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For traders who spoofed market years ago, a new ruling spells trouble
US prosecutors are starting to build cases against traders suspected of manipulating markets as long as a decade ago, after an obscure legal ruling extended the statute of limitations for spoofing cases.
In October, the judge presiding over the impending trial of two former metals traders ruled that the US government can pursue charges of wire fraud as well as spoofing against the pair. The decision addressed a long-running legal debate about whether the placing of electronic market orders with the intention of cancelling them constituted a form of "false representation" and therefore fraud.
For James Vorley and Cedric Chanu, the former Deutsche Bank AG traders on trial, it was an unwelcome development as they prepare to go to court in May. But the ruling has wider ramifications, because wire fraud, when perpetrated against a financial institution, is subject to a 10-year statute of limitations compared with just five for spoofing.
Cases involving conduct older than five years are already under way, according to people familiar with the matter.
"The Department of Justice pushed for wire fraud simply to expand the statute of limitations, and people are concerned by that," said Gary DeWaal, a financial markets defence lawyer at Katten Muchin Rosenman LLP in New York. "People wonder: 'Why did Congress enact a provision on spoofing with its own statute of limitations if the Department of Justice view is it can just go and do something else?'"
Spoofers place and then cancel large numbers of buy or sell orders with the aim of deceiving other market participants about supply and demand. Stamping out the practice has been a priority for the Justice Department and the Commodity Futures Trading Commission since new rules prohibiting the practice came into force in 2011.
More than two dozen individuals and firms have been sanctioned, including day traders operating out of their bedrooms, sophisticated high-frequency trading shops and big Wall Street banks like Bank of America Corp and Deutsche Bank.
However, some of the most egregious actors have escaped scrutiny, according to the people familiar with the matter, because they were operating in the period from 2011 to 2013, before a spate of spoofing prosecutions by the Justice Department. While prosecutors may be relishing their new powers, some defence attorneys describe it as government overreach.
"The net effect will be that manual traders, who were struggling to deal with the rise of algorithmic trading in the marketplace, will be at even greater risk of prosecution by hindsight," said David McGill of Kobre & Kim, which has represented several people accused of spoofing. Worse, he said, good-faith orders could be "at a greater risk of being deemed 'false' statements."
US authorities have already used the wire-fraud statute in other manipulation cases. The Justice Department recently brought a criminal racketeering case against JPMorgan Chase & Co precious-metals traders using the wire fraud statute - among other fraud charges - to prosecute alleged market rigging dating as far back as 2008.
Prosecuting suspected spoofers with wire fraud does carry some risk for the government, according to lawyers involved in spoofing cases. If the two Deutsche Bank traders are convicted and they choose to appeal, an appellate court might reverse the earlier judge's ruling allowing wire-fraud charges. BLOOMBERG