Securities Industry Commentator by Bill Singer Esq

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7Cir Affirms Former Deutsche Bank Traders Chanu and Vorley's Spoofing Convictions

United States of America, Plaintiff/Appellee, v. Cedric Chanu and James Vorley, Defendants/Appellants (Opinion, 7Cir)

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Turning to the conduct underpinning this criminal case, Chanu and Vorley placed orders for precious metals futures contracts on one side of the market that, at the time the orders were placed, they intended to cancel prior to execution. The government alleged that Chanu and Vorley placed such orders with the intent "to create and communicate false and misleading information regarding supply or demand (i.e., orders they did not intend to execute) in order to deceive other traders" and entice them to react to the false and misleading increase in supply or demand. As noted above, at all times relevant to this case, CME rules prohibited such conduct.   

Specifically at issue was Chanu and Vorley's manual "spoofing" conduct, which involved placing "fake bids and offers" to "trick other market participants." Chanu and Vorleyʹs trading colleague, David Liew, who testified against them at trial pursuant to a plea agreement, explained how manual spoofing worked: In an effort to buy something at the lowest possible price, that trader may use spoofing. Spoofing entails "plac[ing] orders opposite of [the] buy order . . . [with the] intent to have those offers deceive other market participants into thinking that there was more selling than there actually was and so hoping to get a better price on [the] original order." In Liew's words, a spoofing trader tries "to signal that [certain] trades would go through, but [the trader's] intent is actually to cancel them shortly after." Liew testified that, if successful, employing this illusion "would help Deutsche Bank" while "hurt[ing] any other market participants.

Of note, there are times when a trader may "cancel an order for totally legitimate reasons." A client may change their wishes or breaking news may "cause[] [the trader] to think differently about whether a buy or sell was a good idea." Although, as Liew explained, Deutsche Bank had a rule "where there should be only one person active in the market," and that person would be referred to as the "book runner," there were times when Chanu and Vorley placed opposite orders (for example, a sell order placed to facilitate a buy order, and vice versa) in violation of this rule. The rule was intended to avoid "different people placing orders that might confuse each other." If, however, a trader is "the book runner and [the trader's] colleagues are aware that [they are] selling something, and if [the trader] see[s] them buying . . . and especially if they don't talk to [the trader] about a trade and they're just placing orders very quickly and cancelling, [the trader] has very good reason to believe that those orders placed by them were to assist [the book running trader] buy‐ ing or selling rather than genuine intent."

(1) whether "spoofing" of readily tradeable, at‐risk orders that a trader is willing to honor if executed violates the wire fraud statute; (2) whether the district court correctly instructed the jury; (3) whether the district court abused its discretion in admitting Vorley's chat message stating that a competitor bank's "spo[o]fing is . . . illegal"; and (4) whether this case should be dismissed under the Speedy Trial Act. . . .

[W]e ask two questions: Was there a scheme to defraud by means of false representations or omissions, and were such false representations or omissions material? Answering both questions in the affirmative, we conclude Chanu and Vorley's conduct was within the reach of the wire fraud statute.  

Defendants argue that their readily tradeable bids and offers are not rendered "false" by their subjective intent to cancel. We agree that by simply placing an order, a trader is not certifying it will never be cancelled. Instead, the order placement signals a trader's intent to buy or sell. By obscuring their intent to cancel, through an orchestrated approach, Chanu and Vorley advanced a quintessential "half‐truth" or implied misrepresentation-the public perception of an intent to trade and a private intent to cancel in the hopes of financial gain. We remain unconvinced by defendants' arguments to the contrary. 

The record clearly establishes that traders employing manual spoofing do so with the aim (and effect) of influencing other actors in the trading space. Defendants' former colleague Liew testified that the spoofing illusion "would help Deutsche Bank" while "hurt[ing] other market participants." Such action is neither customary nor relatively harmless. See Weimert, 819 F.3d at 357 (outlining the bounds of criminalizing deceptive misstatements or omissions about a buyer or seller's negotiating position). Thus, there is no question the traders' implied misrepresentations were material.

[T]he Seventh Circuit described this "new trading environment" in the commodities markets, in which "trading takes place on digital markets where the participants utilize computers to execute hyper-fast trading strategies at speeds, and in volumes, that far surpass those common in the past." None of the parties contend that rapidly cancelling orders, in and of itself, is illegal.

[F]rom September to May 2020, Howard recruited a number of coconspirators in Cleveland and elsewhere, including codefendants Robert Nathaniel Andre Thomas, Tyvione Guthery and Jaelen D. Lattimore, to participate in a scheme that bought stolen credit and debit card information from the dark web and used it to purchase expensive jewelry and services at retail locations around Northeast Ohio.

As part of the conspiracy, Howard used the stolen financial information to create fraudulent credit and debit cards, which he then provided to his coconspirators.  Howard and the others would then use the cards to make purchases of expensive merchandise and services, including jewelry.  Howard and the coconspirators purchased the items either over the phone or in-store, using fraudulent identification cards embossed with the stolen information of others.

In one instance, court documents state that Howard, Guthery and Lattimore purchased a Rolex watch from a jewelry store in Westlake, Ohio, valued at $19,062 using a fraudulent credit card.  In a separate instance, court records show that Howard again used a fraudulent credit card to purchase four diamond and gold bracelets from a jewelry store in Canton, Ohio, valued at $26,463.

After obtaining the jewelry, Howard frequently sold the stolen items to others and used the proceeds for his own benefit and to pay his coconspirators.

Howard was arrested on May 20, 2021, with codefendant Lattimore, after purchasing more than $20,000 in items from jewelers in Aurora, Ohio.  At the time of the arrest, court documents state that Howard and Lattimore had in their possession a credit card embossing machine and three Rolex watches.

In total, court records show that Howard and the other coconspirators made fraudulent purchases at approximately 30 stores and caused a total loss of $261,319.28.

[B]eginning in January 2018 through at least August 2020, Doron "Ron" Tavlin, 66, of Minneapolis, Afshin "Alex" Farahan, 55, of Los Angeles, and David Gantman, 56, of Mendota Heights, willfully engaged in an insider trading conspiracy. The conspiracy involved nonpublic information about the acquisition of Company B, an Israeli-based company that specialized in robotics for spinal procedures, by Company A, an Ireland-based medical device company that primarily operated from its executive headquarters in Minneapolis. Tavlin, a former vice president of Company B, learned material, nonpublic information about Company A's potential acquisition of Company B. In violation of his duty to the company, Tavlin tipped this information about the acquisition to his friend, Farahan, who then tipped the information to Gantman. The defendants knew that Company A's imminent acquisition of Company B would likely result in an increase in Company B's stock price. Farahan and Gantman used the nonpublic information to purchase quickly substantial amounts of Company B securities throughout August and September 2018. On September 21, 2018, the day after Company B publicly announced its acquisition by Company A, Farahan and Gantman each sold all of their Company B securities for a total profit of more than $500,000.

According to court documents, in October 2018, Tavlin learned that the Financial Industry Regulatory Authority (FINRA) was investigating certain trades of Company B securities that occurred prior to the publicly announced acquisition. As part of its inquiry, FINRA asked insiders who knew about the secret acquisition negotiations, which included Tavlin, whether they knew any of the parties who traded in Company B securities leading up to the public announcement. In January 2019, Tavlin responded to FINRA's inquiry by falsely denying that he recognized any names on a list of persons and entities that purchased Company B securities, which included Farahan and Gantman's names.

According to court documents, it was part of the insider trading conspiracy that Tavlin and Farahan agreed that Farahan would pay money to Tavlin in exchange for the material, nonpublic information that Tavlin provided to Farahan. For example, in October 2019, Farahan gave Tavlin a $25,000 check in exchange for the information that Tavlin had provided about Company B leading up to the acquisition.

[T]avlin tipped his friend Afshin Farahan regarding Mazor's impending acquisition by Medtronic. The complaint alleges that Farahan used the information to buy Mazor stock and also tipped his friend, David J. Gantman, who purchased Mazor stock and call options in advance of the September 20, 2018 acquisition announcement. The SEC alleges that Farahan made about $247,500 in illegal trading profits, and Gantman made approximately $255,600. According to the complaint, in October 2019, Tavlin asked Farahan for money in exchange for the Mazor information, and Farahan paid him a kickback of $25,000. The SEC's Market Abuse Unit used data analysis tools to uncover the defendants' timely and profitable trading.

[I] January 2020, NTRP invited Haywood to participate in a registered direct offering of shares. Before being told about the offering, Haywood expressly agreed not to trade on the material, nonpublic information he was about to receive. Notwithstanding this agreement, after receiving information about the offering, Haywood immediately sold more than 100,000 shares of NTRP stock. As alleged in the complaint, NTRP's stock price dropped nearly 50 percent after the offering was announced. The complaint alleges that Haywood avoid losses of approximately $179,297.

As the court previously found, from March 2016 through April 2019, Seibert fraudulently solicited and accepted more than $10 million from 11 participants. At the time, Seibert claimed that he would use participant funds for short-term, high-interest, secured "bridge loans" made to third-party borrowers who purportedly would use the loaned funds to make property repairs as they sought permanent financing. Seibert told participants that he would find the lending opportunities, complete the due diligence to confirm that the borrower was qualified, and handle the closing and servicing of the loan. However, Seibert did not originate any loans. Seibert instead pooled and used most of the funds to trade commodity interests in his personal trading account, where he lost more than $8.3 million trading. He used other participant funds for personal expenditures.

Parallel Criminal Action

In a separate action, the U.S. Attorney's Office for the Western District of Texas filed a criminal complaint against Seibert on June 3, 2021, charging him with two counts of wire fraud and engaging in monetary transactions in property derived from unlawful activity. United States v. David Byron Seibert, No. 1:21-CR-00104-RP (W. D. Texas). Seibert pled guilty and was sentenced on December 7, 2021 to 70 months of incarceration and three additional years of supervised release. He was also ordered to pay restitution of $10,794,508 and was subject to a criminal forfeiture. 

• Securities Industry Commentator
• Bill Singer