Two Former London Precious Metals Traders Sentenced to U.S. Federal Prison for “Spoofing” Trades

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), it is a U.S. federal crime for commodities traders to engage in “spoofing.”  Spoofing is a trading practice that involves the placement of bids to buy or offers to sell futures contracts and cancellation of the bids or offers prior to the deal’s execution.

Because spoofing can result in massive market manipulation, U.S. enforcement authorities have vigorously pursued enforcement actions against companies and individuals for systematic spoofing.  In 2020, for example, the U.S. Commodity Futures Trading Commission imposed a record $920 million fine on J.P. Morgan Chase & Co. for engaging in spoofing and market manipulation over at least eight years.  In addition, the U.S. Department of Justice, which has authority to prosecute criminal spoofing violations, has prosecuted a variety of spoofing cases against U.S.- and foreign-based commodities traders.

Two recent sentences of London-based commodities traders show the Justice Department’s continuing commitment to prosecute spoofing, as well as the vagaries of the sentencing process in U.S. federal courts.  On June 25 and 28, respectively, two former Deutsche Bank commodities traders, James Vorley and Cedric Chanu, were each sentenced to one year and a day imprisonment.  The cases against Vorley and Chanu were part of a larger Justice Department investigation of Deutsche Bank for Foreign Corrupt Practices Act and spoofing-related violations that resulted in corporate resolutions with Deutsche Bank involving more than $130 million in criminal and civil penalties.

Vorley and Chanu, who had been precious metals traders with Deutsche Bank in London, were indicted by a federal grand jury in Chicago on spoofing-related charges.  Both men were convicted after a five-day trial in 2020, based on evidence that they and other Deutsche Bank traders engaged in a scheme to defraud other traders on the Commodity Exchange Inc.

Although the federal prosecutors had recommended a sentence of 57 to 61 months’ imprisonment, the Chicago U.S. Probation Office (which, among other functions, formulates independent sentencing recommendations for federal judges in that judicial district) reportedly recommended no prison time for either defendant.  Despite – or perhaps because of – the prosecutors’ vigorous opposition to the Probation Office recommendations, the sentencing judge imposed sentences on each defendant that were less than 25 percent of the minimum sentences that prosecutors had sought.

Firms engaging in commodities trading should take note of three lessons to be learned from the Vorley and Chanu cases. First, these prosecutions show that the Justice Department has authority to prosecute traders for spoofing, regardless of where the traders are physically located, if it can show the effect on U.S. markets, use of U.S. financial channels, or communications to or from the United States in furtherance of the spoofing scheme.  Second, the Varley and Chanu sentences should not be taken as an indication of probable sentences in future cases.  Under the U.S. Commodities Exchange Act, a conviction for spoofing can result in up to ten years’ imprisonment.  Finally, firms should use these cases as an opportunity to review their compliance programs and make sure that their internal controls are effective in detecting possible ongoing spoofing activity.

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