Federal prosecutors on Monday announced charges against eight traders for deceptive trading practices in the futures markets, with all but one person charged with illegal spoofing.
The traders worked for UBS Group AG and Deutsche Bank AG, among other firms. The Commodity Futures Trading Commission later announced related civil charges against three banks and six individuals.
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"Conduct like this poses significant risk of eroding confidence in U.S. markets and creates an uneven playing field for legitimate traders and investors," acting assistant attorney general John P. Cronan said in a statement.
Before Monday's cases, only three individuals had ever been charged with spoofing, which involves a trader entering large orders with the intention of tricking others into thinking there had been a fundamental change in supply and demand in a market. Congress outlawed the practice in 2010 as part of the Dodd-Frank Act. In August, a federal appeals court upheld the conviction of the first U.S. trader to face prison time for manipulating futures prices using spoofing tactics.
In addition to the criminal charges, the CFTC announced civil settlements with Deutsche Bank, UBS, and HSBC Securities Inc. related to commodities fraud and spoofing. Deutsche Bank agreed to pay $30 million after the CFTC charged it with engaging in a scheme to manipulate the prices of precious metal futures. UBS reached a $15 million settlement for similar charges, and HSBC agreed to pay $1.6 million, also for spoofing in precious metals markets. The fines for UBS and HSBC were lower due to their cooperation with the CFTC, including UBS self-reporting much of the illegal activity, the agency said.
"These cases should send a strong signal that we at the CFTC are committed to identifying individuals responsible for unlawful activity and holding them accountable," said CFTC Enforcement Director James McDonald.
Monday's cases are the most significant action taken against banks for spoofing since the CFTC fined Citigroup Inc. $25 million last January for illegal activity in Treasury futures markets. Citigroup neither admitted to nor denied the allegations.
In one of the cases, the CFTC fined Andre Flotron, a former UBS precious metals trader in Stamford, Conn., and Zurich, with concocting a spoofing scheme for personal and corporate profit. UBS had provided its futures traders, including Mr. Flotron, with automated trading software that allowed them to "place, modify, and cancel multiple orders nearly simultaneously," according to a criminal indictment filed in September.
Mr. Flotron's lawyer, Marc Mukasey, said the new case "is an especially enormous waste of taxpayers' money because the CFTC knows darn well that there is a pending criminal matter, that Mr. Flotron has long been retired from the business, and that he lives in Switzerland. Their case is a paper tiger."
Representatives for HSBC didn't immediately respond to requests for comment.
"UBS is pleased to have resolved this several-year-old matter. As the CFTC recognizes in the settlement, UBS self-reported this alleged conduct to the CFTC, cooperated fully in the investigation, and has long since remediated the conduct," a spokesman for UBS said.
A spokesperson for Deutsche Bank said the bank provided "substantial and proactive cooperation with the government's investigation and has enhanced controls and surveillance to help ensure that the underlying conduct does not occur in the future."
The charges against the traders primarily reference activity before 2015, when both firms and regulators lacked sufficient controls to monitor for spoofing activity, as trading migrated from open pits to electronic platforms.
"The conduct at issue here started in 2008," said Michael Friedman, general counsel of Trillium Management LLC, a New York-based electronic-trading firm, which isn't involved in the cases announced Monday. "When this conduct was in its heyday, which is now seven to eight years ago, people weren't looking to detect it like they are now."
The cases mark the first major enforcement actions of 2018 for the CFTC and Mr. McDonald, who took over as enforcement director in April 2017. The relatively large fines follow a year that saw a steep drop in total financial penalties, although it can be hard to compare years that involve a change in agency leadership.
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(END) Dow Jones Newswires
January 29, 2018 16:50 ET (21:50 GMT)