Wednesday’s stunning “not guilty” verdict in United States v. Andre Flotron, only the second spoofing case ever taken to trial, is a reminder that it is extremely difficult for prosecutors to prove a defendant’s intent beyond a reasonable doubt in the absence of direct evidence. We should expect the DOJ and CFTC to reevaluate their charging practices in the wake of this significant defense victory.
The seeds of the “not guilty” verdict were sown when the DOJ drafted an initial indictment charging Flotron in the District of Connecticut with a single count of conspiring with others to “drive prices” up and down by causing the price to “change” using spoof orders that were “designed and intended to deceive” other traders to purchase contracts “at prices and at times that they otherwise would not.” This is a higher burden than the Justice Department needed to take on – spoofing is merely entering orders with the intent to cancel them before execution, yet the DOJ took on the burden of proving that the defendant moved prices.
By charging only conspiracy in the one-count indictment, the government also took on a difficult burden because there was no evidence of an explicit agreement – either verbal or oral – between Flotron and his co-workers. Perhaps for that reason, the DOJ later obtained a superseding indictment that added several additional counts, including spoofing counts that did not involve a conspiracy. In a highly unusual move, however, the venue for those additional counts was the Northern District of Illinois, even though the indictment was returned by a Connecticut grand jury.
In response, Flotron moved to dismiss the additional counts because venue was not proper in Connecticut. The government countered by moving to dismiss the counts without prejudice so it could re-file the entire case in Chicago. In a sharply worded opinion, the judge dismissed the new counts, concluding that the government sought to “decorate its broad conspiracy charge with baubles of substantive charges that serve little or no function other than to run up defendant’s sentencing exposure beyond the 25 years of imprisonment that he already faces if convicted on the conspiracy charge alone.”
For that reason, the trial that unfolded last week in Connecticut involved a single conspiracy count that made the bold allegations above regarding the defendant’s ability to move prices. The government had the burden of proving beyond a reasonable doubt that Flotron agreed with others to design orders that deceived other traders in order to drive prices up and down.
Proving that Flotron conspired to deceive other traders was difficult because the government lacked direct evidence of his intent. When I tried and won the first spoofing case, United States v. Michael Coscia, I relied heavily on direct evidence. Coscia was an algorithmic trader and programmed his large spoof orders to cancel automatically. He wrote emails setting forth his strategy to his programmer, and the programmer took handwritten notes of his conversations with Coscia, in which Coscia discussed using the orders to “pump the market.”
In contrast, Flotron was a manual trader. His cancellations were made manually and there was no record of why he chose to cancel a particular order. Flotron was able to explain his thought process at trial and no government witness could directly refute his testimony. The government cooperators, former colleagues of Flotron who admittedly spoofed but were not prosecuted, believed that Flotron had spoofed but had never explicitly agreed with him to do so.
Prosecutors often ask juries to infer a defendant’s state of mind from other evidence, and that’s what the DOJ did in the Flotron trial. But convincing a jury to infer intent – and an agreement – without any direct evidence is always an uphill battle. The lesson the government should take from the Flotron verdict is that criminal spoofing cases should not be brought without direct evidence of the defendant’s intent, such as statements of the defendant.
For market participants, the Flotron decision serves as a reminder that the government can be successfully challenged when it bites off more than it can chew, particularly when it lacks direct evidence of intent. Despite a recent spate of criminal spoofing charges, the Flotron decision suggests that not every spoofing investigation will result in criminal charges, and not all indictments will result in a conviction.
But it is important not to overreact to this week’s verdict. The CFTC and exchanges continue to actively investigate spoofing, and there will be more criminal spoofing indictments and convictions in the years to come. The most efficient and effective way to avoid enforcement action remains robust training, surveillance, and supervision of traders.