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U.S. Market-Manipulation Cases Reach Record (#GotBitcoin)

CFTC and Justice Department target spoofing and other illegal tactics, helped by data-sharing deal with key exchange. U.S. Market-Manipulation Cases Reach Record (#GotBitcoin)

Federal regulators have ramped up their pursuit of traders who use a bluffing tactic known as spoofing to manipulate market prices, enforcement officials said, leading to a record number of manipulation cases.

U.S. Market-Manipulation Cases Reach Record (#GotBitcoin?)
As part of the push, the Commodity Futures Trading Commission earlier this year quietly began receiving daily sets of market data from the world’s largest futures exchange, CME Group Inc.

CME handles around 85% of total U.S. futures-markets trading by volume. Regulators for the first time now have access to daily trading data with a one-day delay, giving them a much broader window into trading activity—and possible manipulation. Previously, the CFTC largely relied on CME staff and whistleblowers to spot spoofing.

The data-sharing agreement, effective as of February, comes as the CFTC and Justice Department both pursue traders engaged in spoofing, a practice outlawed by the 2010 Dodd-Frank Act. When spoofing, traders place fake orders to create the illusion of supply or demand, causing prices to swing up or down. The traders then profit from the move back as the market reverts to normal levels.

The CFTC brought a record 26 cases related to manipulative conduct and spoofing in the fiscal year ended Sept. 30. Several of those civil cases were accompanied by criminal charges filed by the Justice Department. Between 2009 and 2016, the average number of such cases brought was just five a year.

While spoofing is a problem in stock, bond and futures markets, it has been a particular focus of futures regulators and exchanges since the 2010 stock-market flash crash. Navinder Sarao, a British trader whom U.S. authorities charged with fraud, used an automated trading program to manipulate the market for S&P 500 futures contracts.

Regulators say having broader access to trading data makes it easier to identify spoofing and other market manipulations.

“Our ability to evaluate that data has helped us identify misconduct,” said James McDonald, the CFTC’s enforcement director.

In one recent case, the Justice Department charged three traders with manipulating stock-futures contracts that resulted in more than $60 million in losses for the firm that traded with them.

The data-sharing deal with CME came after the CFTC in 2014 pressed CME-operated exchanges to “continue to develop strategies to detect spoofing.” The regulator had grown frustrated by CME’s work in spotting and flagging manipulation.

Regulators and exchanges typically use statistical analysis to determine if a trader’s strategy relies on spoofing. In addition, they examine emails and other communication for signs of intent to spoof.

CME also has implemented new automated surveillance programs to monitor trader-messaging activity. This can help determine whether traders intended to engage in manipulation. The exchange employs more than 50 investigators who have experience working on anti-spoofing programs.

“Policing the market for disruptive trading practices continues to be a huge part of our regulatory investment and effort,” Thomas LaSala, CME’s chief regulatory officer, said in an email.

Cooperation between federal agencies was boosted by the government’s conviction of Mr. Sarao, whose 2016 guilty plea to criminal charges set a precedent for future spoofing cases. It spurred the Justice Department’s antifraud division to take on more spoofing cases, according to Mr. McDonald and Aitan Goelman, who was CFTC enforcement chief during the Sarao case. Meanwhile, the lead CFTC trial attorney on the Sarao case, Jeff Le Riche, moved to the Justice Department last year to help bring spoofing cases.

Updated: 11-9-2019

Tower Research to Pay $67 Million to Settle Spoofing Claims

Good morning. High-speed trading firm Tower Research Capital LLC agreed to pay $67 million to settle regulatory allegations that its traders manipulated the price of stock-index futures, the biggest penalty ever imposed by the U.S. derivatives watchdog in such a case.

New York-based Tower, which has been one of the most active participants in equity and derivatives markets, also signed a deferred-prosecution agreement with the Justice Department, which has worked closely with the Commodity Futures Trading Commission on such cases.

The resolution follows the guilty plea of two former traders at Tower who were involved in the scheme. Kamaldeep Gandhi and Krishna Mohan pleaded guilty to conspiracy to engage in wire fraud, commodities fraud and spoofing, while a grand jury indicted a third trader, Chinese citizen Yuchun “Bruce” Mao, on similar charges.

Messrs. Gandhi and Mohan are scheduled to be sentenced in February. Their lawyers didn’t immediately respond to messages seeking comment. Mr. Mao couldn’t be reached. Tower said it was “deeply disappointed” by the allegations and added that all three traders left the firm nearly six years ago.

Updated: 2-7-2020

Justice Department Presses Ahead With ‘Spoofing’ Prosecutions Despite Mixed Record

Crackdown in futures markets is yielding new wins for prosecutors, but several coming trials will show if tactic is ultimately successful.

A yearslong crackdown on cheating in futures markets is yielding new wins for the government, but several trials to come will show whether the Justice Department’s focus on a tactic known as “spoofing” is ultimately successful.

Prosecutors have doubled down on their effort to curtail this form of market manipulation, with four former traders scheduled to stand trial this year. The Justice Department’s Fraud Section, which focuses on white-collar crime, dedicated a special team last year to rooting out the conduct.

In recent weeks, two former traders alleged to have deceived markets with spoofed orders were sentenced to time served. On Tuesday, a federal judge in Chicago allowed one of them, Jiongsheng “Jim” Zhao, to return home to Australia. Mr. Zhao spent 10 months in an Australian prison before being extradited to the U.S. and pleading guilty.

“We need to flush this trading behavior out of the system in these markets in order to protect the integrity of them,” said Assistant Attorney General Brian Benczkowski, who oversees the DOJ’s criminal division.

Critics of the government’s campaign say prosecutors have turned routine, if cunning, behavior into a crime on par with insider trading. Some traders say spoofing, a form of bluffing that entails entering bogus orders and quickly canceling them, is hard to distinguish in markets where algorithmic traders constantly post, cancel and update prices.

The spoofing defendants are mostly manual traders at Wall Street banks accused of posting phony orders that trick high-speed traders, such as Citadel Securities and Quantlab Financial LLC, into making bad trades.

“It sounds like a moral issue because deception is involved, but that is what trading is all about,” said Jerry Markham, a professor at Florida International University and former regulator who has testified on behalf of traders accused of spoofing.

Other officials say the DOJ’s involvement has boosted the enforcement efforts of the regulators who supervise derivatives markets. The Commodity Futures Trading Commission has occasionally assigned its employees to temporarily work at the DOJ to assist the probes.

The CFTC has already fined arms of Wall Street banks that employed some of the traders accused of spoofing, including Deutsche Bank AG and Merrill Lynch Commodities Inc.

“We know there is no deterrent like, in the appropriate case, the prospect of criminal prosecution in parallel with the underlying CFTC action,” CFTC enforcement director James McDonald said in November.

The Justice Department has aggressively pursued what it believes are the worst examples of spoofing, including charging four former JPMorgan Chase & Co. precious-metals traders with a range of offenses including racketeering conspiracy, said Aitan Goelman, a former CFTC enforcement director.

“Labeling that part of the bank a racketeering enterprise was an escalation that is unprecedented,” Mr. Goelman said.

A JPMorgan spokeswoman declined to comment.

Spoofers typically enter large orders on one side of the market—an order to sell, for instance—thereby fooling other traders into thinking supply or demand has changed. If it works, another participant will adjust prices and trade with a smaller order that the spoofer wants filled. The spoofer then cancels the bigger order, prices revert back to their previous level, and the spoofer makes money.

Done systematically, spoofing can generate a lot of income. Navinder Singh Sarao, whose spoofing was blamed for destabilizing markets in 2010, was sentenced last week and agreed to forfeit $12.8 million in illicit gains as part of a guilty plea.

Prosecutors believed they could detect deceptive orders in futures markets by using the same type of data analysis used to identify Medicare-billing fraud, people familiar with the matter said.

The prosecutors later hired their own consultants, the Boston-based Analysis Group Inc., to analyze spoofing signs in terabytes of futures-market data and prepare for trials. DOJ’s criminal division has paid the company at least $4.5 million since 2017 for work tied to the spoofing crackdown, according to federal contracting data.

A Justice Department spokesman declined to comment on its use of consultants. An officer of Analysis Group couldn’t immediately be reached for comment.

Mr. Benczkowski said the government’s use of data, work with the CFTC, and its ability to recruit cooperating witnesses who knew where spoofing occurred led authorities to discover more cases. “As we continue to see those trading patterns and manipulative conduct, we’re going to work to try to stop it,” he said.

Winning at trial has proven difficult, though, because juries have to be convinced of a trader’s intent to enter bogus orders and that others were harmed.

The victims in spoofing cases are often high-speed traders, such as Citadel Securities and Quantlab, whose computers rely on the order data they ingest from exchanges to drive their own super-fast trading decisions. Prosecutors have prevailed at trial in one case but lost two others. A Citadel spokeswoman declined to comment.

“There is no question it takes money from algorithmic trading firms like us, who rely on the market data,” a Quantlab spokesman said.

A jury two years ago acquitted a former trader at UBS Group AG accused of spoofing after a federal judge in Connecticut had already dismissed several counts against the defendant, Andre Flotron, because the trading occurred outside the state.

The prosecutors who tried the case, Robert Zink and Avi Perry, continued to pursue cases of spoofing despite the Flotron loss. Mr. Perry, 37 years old, moved from the Connecticut U.S. Attorney’s office to Washington, overseeing a team of attorneys focused on commodities fraud. Mr. Zink, 41 years old, was promoted to head the fraud section and continues to oversee spoofing prosecutions.

Defense attorneys say the government has filed sharper cases since losing the Flotron case and failing to convict another defendant—who programmed spoofing algorithms but didn’t trade—in Chicago.

“If they are smart, they learned a lot of lessons from Flotron,” said Marc Mukasey, who represented Mr. Flotron and beat the government at trial. “I think they are being more focused and targeted.”

More recently, prosecutors have charged former traders at JPMorgan Chase, Bank of America and Deutsche Bank. Spokesmen for Bank of America and Deutsche Bank declined to comment.

In the case involving former Deutsche Bank employees, prosecutors charged the defendants with conspiracy and wire fraud because the trading at issue predated the law that prohibited spoofing. Defense attorneys argued that was an unfair attempt to criminalize conduct before the market knew it was forbidden.

The federal judge in the Deutsche Bank case, John J. Tharp Jr. in Chicago, has so far agreed with the government. The two traders, James Vorley and Cedric Chanu, are scheduled to go to trial in May.

An attorney for Mr. Vorley declined to comment, while Mr. Chanu’s lawyer didn’t return messages seeking comment. Deutsche Bank has said it cooperated with the government’s investigation and improved how it spots questionable activity by traders.

In separate cases, two other former traders who pleaded guilty to spoofing were sentenced in the past week.

Mr. Sarao, 41 years old, was sentenced to time served. Prosecutors said his attempts to rig prices weren’t motivated by greed but were related to his autism and “an obsessive or addictive desire to excel at electronic trading.”

A lawyer for Mr. Sarao said the judge’s decision was a “wonderful outcome” and that Mr. Sarao was “overjoyed to put this behind him.”

Mr. Zhao, who like Mr. Sarao traded e-mini S&P 500 futures, was sentenced Tuesday in Chicago. Prosecutors said he earned $21,000 from deceptive trading and spoofed to close out positions when he wanted to leave work for the day.

Mr. Zhao stood in a Chicago courtroom Tuesday and told Judge Tharp that he understood the consequences. Judge Tharp called spoofing “quite a serious crime.”

While Mr. Zhao may not have been motivated by greed, Judge Tharp told him: “You weren’t doing this to lose money.” The judge added: “You were doing this … to move the market in your favor.”

Updated: 3-10-2023

SEC Is Focusing On Earnings Manipulation By Companies

U.S. Market-Manipulation Cases Reach Record (#GotBitcoin)

Watchdog scrutinizes financial reports to sniff out accounting tricks.

Regulators are scrutinizing whether companies are manipulating financial results to meet Wall Street targets, as a profit-squeeze amps up pressure on executives to “make the numbers.”

This earnings season has been marked by falls in both reported profits and expectations of future returns. With more than 99% of S&P 500 companies having reported, fourth-quarter earnings are down 4.65%, according to FactSet. That is the first year-over-year decline since fall 2020, at the height of the pandemic.

Tough economic times have historically been fertile ground for earnings management. Executives use flexibility in the accounting treatment of items such as reserves for losses, or revenue recognition, to boost reported earnings per share.

In many instances, this is perfectly legal. It can, though, in some cases slide into securities-law violations or even fraud. Problematic tactics range from accounting changes that mask an underlying deterioration in the company’s finances to numbers-juggling that falls outside generally accepted accounting principles.

U.S. Market-Manipulation Cases Reach Record (#GotBitcoin)

“There are more incentives for being clever with earnings because of the overall economic scenario,” said Jack Ciesielski, owner of investment research firm R.G. Associates Inc.

Regulators are on high alert. In recent months, the Securities and Exchange Commission has brought a string of cases accusing executives of cooking the books to meet numbers. Today’s tough climate for earnings will likely swell the pipeline of future actions.

“My money is on a few years from now, say 2026, we’ll see a lot more of these earnings management cases,” said Lenin Lopez, an attorney at insurance brokerage Woodruff Sawyer & Co.

The SEC’s enforcement armory includes its so-called EPS Initiative, which uses data-driven analytics to try to root out earnings manipulation. So far, that has resulted in cases against six companies and an unusually high number of individuals, including five current or former chief financial officers.

The SEC has put particular focus on pursuing individuals in the EPS cases in the hope of changing corporate behavior.

The aim is to dissuade executives from the temptation to use accounting gimmicks to make the numbers. Even seemingly small accounting tweaks can result in a lawsuit.

In the latest case under the EPS Initiative, the SEC in February fined automotive-parts supplier Gentex Corp. $4 million for alleged earnings-management tactics that added a single penny to its reported EPS.

In 2015, Kevin Nash, who was then Gentex’s chief accounting officer and is now the company’s finance chief, reduced a reserve for paying executive bonuses from $300,000 to $100,000.

The change meant the Michigan-based manufacturer met its 27-cent-a-share earnings target. “Had to reduce [the reserve] in order to keep .27 a share,” Mr. Nash wrote in an internal email, cited by the SEC.

“[G]ood call,” a senior Gentex executive responded. “That puts in line with consensus, right?” Mr. Nash replied yes.

Mr. Nash last month agreed to pay the SEC $75,000 to resolve its charges, without admitting liability. He didn’t respond to requests for comment.

Gentex “continues to have complete faith in Kevin Nash, who remains a critical member of our management team,” a spokesman said.

The SEC didn’t allege intentional wrongdoing by Gentex, and none of the accounting entries involved had a material impact on the company’s financial statements, the spokesman added. Gentex resolved the SEC case without admitting liability.

The SEC has a long history of trying to tamp down earnings manipulation. A quarter of a century ago, the agency’s then-chairman, Arthur Levitt, criticized what he called the widespread use of “accounting hocus-pocus” to smooth earnings.

His call to Wall Street to end this practice appears to have fallen on deaf ears. Warren Buffett last month warned that earnings can easily be manipulated by managers who wish to do so, calling it “one of the shames of capitalism.”

In his annual letter to shareholders, the investor said tampering with earnings to beat expectations was often thought of as sophisticated.

“That activity is disgusting,” Mr. Buffett wrote.

Not all earnings management is bad, according to some analysts and academics. Provided it is done effectively, it can benefit shareholders by smoothing out the impact of one-off events, a 2020 study of more than 43,000 quarterly earnings reports found.

“Smoothing can help investors,” said David Farber, an accounting professor at Indiana University’s Kelley School of Business and a co-author of the paper. “Companies that manage earnings well can have more predictable earnings and cash flows, and that’s reflected in the price of their stock.”

A key determinant of whether smoothing helps or hinders the share price is the ability of the people running the company, measured by their ability to convert assets into cash, according to Mr. Farber.

High-quality management teams use smoothing more often, and more effectively, than poor-quality ones, his research found.

At the other end of the spectrum, illegal earnings manipulation can carry a heavy price for companies and executives alike.

Peter Armbruster is currently serving a two-year prison sentence in Duluth, Minn., for an accounting fraud regulators said was designed to meet earnings targets.


United States v. Peter Armbruster

The former chief financial officer of Roadrunner Transportation Systems Inc. was convicted in 2021 on four criminal counts.

His alleged conduct included hiding incurred expenses and failing to write-off millions of dollars in overvalued assets, the SEC said.

The scheme has cast a long shadow over his former employer, Roadrunner. The transport company in February resolved SEC allegations related to the alleged fraud, without admitting liability.

Roadrunner had already paid $20 million in 2019 to settle a class-action lawsuit brought by shareholders, after it restated several years of financial statements.

Lawyers representing Mr. Ambruster didn’t respond to requests for comment. Roadrunner said in a statement the allegations related to “conduct that took place more than five years ago by individuals not involved with the company since 2018.”

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