Three European banks and eight individuals have been charged in the largest criminal takedown of fraudulent activity in the futures market to date, US authorities announced on Monday.
Deutsche Bank AG, HSBC Securities and UBS AG will pay more than $40m between them for their part in the commodities fraud and spoofing schemes.
The US Commodity Futures Trading Commission announced the settlements on Monday, January 29, with Deutsche Bank required to pay a $30m civil penalty, alongside fines of $15m for UBS and $1.6m for HSBC.
In parallel, the US Department of Justice charged eight individuals in connection with their alleged roles in spoofing, saying it was “the largest futures market criminal enforcement action in department history”.
Both agencies were helped by financial enforcers from around the world, including the UK Financial Conduct Authority.
Seven of the eight individuals were charged with the crime of spoofing, an illegal trading practice that can be used to manipulate the commodities markets.
Only three other individuals have ever been publicly charged with the crime of spoofing.
Of those identified, five were traders employed by global financial institutions including Deutsche Bank, UBS and HSBC. Two were traders at large commodities trading firms, and one was the owner of a technology consulting firm.
Spoofing is a practice in which traders attempt to give an artificial impression of market conditions by entering and quickly canceling large buy or sell orders onto an exchange, in an attempt to manipulate prices.
Though the tactic has long been used by some traders, regulators have only recently begun clamping down on the practice. The 2010 Dodd-Frank Act specifically forbids the act.
The banks were slammed for failing to perform supervisory duties diligently. Deutsche Bank’s surveillance system spotted specific instances of potential misconduct, but the bank did not follow up on the majority of those identified, the CFTC said.
In the accompanying Deutsche order, in February 2011 one trader wrote: !shall we spoof”, to which the other responded: “sure.”
One UBS individual is alleged to have shown others in the team how to spoof; snippets of dialogue include a trader telling another to “see how the master does it”.
Five of the people charged were arrested on Monday, a justice department official said.
Krishna Mohan of New York City was charged with spoofing the E-mini Dow futures contract market on the Chicago Board of Trade, and the E-mini NASDAQ 100 futures contract market on the Chicago Mercantile Exchange.
Jitesh Thakkar and his Chicago-based company Edge Financial Technologies, and Jiongsheng Zhao, of Australia, have been charged with aiding and abetting spoofing and manipulating the same markets.
The CFTC also filed a civil enforcement action against James Vorley, a UK resident, and Cedric Chanu, a United Arab Emirates resident, charging them with spoofing in the precious metals futures markets.
Andre Flotron, of Switzerland, was charged with spoofing in the precious metals futures markets on a registered entity.
Finally, NYC-based Edward Bases, 55, and John Pacilio, 53, both of Southport, Connecticut, were charged with commodities fraud in connection with spoofing on the Chicago Mercantile Exchange, when they were employed as precious metals traders at a leading global financial institution. Bases is also charged with spoofing offences.
The Behavox Regulatory Intelligence team has put together a guide to spoofing, and looked at how chatrooms and lexicon shortcomings can lead to a failure to identify market manipulation.
Behavox runs regular roundtables for compliance professionals as part of its Compliance Community service in New York and London where peers get to share their knowledge and experience of market practice confidentially - the next roundtable will discuss email surveillance, as well as a discussion of methodologies used to adapt lexicons, lexicon themes, frequency of update etc. Anyone interested in attending should email firstname.lastname@example.org