoofing statute is aimed at the activity of traders. Indeed, the only Court of Appeals to have considered the constitutionality of the anti-spoofing statute determined that the intent requirement of the statute prevents arbitrary enforcement because “[c]riminal prosecution is thus limited to the pool of traders who exhibit the requisite criminal intent.” United States v. Coscia, 866 F.3d 782 (7th Cir. 2017) (emphasis added). The government’s theory in United States v. Thakkar, however, was that a vendor providing services to a trader could be charged with a criminal conspiracy if there was an agreement to provide services that were used in spoofing. The government also alleged that the same conduct could result in criminal liability under an aiding and abetting theory. The implications of the government’s approach are immense. Non-traders who provide products or services that are used by traders must carefully scrutinize documentation and communications to ensure that there is no language that can be construed by the government to put the non-trader on notice that the customer intends to engage in wrongdoing.

The failure of this approach in United States v. Thakkar was due to a lack of evidence, rather than a defeat of this legal theory. Given the government’s aggressive approach to prosecuting spoofing, we can expect more cases in the future pursuing this same theory, albeit with stronger evidence. Trading firms should be concerned that a single trader engaged in wrongdoing could potentially create liability for multiple developers who aided the trader’s activity.

Given the government’s expansive view of liability in United States v. Thakkar, those non-traders can be liable for millions in trading losses caused by a trader. For example, the government claimed that Mr. Thakkar was responsible for $1.3 million in trading profits caused by Sarao’s activity even though his company only made $24,200 for the product.

Because the government lacked sufficient evidence to prove Mr. Thakkar’s knowledge, the government sought the Court’s permission to instruct the jury that Mr. Thakkar could be convicted even absent proof that he actually knew about Mr. Sarao’s trading activity. Specifically, they asked the Court to give an “ostrich” instruction, which is reserved for cases in which someone deliberately avoided knowing the truth, like a drug courier who never asks what’s in the bag they’re carrying across the border.

The implications of the government’s theory in this context are troubling. Their argument was that Mr. Thakkar’s attendance at industry events, participation in CFTC panels, and review of articles discussing the applicable law (like this one), could be used to infer that he must have known, or should have known, that Mr. Sarao would engage in spoofing. After the judge denied their request for an “ostrich” instruction — due to late notice, rather than a rejection of the legal theory itself — the government nonetheless argued at closing that Thakkar must have known Mr. Sarao would engage in spoofing.

You can expect the government to use this theory the next time they have difficulty proving their case. Since the government’s jury verdict in United States v. Coscia — which was tried by one of us — the government has never prevailed in a spoofing trial despite charging numerous people with spoofing or related activities. Some defendants have pleaded guilty, including Mr. Sarao, but all spoofing defendants should carefully consider testing whether the government can convince a jury that someone other than Mr. Coscia engaged in spoofing.

It could be difficult to completely avoid liability under the theories advances by the government in United States v. Thakkar. To avoid entering into agreements with problematic language, a knowledge of law and regulations is required. But, that same knowledge can be used by the government to infer knowledge of criminal activity where none existed.

Accordingly, in the face of hyper-aggressive enforcement by the DOJ and CFTC, enforcement counsel should be engaged at the first indication of interest by regulators.

A former federal prosecutor, Renato Mariotti is an accomplished trial attorney who represents a diverse group of clients in complex high-stakes litigation, including securities class actions, derivative-related claims, and cyber theft. Holly Campbell is an experienced litigator who has represented clients in a variety of high-stakes litigation and enforcement matters. They represented Mr. Thakkar in this matter.