CFTC presses ahead with spoofing case against former Deutsche Bank traders

The United States Commodity Futures Trading Commission (CFTC) has opposed the arguments raised by former Deutsche Bank traders James Vorley and Cedric Chanu, who are accused of spoofing. The regulator has submitted its opposition to the defendants’ motion to dismiss at the Illinois Northern District Court on December 6, 2021.

The CFTC argues that the defendants’ motions should be denied in full.

Let’s recall that the CFTC alleges in its Complaint that Vorley and Chanu engaged in a five- year manipulative and deceptive scheme to trick other traders in the precious metals futures market by spoofing. To effect the scheme, Vorley and Chanu allegedly placed large bids and offers with the intent to cancel those orders before execution, in order to induce other market participants to transact on smaller orders that Vorley and Chanu had placed on the opposite side of the market.

In other words, Vorley and Chanu are alleged to have tricked the market into believing that certain of their orders were genuine to benefit themselves. The Complaint alleges that, by virtue of this conduct, the traders engaged in acts and practices that violated the anti-spoofing provision in Section 4c(a)(5)(C) of the Commodity Exchange Act (“Act”), 7 U.S.C. § 6c(a)(5)(C) (2012), (Count I), and the prohibition on manipulative and deceptive devices in Section 6(c)(1) of the Act, 7 U.S.C. § 9(1) (2012), and Commission Regulation (“Regulation”) 180.1(a)(1) and (3), 17 C.F.R. § 180.1(a)(1), (3) (Count II).

As FX News Group has reported, Vorley and Chanu moved to dismiss portions of both Counts, arguing that the Complaint was filed after the applicable five-year limitations period as to all but approximately six months of alleged misconduct. The CFTC notes that the defendants do not dispute that certain alleged conduct falls within the limitations period and that the case will proceed as to that conduct.

The regulator says that the defendants’ arguments fail because both spoofing and manipulation are properly pleaded as the types of continuing schemes that prevent the running of the statute of limitations provided at least one instance occurred within the limitations period, so the entire Complaint is timely.

The CFTC explains that its Complaint identifies a specific trading pattern, namely, that Vorley and Chanu entered visible Spoof Orders that were intended to be cancelled, on the opposite side of Genuine Orders, which were typically divided into a visible portion of a certain pre-set quantity that was visible to other market participants, and another portion of the order that was not visible to market participants until the visible portion was filled.

The allegations put Vorley and Chanu on notice of what conduct the CFTC alleges violated the Act and Regulations, and the defendants are adequately equipped to frame their defense. Further, the Complaint sets forth eight specific examples of trading by Vorley and Chanu that fall within this pattern and indicate that Defendants, when placing the Spoof Orders, intended to cancel them. Each example sets forth the date, time stamps, product, order size and placement, fills, and cancellation activity.

The Complaint also details numerous electronic communications involving Vorley, Chanu, and other traders, that include explicit references to “fake bids,” “spam bids,” “spoofing it up,” and “trick[ing]” an algorithm used by traders at other institutions. Those communications, the CFTC says, directly evidence Defendants’ manipulative and deceptive intent underlying the Scheme.

Defendants argue that the Complaint fails sufficiently to allege intent because they were “ready, willing, and able to honor” the Spoof Orders that they placed.

The CFTC says that whether certain Spoof Orders may have been executed before Defendants could cancel them—another potential fact not found in the Complaint—is not dispositive of their intent. That thousands of the defendants’ spoof orders were executed did not alter the fact that the defendant wanted to avoid having those orders executed, the regulator argues.

For the same reason, the purported distinction Defendants draw between manual and high-frequency trading, also bears no legal significance, the CFTC says adding that intent, not speed, defines spoofing.

Defendants also argue that the Complaint fails to adequately describe the market impact of their trading. In an enforcement action, however, the CFTC need not plead or prove reliance or damages.

The lawsuit reached this stage after the former traders and the regulator failed to reach a settlement.