Prosecutors behind a sweeping U.S. crackdown on market “spoofing” scored a big win Friday when former Deutsche Bank AG traders Cedric Chanu and James Vorley were convicted of fraud for manipulating gold and silver prices.
A federal jury in Chicago, after three days of deliberations, concluded Chanu and Vorley made bogus trade orders between 2008 and 2013 to illegally influence precious-metals prices. The weeklong trial was the latest U.S. prosecution of a “spoofing” case since the global market “flash crash” in 2010.
Chanu and Vorley engaged in a classic “bait and switch” by placing orders they never intended to execute and then canceling them, which “weaponized” the forces of supply and demand to mislead other traders, prosecutor Brian Young told jurors in closing arguments Tuesday.
Spoofing occurs when a trader enters buy or sell orders and then cancels them before they are executed, creating a false market indicator that can generate profit by taking the opposite position. While canceling orders isn’t prohibited, the 2010 Dodd-Frank Act made it illegal to place orders with no intention of executing them.
Transcripts of messages the two traders sent show they knew what they were doing was wrong, Young said. In one instance, Vorley wrote: “This spoofing is annoying me. It’s illegal for a start.”
The star witness at the trial was their former Deutsche Bank coworker, David Liew, who told the jury he learned from Chanu and Vorley how to use spoof trades to manipulate prices. Liew faces his own criminal charges and agreed to cooperate with the government.
Chanu was convicted on seven fraud counts and Vorley on three counts, while they were found not guilty of other charges, including conspiracy. Each count carries a maximum penalty of 30 years in prison, though U.S. District Judge John Tharp said the government would seek about four or five years. Sentencing was set for Jan. 21, and both men remain free on bail.
Vorley’s attorney, Roger Burlingame, said he’ll appeal the conviction. He called the prosecution “misguided” because his client’s trading was “well within the law.”
“It was a compromise verdict by a jury that three times declared it was deadlocked, deliberating in the face of a Covid scare,” Burlingame said. The jury had been reduced to 11 after one juror complained of coronavirus-like symptoms and was dismissed. “The record is clear there was no fraud. The compromise conviction will not stand.”
Chanu’s attorney, Michael McGovern, said in an email that he was “gratified that the jury unanimously acquitted Cedric on the conspiracy and other charges, and we intend to continue the fight as to the remaining charges.”
The prosecutor declined to comment after the verdict.
Since anti-spoofing laws passed under the Dodd-Frank financial reforms a decade ago, the U.S. has prosecuted about a dozen criminal cases, including Navinder Sarao, the British day trader linked to the 2010 “flash crash” that erased $1 trillion in market value.
The Commodity Futures Trading Commission also has stepped up civil complaints and reached many settlements, including a $30 million deal with Deutsche Bank in 2018. JPMorgan Chase & Co. is poised to pay close to $1 billion to resolve market manipulation investigations by U.S. authorities into its trading of metals futures and Treasury securities, Bloomberg reported Wednesday.
While prosecutors have secured several guilty pleas in spoofing cases — including Liew, Sarao and others — they’d had mixed results at trial.
In 2015, Michael Coscia was convicted in Chicago and sentenced to three years in prison. In 2018, Andre Flotron was acquitted after a federal judge in Connecticut threw out most of the charges on the grounds that the case should have been brought in Chicago, where the trading occurred. Last year, the case against Chicago programmer Jitesh Thakkar, the first non-trader prosecuted under anti-spoofing laws, ended in a mistrial and charges were dropped.
Defense lawyers for Chanu and Vorley didn’t present any witnesses at the trial. While questioning prosecution witnesses, they emphasized how difficult it is to determine criminal intent for “spoofing” in competitive global markets where traders keep strategies secret and try to outmaneuver rivals. The defense team cited several examples of legal trading practices that allow market players to hide their intentions from everyone else.
“If you fake a pass and run the ball, that’s competition, not fraud,” Burlingame told the jurors during closing arguments Tuesday. Every order placed by Vorley was “100% real,” Burlingame said.
The case is U.S. v. Vorley 18-cr-35, Northern District of Illinois (Chicago).
(Updates with defense comments and plans for appeal.)
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