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DOJ and CFTC use tough tactics to pursue spoofers

Renato Mariotti Holly Campbell May 7, 2020

This article originally appeared in an April 1 John Lothian News special report on spoofing.

Despite recent setbacks, the U.S. Department of Justice (DOJ) and Commodity Futures Trading Commission (CFTC) continue to ramp up their spoofing enforcement campaign, utilizing aggressive practices that can be difficult to anticipate. Market participants should exercise caution to ensure that they stay off the government’s radar, given how aggressive the government agencies have been in using their power in spoofing investigations.

Perhaps the most aggressive recent DOJ practice has been its use of potential liability to compel firms to undertake investigative actions against their own employees on the Department’s behalf. Understandably, market participants facing a potential indictment by the DOJ are eager to cooperate with the government in any way possible, but DOJ’s fervor for prosecuting spoofing has led it to make questionable demands of cooperating firms.

Most notably, according to a recent motion filed by James Vorley — a former Deutsche Bank trader charged criminally with engaging in fraudulent and manipulative trading involving alleged spoofing of precious metals futures contracts—the government is using firms such as Deutsche Bank to develop evidence against their own employees in spoofing cases. In Mr. Vorley’s case, after Deutsche Bank conducted its own internal investigation into its precious metals desk, including multiple interviews of Mr. Vorley, the DOJ began its own investigation into the same subject. Mr. Vorley alleges that the DOJ “outsourced” its investigation to Deutsche Bank. As part of Deutsche Bank’s cooperation with the DOJ, Mr. Vorley alleges that the firm re-interviewed him in a recorded meeting regarding the conduct the DOJ was investigating and subsequently turned over the recording to the department. The DOJ now intends to use Mr. Vorley’s statements from this meeting with his employer against Mr. Vorley in his criminal case.

Mr. Vorley moved to prevent the DOJ from using the statements he made to Deutsche Bank during the bank’s cooperation with the DOJ at trial, arguing that introduction of his statements violate his Fifth Amendment rights. He argued that Deutsche Bank obtained his recorded statements as part of their cooperation with the DOJ’s precious metals investigation, and thus the interview amounted to a state action. He also argued that his statements in this interview were compelled because Deutsche Bank told him he stood to lose certain compensation and he believed he would lose future job opportunities if the bank made a finding of misconduct in his absence. Under these circumstances, Mr. Vorley claimed that allowing the DOJ to use his recorded statements to Deutsche Bank at trial would violate his Fifth Amendment right against the use of compelled statements in a criminal case.

The court recently denied Mr. Vorley’s motion to suppress the statements, finding that Mr. Vorley was not “compelled” to answer the Bank’s questions and did, in fact, refuse to answer certain questions the Bank asked. Thus, the government will be able to use Mr. Vorley’s statements to Deutsche Bank against him at trial.

This ruling, and the government’s aggressive use of information collected by cooperating firms, can impose real long-term business costs. For example, employees may be concerned that a request by their employer is in fact a DOJ investigative action in disguise, leading to an erosion of trust and a lack of candor. After all, it is important for employees to feel comfortable coming forward to employers with potential wrongdoing so corrective action can be taken before regulators launch an investigation. If employees are afraid to raise potential issues with their employers, conduct that could be corrected may go unreported and develop into much larger issues.

Thus firms should take proactive steps to create a culture of openness so they can learn of potentially problematic conduct and take corrective action before regulators are involved. Once the regulators are involved, it can be costly not to cooperate.

Market participants should be cautious even during the settlement process with the CFTC. In CFTC v. Kraft Foods Group, Inc., Kraft and Mondelez settled a civil action with the CFTC that accused them of manipulation and attempted manipulation of the prices of cash wheat and wheat futures. The consent decree in the case included a confidentiality provision, which stated, “[n]either party shall make any public statement about this case other than to refer to the terms of this settlement agreement or public documents filed in this case, except any party may take any lawful position in any legal proceedings, testimony or by court order.” Following the settlement, however, the CFTC issued a press release about the case and two commissioners filed statements regarding their votes on the settlement, which Kraft and Mondelez argued violated the confidentiality provision of the consent decree.

Kraft and Mondelez moved for sanctions against the CFTC and asked the district judge to hold the CFTC in contempt for violating the confidentiality provisions. The district judge in the case set the motion for an evidentiary hearing and ordered CFTC Director of the Division of Enforcement Jamie McDonald and the two commissioners who made statements on the settlement to appear in his Chicago court to testify under oath regarding the settlement and statements. The district judge went so far as to ask if the CFTC and the commissioners wished to invoke their Fifth Amendment rights, which they provisionally did before the evidentiary hearing.

Before the evidentiary hearing on the motion in the district court could take place, however, the CFTC asked the Seventh Circuit to review the matter. The Seventh Circuit determined that because each CFTC commissioner has a statutory right to publish an explanation of his or her vote on the settlement, the CFTC did not have the authority to bind its commissioners to the confidentiality provisions in the consent decree. The district court ultimately vacated the consent order, and the case continued into discovery. On February 14, 2020, the district court granted Kraft and Mondelez’s motion for contempt and sanctions in part due to the “egregious conduct” by the CFTC. Although the parties filed an agreed motion to withdraw the sanctions and contempt motion, the motion remains under advisement with the district court.

Given the CFTC’s conduct in this case, during any settlement negotiations with the CFTC, market participants should request the opportunity to review the proposed press release before it is released, which the CFTC has agreed to do in the past. Market participants also should not rely upon the CFTC’s representation regarding statements that will not be made publicly, because the Seventh Circuit has determined that the CFTC cannot bind individual commissioners from making their own statements.

The CFTC’s enthusiasm for spoofing and market manipulation cases also led them to initiate an enforcement action against Mirae Asset Securities for spoofing by a trader at a firm, which Mirae Asset later acquired, that took place long before Mirae Asset acquired the firm. Even though Mirae Asset provided extensive cooperation by voluntarily producing documents, hiring U.S. counsel to conduct an internal review, hiring an expert to analyze trading activity, and providing important information and analysis at the CFTC’s request, the CFTC still imposed a fine on Mirae Asset for the “reduced” amount of $700,000.

Given the CFTC’s intense interest in spoofing, market participants who acquire companies or hire employees should engage in enhanced due diligence into potential spoofing during a prospective merger or acquisition to ensure that they don’t take on significant liabilities.

In the face of aggressive enforcement by the DOJ and the CFTC, market participants must tread carefully whenever regulators emerge and begin an investigation. But the best course of action is first to create a culture that encourages employees to come forward and flag potentially unlawful conduct before regulators launch an investigation, so corrective action can be taken before firms incur significant liability.

A former federal prosecutor, Renato Mariotti is an accomplished trial attorney who represents trading firms, FCMs, and individuals in enforcement matters, high-stakes litigation, and investigations by the CFTC, SEC, and other regulators. Holly Campbell is an experienced litigator who has represents trading firms, FCMs, and, individuals in a variety of high-stakes litigation and enforcement matters.