The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 8, 2022









Alas . . . there's no one left to beat the crap out of Carlo. RIP James Caan.



https://www.brokeandbroker.com/6544/frumento-nir-rahamim/
The SEC filed charges against two alleged fraudsters, who purportedly misappropriated a website and impersonated its owner; and, thereby encouraged investors to liquidate their retirement accounts in order to purchase fixed indexed annuities. Seems like and open-and-shut, down-and-dirty SEC fraud case, right? Except the fact pattern troubles veteran Wall Street lawyer Aegis Frumento. There's wrongful conduct in the takeover of the website. There's wrongful conduct in impersonating the site's owner. Beyond that, Aegis wonders: What exactly is the deceptive conduct, or material misstatements or omissions "in connection with the purchase or sale of securities." 

United States of America, Plaintiff/Appellee, v. Cedric Chanu and James Vorley, Defendants/Appellants (Opinion, United States Court of Appeals for the Seventh Circuit ("7Cir"), No. 21-2242, 21-2251, and 21-2666 / July 6, 2022)
https://brokeandbroker.com/PDF/Chanu7CirOp220706.pdf
As set forth in the 7Cir Opinion:

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."

at Pages 4 - 6 of the 7Cir Opinion

In an Indictment filed on July 24, 2018, the government charged Chanu and Vorley with conspiracy to commit wire fraud affecting a financial institution between 2009 and 2011 in violation of 18 U.S.C. § 1343.  A Superseding Indictment on November 26, 2019, expanding the charged conspiracy to 2008-2013. Count 1 charged Vorley and Chanu with conspiracy to commit wire fraud affecting a financial institution; and Counts 2 -17 alleged incidents of wire fraud.

After four days of deliberation, a jury in the United States District Court for the Northern District of Illinois returned several deadlock notes before:
  • acquitting Chanu and Vorley on the conspiracy count;
  • convicting Vorley of three counts of wire fraud, and 
  • convicting Chanu of seven counts of wire fraud 
The District Court denied Defendants' motion for a judgment of acquittal and motion for a new trial; and sentenced Vorley and Chanu to one year and one day in prison. 

On appeal to the 7Cir, Chanu and Vorley raise four issues:

(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. . . .

at Page 15 of the 7Cir Opinion

In finding that the spoofing at issue rose to the level of wire fraud, the Court stated in part that:

[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.  

at Pages 17 -18 of the 7Cir Opinion

7Cir offers an interesting over-view of spoofing can amount to a scheme to defraud by means of false representations or omissions:

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. 

at Page 21 of the 7Cir Opinion

Even if the spoofing is conceded, the Defendants argued that the cited bids/offers should not be deemed as "material" for purposes of satisfying the wire fraud statute's threshold. In rejecting that argument, the Court found in part that:

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.

at Page 22 of the 7Cir Opinion

After affirming other aspects of the District Court's conduct, 7Cir affirmed the lower court's judgment

Bill Singer's Comment: A well drafted Opinion by 7Cir. On the other hand, as recently reported in "The Flash Crash, Interactive Brokers, Two Hedge Funds, John Does, And Homer Simpson's Appetite For Donuts" (BrokeAndBroker.com Blog / July 6, 2022) 
https://www.brokeandbroker.com/6541/kessev-tov-pajoje/ we have the very same United States District Court for the Northern District of Illinois as conducted Chanu and Vorlye's criminal trial offering this analysis of spoofing:

At bottom, Plaintiffs have alleged that Defendants engaged in market manipulation because they entered-and quickly cancelled-orders to buy and sell. The complaints allege that Defendants' manipulation is evident in the "well-defined pattern and speed of placing these bids" and the "frequency, speed, and precision with which the bidding took place evidences a highly orchestrated plan to deceive." (Case No. 20-cv-04947, Dkt. 25 at 6-7, ¶ 16; Case No. 20-cv-04948, Dkt. 24 at 6-7, ¶ 15.) In the case of John Does A and D, the complaints place the volumes of simultaneous bids and asks in a range of 12 to 83, while for John Doe B, the range was 3 to 7. (See generally Case No. 20-cv-04947, Dkt. 25; Case No. 20-cv-04948, Dkt. 24.) The only "pattern" apparent from the face of the complaints is that of rapidly placed and subsequently cancelled orders. 

But placing rapid orders and cancelling them does not necessarily evince illegal market activity. Other courts have recognized the ubiquity of rapid trading across securities platforms. For example, in United States v. Coscia, 866 F.3d 782, 785 (7th Cir. 2017), the 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.

at Pages 17 - 18 of the NDIL Kessev Tov/Pajoje Opinion

Chanu and Vorley is a criminal case, whereas, Kessev Tov/Pajoje is civil. Consequently, spoofing is being viewed through two very different legal prisms in the criminal and civil cases. Notwithstanding that critical distinction, we really need to carefully weigh NDIL's observation in Kessev Tov/Pajoje:

[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.

Cleveland Man Sentenced to Prison for Leading Conspiracy that Purchased Thousands Worth of Jewelry Using Stolen Financial Information (DOJ Release)
https://www.justice.gov/usao-ndoh/pr/cleveland-man-sentenced-more-six-years-prison-leading-conspiracy-purchased-thousands
Hasan Howard, 23, pled guilty in the United States District Court for the Northern District of Ohio to conspiracy to commit access device fraud, access device fraud and aggravated identity theft; and he was sentenced to "more than six years in prison" and ordered to pay $261,319.28 in restitution. As alleged in part in the DOJ Release:

[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.

Bill Singer's Comment: Why do folks want to steal your financial information -- you may have wondered. Well, at times it's so that they can fabricate credit/debit cards and go on a shopping spree (under your name). Sadly, the creativity that went into stealing your confidential information is sort of wasted with the banality of the crime: watches and jewelry. Ho hum. Making matters even a tad more droll, the swag was converted into cash and the proceeds divvied up. It's one thing for me to respond to the allegations with boredom; however, how the hell does DOJ report the Court's sentence as imprecisely as "more than six years." I mean, seriously? The Court did not hand down such a vague term of imprisonment as more than six years. I'm guessing that the Court imposed something far more precise like 73 months or 75 months. Given that DOJ thought it important enough to generate a press release, you'd think that someone would have invested a few extra seconds to report the accurate sentence handed down. Courts do not impose sentence by starting out with "I'm thinking of a number between six years but probably not more than eight years, and, well, maybe I'll just pronounce something more than six years, bang the gavel, call the next case, and, sure, someone at BOP can work it out with the convicted felon."

https://www.justice.gov/usao-mn/pr/three-men-federally-indicted-insider-trading-securities-fraud
-and-
https://www.sec.gov/litigation/litreleases/2022/lr25439.htm

In an Indictment filed in the United States District Court for the District of Minnesota, Doron "Ron" Tavlin,  Afshin "Alex" Farahan, and David Gantman were charged with conspiracy to engage in insider trading, securities fraud in the form of insider trading, and aiding and abetting securities fraud. As alleged in part in the DOJ Release:

[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.
https://www.sec.gov/litigation/complaints/2022/comp25439.pdf, the SEC charged
Mazor Robotics Ltd's former Vice President of Business Development Tavlin, and his friends Afshin Farahan, and David J. Gantman with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[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.

SEC Charges Washington, D.C. Investor with Insider Trading (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25440.htm
In a Complaint filed in the United States District Court for the District of Columbia
https://www.sec.gov/litigation/complaints/2022/comp25440.pdf, the SEC charged Georges W. Haywood with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Haywood agreed to 
  • be permanently enjoined from violating those provisions, 
  • be barred from serving as an officer or director of a public company, and 
  • to pay disgorgement, prejudgment interest, and a civil penalty.
As alleged in part in the SEC Release:

[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.

https://www.cftc.gov/media/7461/enfdavidseibertsupplementalconsentorder070622
/download requiring him to pay $10,794,508 in restitution and a $2,278,853 civil monetary penalty. Previously, the Court permanently prohibited Seibert from further violations of the Commodity Exchange Act, as charged, and imposed permanent registration and trading bans. As alleged in part in the CFTC Release:

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. 

Vanguard Group appeases Mass. regulator by paying just 65%, or $5.5 million, of the capital gains taxes its TDF fund restructuring inflicted -- and the deal may deter the other 49 states from copycat actions (RIA Biz by Oisin Breen)
https://riabiz.com/a/2022/7/8/vanguard-group-appeases-mass-regulator-by-paying-just-65-or-55-million-of-the-capital-gains-taxes-its-tdf-fund-restructuring-inflicted-and-the-deal-may-deter-the-other-49-states-from-copycat-actions
RIABiz's Oisin Breen reports about Vanguard's settlement with Massachusetts involving the fund's failure to alert investors to the tax consequences of what looks like a wave of sales forced by liquidations from large institutions. As has become all too typical of Wall Street, Vanguard seems to have first opted to circle its wagons rather than make full disclosure to its clients. Making matters worse, the firm seems to have favored larger clients over its mom-and-pops. Not a good look. By the time the problem had mushroomed, about the only thing left was expensive and embarrassing damage control via Massachusetts -- and whatever further actions may follow on. Oddly, Vanguard's somewhat cynical reaction may prove a fairly effective legal strategy in the face of future lawsuits or investigations. As usual, Breen gets into the nitty gritty of the underlying facts, the settlement, and the myriad of potential ramifications.

https://www.brokeandbroker.com/6531/ubs-1099-dnj/
A UBS Financial Services, Inc. customer bought municipal bonds; and, at this point in time, that's about all you really need to know concerning the transaction. Where problems arose was when UBS provided several years of Forms 1099 allegedly reporting only the amount of interest paid without including amortizable bond premium. As the customer argues in his federal lawsuit, UBS screwed up and it caused him to overpay his federal taxes.  

https://www.brokeandbroker.com/6541/kessev-tov-pajoje/
The 2015 Flash Crash is the Wall Street gift that keeps on giving. In today's blog we got a FINRA arbitration and two federal lawsuits. Then we got spoofing. Is spoofing illegal? Is it fraudulent? Or, as a federal court muses, is it just a byproduct of things getting faster to the point that it's all pretty much a blur and, spoofing or not, we're all moving close to the speed of light on Wall Street. 

https://www.brokeandbroker.com/6540/schwab-sip-finra/
Schwab Intelligent Portfolios ("SIP") was advertised as a robo-adviser that didn't charge advisory fees; however, from March 2015 through November 2018, Schwab profited on its clients' cash holdings by arbitraging the difference between what was earned by Schwab lending out those balances and what Schwab paid to the clients -- and, SIP had allocated relatively high levels of cash rather than investing those amounts. SIP clients were were not fully informed about the interest earned on the cash balances in their portfolio, which prompted the SEC to order Charles Schwab & Co. to pay a $52 million in disgorgement and prejudgment interest, and a $135 million civil penalty. In one of those troubling quirks of Wall Street regulation, while the SEC was finalizing its multi-million dollar settlement against Schwab, the firm was battling it out in a FINRA arbitration with a SIP customer, who was complaining about transaction errors. Read about that arbitration in today's blog.

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