Spoofing Case Results in CFTC’s First Non-Prosecution Agreements

In January, the CFTC settled its first civil enforcement action against a bank for spoofing when Citigroup agreed to pay a $25 million fine for sending orders into the U.S. Treasury futures market with the intent of canceling them. Now, the CFTC has entered into its first non-prosecution agreements ever, making deals with three traders who engaged in wrongful conduct but served as cooperating witnesses in that case.

The Dodd-Frank Act declared spoofing illegal as a form of manipulative trading under the Commodity Exchange Act. The agency received its first conviction in a spoofing prosecution against a U.S. trader in 2015. It has brought several other actions under the law, including a high profile action against a UK trader who allegedly contributed to the May 6, 2010 flash crash in the stock market.

The order in January alleged that Citigroup subsidiary Citigroup Global Markets had five traders working on its U.S. Treasury and Swaps desks send 2,5000 orders to the CME with the intent to cancel them before execution. The employees were engaged in spoofing to ensure that its smaller, resting orders on the other side of market (from the spoofed orders) received quicker execution. The order alleged that the investment bank inadequately trained its employees on the law and had inadequate systems and controls in place to detect spoofing by its traders. A head trader reportedly knew of at least one incident of spoofing because a trader lost money on an order that was partially filled before canceled, and admitted to spoofing, but no one reported it to compliance or any other senior manager.

The NPAs announced in late June about five months after the settlement are the first entered into by the CFTC. The Director of Enforcement James McDonald anticipates NPAs will be an important part of incentivizing extraordinary cooperation against wrongdoing in particular cases in the future. McDonald said that cooperating witnesses can help identify more culpable wrongdoers and hold them accountable. In order to receive the NPA here, each trader had to admit to engaging in spoofing. Both the SEC and the Justice Department have previously entered into non-prosecution agreements.