Prosecutions Defended by Dechert’s White-Collar Team — The Crime of Spoofing, Following the Cases of Navinder Sarao and James Vorley

The Department of Justice's (DOJ) prosecution of U.K. citizen Navinder Sarao has raised the profile of "spoofing," a form of illegal market manipulation that can have devastating effects on the markets. Sarao's prosecution highlights the extensive reach of U.S. law, in this case reaching the activities of a man outside the U.S. when the offense was committed. Sarao was represented by Dechert, an international law firm known for its high-stakes litigation capability with white-collar teams in the U.S. and London.

The "Hound of Hounslow"?

Sarao was a self-taught trader, operating out of a bedroom in his parents' modest home in West London. He used sophisticated software to place thousands of orders before canceling them, benefiting traders on the opposite side of the market. Sarao's profit was estimated at around US$40 million in the space of five years.

Despite being based in the U.K., Sarao was extradited to the U.S. over allegations that his activities contributed to the 2010 flash crash: a brief period in which US$1 trillion was wiped off shares before the markets recovered. Facing a lengthy spell in prison far from home, Sarao turned to a white-collar Dechert team led by London-based Roger Burlingame. 

The facts of the case and the high-profile extradition of Sarao to the U.S. created a media storm. Sarao was dubbed "Hound of Hounslow" in homage to "Wolf of Wall Street", although he was a very different character. His extraordinary tale shares but one parallel - it's being made into a film starring Dev Patel. Sarao faced 22 charges, carrying a maximum sentence of 380 years. 

The Strategy Devised by Dechert's White-Collar Team

Burlingame is himself a former high-ranking prosecutor for the DOJ. Used to defending clients involved in cross-border U.S. government investigations, the strategy the Dechert white-collar team formulated saved Sarao from a lengthy prison term.

Sarao is an autistic and highly gifted individual. He saw his feinting at the markets "like winning a video game," as his Dechert white-collar defense team argued. It also helped his case that Sarao did not lavishly spend, losing most of his money to fraudsters. Recognizing his autism, time spent in prison, and cooperation, he was spared prison and cooperated with the authorities. U.S. prosecutors used Sarao's knowledge to enhance the DOJ's understanding of spoofing - an advantage for future investigations. 

Dechert's White-Collar Team and Growing Regulator Interest in Spoofing

Law firms with white-collar and corporate investigations practices such as Dechert have noted a growing regulatory interest in spoofing. Spoofing is bidding or offering without the intent to execute; its purpose is to create a false market position that can benefit traders on the opposite side of the market. While canceling orders is allowed, the Dodd-Frank Wall Street Reform and Consumer Protection Act makes it illegal to place orders with no intention of execution. 

Various factors point to an uplift in regulatory interest in spoofing cases on both sides of the Atlantic. In the U.S, these include new theories of civil and criminal liability and more sophisticated data analytics. The U.S. regulators' pursuit of offenders overseas is also a clear sign of how seriously this offense is taken.

Recent U.S. cases point to a new take on spoofing. In 2020, the DOJ prosecuted James Vorley and Cedric Chanu, both foreign citizens, for "wire fraud affecting a financial institution." Roger Burlingame and Matthew Mazur from Dechert's white-collar team represented Vorley. Like many recent targets of the DOJ, the accused were traders employed by large banks to trade precious metals. 

The trial showcased the government's new theory that spoofing should fall under the wire fraud statute. The DOJ argued that each bid or offer makes an "implied representation" that the trader intends to trade the order. Such a spoof order is designed to benefit an order on the other side of the market. Further, it can defraud other market participants. So Vorley and Chanu, who traded for Deutsche Bank, also "affected" Deutsche by exposing the bank to increased risks. At trial, Vorley and Chanu were acquitted on a conspiracy charge and eight substantive wire fraud counts. However, they were found guilty on 10 other counts of wire fraud (three for Vorley and seven for Chanu). 

The U.S. regulators are also cracking down on financial institutions as well as individuals. In January 2021 Deutsche Bank agreed to pay more than US$130 million to settle criminal and civil charges, including that of spoofing, and JPMorgan Chase & Co. agreed to pay a US$390 million fine.

Difference Between US and UK Regulators

The DOJ and Commodity Futures Trading Commission (CFTC) are the main regulators that have spoofing in their sights. The U.S. Securities and Exchange Commission (SEC) has also shown increased interest. In the U.K., the Financial Conduct Authority (FCA) investigates and prosecutes activities that threaten the integrity of the financial markets. To date, there have been no criminal prosecutions for spoofing behavior in the U.K., although there have been regulatory sanctions. Contrast this to the U.S., where all the criminal spoofing trials in 2020 and 2021 so far involve U.K. traders. U.S. and U.K. prosecutors have increasingly cooperated in the related areas of the U.K. Bribery Act and U.S. Foreign Corrupt Practices Act (FCPA). Extrapolating from that, a conjoined approach is likely in future spoofing cases. 

The FCA already has a number of active spoofing cases. In late 2020, the U.K. regulator took enforcement action against an individual, Corrado Abbattista, for spoofing conduct. He was found to have engaged in market abuse by "creating a false and misleading impression as to the supply and demand for equities." The fine totaled £100,000 and Abbattista was banned from trading. Other U.K. regulators have also acted: In 2019, the Office of Gas and Electricity Markets (Ofgem) took steps to tackle spoofing conduct on the wholesale energy markets. 

Spoofing is a global activity, sparking the interest of multiple regulators. This means that market participants - from individual traders to international banks - need to be aware of the risks and potential for prosecution. Increased cross-border regulatory cooperation across the Atlantic is very likely. International law firms with white-collar teams that straddle the U.S. and London, such as Dechert, are the best equipped to handle such prosecutions or regulatory investigations. As well as acting for individuals in spoofing cases, such as Navinder Sarao's, financial institutions and corporates are regular clients. White-collar practices also frequently aid governments in investigations into market regulation, completing the picture.

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