Former Deutsche Bank traders seek to overturn wire fraud convictions

About a month after the Department of Justice (DOJ) urged the United States Court of Appeals for the Seventh Circuit to uphold the wire fraud convictions of James Vorley and Cedric Chanu, the former Deutsche Bank traders have responded to the DOJ’s brief.

The document, filed by Vorley and Chanu on January 21, 2022, uses some rather multi-disciplinary arguments, as the former Deutsche Bank traders seek to reverse their convictions. For instance, they argue that competitions, whether with cards or futures contracts, permit some “deceptive” techniques. And, according to the traders, these techniques do not amount to fraud.

Let’s recall that, according to the indictment, Cedric Chanu and James Vorley manipulated the futures market on the Chicago-based COMEX exchange by placing large visible “spoof” orders for futures contracts and then quickly canceling them before they could be filled. Because these orders appeared to signal genuine market interest, they often drove prices up or down, enabling the defendants to trade more easily or more profitably on the opposite side of the market.

The traders were convicted on September 25, 2020. They were sentenced to 12 months and one day in prison for a scheme to commit wire fraud affecting a financial institution.

While the DOJ argues that the Appeals Court should uphold the convictions, the traders are seeking to overturn them.

In their joint brief, submitted on January 21, 2022, Chanu and Vorley argue that an anonymous and legally binding bid or offer on a futures exchange carries no more of an implied representation of “good faith” than a raise or call does in poker. They add that this is not transformed into a false statement or misleading omission based on the subjective “intent” of the trader.

Vorley and Chanu state:

“To accept the government’s theory would transform the federal wire fraud statute into an all-purpose law for criminalizing violations of exchange rules—or any trading tactics the government deems to be dishonest—because such violations or tactics could always be characterized as implied misrepresentations of good faith”.

The traders note that US Courts have repeatedly warned against the dangers of allowing the mail and wire fraud statutes to be turned into catch-all tools for prosecuting conduct that may strike a prosecutor as manipulative, deceptive, or dishonest. According to Vorley and Chanu, this case is the latest example of such overreach.

Chanu and Vorley claim that they did not scheme to sell an investment that they knew to be worthless. They did not use pre-arranged, riskless trades – such as wash trades – to deceive other traders about the prices at which executed transactions had occurred. They say they placed readily tradeable bids and offers that they were willing and able to honor if executed before they were withdrawn. Chanu and Vorley were willing to “put [their] money where [their] mouth [was]”.

Chanu and Vorley explain that their subjective hopes that their alleged spoof orders would not fill and might be cancelled before execution did not render those orders “fake” or “false.” On an anonymous electronic futures exchange, a limit order placed on the order book conveys no information about the trader’s subjective intentions, nor how long the trader intends to keep the order on the market before cancelling it, nor the reasons why the trader might cancel the order.

Vorley and Chanu argue that “no trader looking at the COMEX order book—an incomplete, split-second snapshot of only the visible limit orders at various price levels, the great majority of which are cancelled before execution—could be defrauded by the appearance of a readily tradeable, at-risk order that he or she knows may be cancelled at any time”.

The traders say:

“Competitions—whether with balls, cards or futures contracts—often allow “deceptive” tactics. In football, the offense may line up for a punt on fourth down only to have the punter throw a pass. In baseball, the batter may show a bunt only to hit away at the helpless, charging third baseman. In poker, a gambler with a terrible hand may bluff her way to the pot by convincing the table that she’s holding pocket aces. And on COMEX, a trader seeking to sell a thousand contracts but not wanting the market to run away from him may use an “iceberg order” to make it appear to other traders as though only ten contracts, or even just one, have been placed on the market for sale”.

Chanu and Vorley say that their theory of defense was that “they believed in good faith that manual spoofing was a form of deception that, like iceberg orders, was permitted on COMEX because their orders were readily tradeable and at risk”.

According to the traders, the government’s burden was not merely to prove that spoofing was against the rules, but that Chanu and Vorley did not believe in good faith that it was permitted.

Vorley and Chanu urge the Court to vacate Appellants’ convictions and dismiss the superseding indictment or, alternatively, remand for a new trial.