On April 24, 2018, a federal jury in New Haven, Connecticut, acquitted a former trader who was accused of manipulating the precious metals futures market through a practice known as “spoofing”.1 Andre Flotron, who faced 25 years in prison, was acquitted of a single count of conspiracy to engage in commodities fraud, making it the first acquittal in a spoofing case.
The Dodd-Frank Act in 2010 outlawed spoofing, which is defined as bidding or offering with the intent to cancel a bid or offer before execution. Spoofing typically involves placing orders on both sides of the market with the intent to transact only on one side. The non-traded opposite orders are intended to create the illusion of price movement that benefits the order the trader intends to execute. Spoofing may be accomplished by manually placing and cancelling orders, or through the use of computer algorithms. Very few have faced criminal charges for spoofing, and Flotron was only the second individual to go to trial on criminal charges based on trading in a manner alleged to be spoofing. In 2015, Michael Coscia was the first person to be convicted of spoofing, and he was sentenced to three years in prison.2
Unlike the Coscia case, however, the jury found Flotron not guilty of conspiracy to commit commodities fraud, where the alleged manner and means of the conspiracy was spoofing. According to the government, Flotron manually placed fake orders and quickly cancelled them to make it appear as if the prices were going up or down to benefit orders he intended to execute. Flotron had allegedly been manipulating the markets for five years starting in 2008.
While it is uncertain what exactly swayed the jury, the government’s case was likely hampered by a lack of direct evidence of intent to cancel orders when they were placed. Further, the credibility, or lack thereof, of some of the key witnesses may have been a factor in the jury’s decision. The government put on two witnesses who cooperated with the government in exchange for an agreement not to prosecute them for spoofing-related crimes. One of the witnesses was Flotron’s former trainee, Mike Chan, who testified that he learned about Flotron’s practices while they were working at the Stamford office together and used them in his own trading. The defense seized on these agreements to cooperate arguing in closing that “[y]ou can’t take their word for anything … They’ve got a motive to tell the story the government wants.”
Additionally, the jury may have been swayed by former US Securities and Exchange Commission economist Emre Carr’s testimony about trading patterns. Carr testified that Chan’s and Flotron’s trading patterns were substantially different because Chan’s cancellation rate for larger orders was twice as high as Flotron’s. Cancellation rates are generally seen as indicators of possible spoofing. Carr also noted that Flotron was more successful at filling large orders that a true spoofer would not want filled.
Ultimately, the jury found reasonable doubt to believe that Flotron had agreed with others to spoof. The acquittal is a significant setback for the US government and the Commodity Futures Trading Commission (CFTC). Federal prosecutors recently filed criminal charges against six people for spoofing, and the CFTC brought civil cases against many former traders, including Flotron.3 It remains to be seen if the jury’s decision in this case will have any impact on pending and future spoofing actions.
1U.S. v. Flotron, No. 3:17-cr-00220 (D. Conn.).
2 Coscia has filed a petition for a writ of certiorari in the US Supreme Court, arguing that the anti-spoofing provision of the Dodd-Frank Act is unconstitutionally vague. See United States v. Coscia, 866 F.3d 782 (7th Cir. 2017), petition for cert. filed, S. Ct. No. 17-1099.
3 Federal Charges Filed in Price ‘Spoofing’ Inquiry on Wall St., The N.Y. Times, (Jan. 29, 2018), https://www.nytimes.com/2018/01/29/business/wall-street-price-spoofing.html.
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