A 12-member jury on Wednesday found Andre Flotron, 54, not guilty of one count of conspiracy to commit commodities fraud for allegedly having joined with others on the Swiss bank's precious metals trading desk in an effort to enrich themselves and UBS AG through spoofing, a technique where traders try to move market prices in favorable directions by placing orders they don't intend to execute.
From the start of the five-day trial, federal prosecutors emphasized the volume of quantitative evidence they had gathered by sifting through hundreds of thousands of Flotron's past trades to identify several hundred sequences that it alleged matched a spoofing pattern. The government's case also had help from two flipped witnesses who had once worked alongside Flotron at UBS, including one who testified to having learned how to spoof by watching Flotron trade.
But according to Trace Schmeltz, who co-chairs Barnes & Thornburg LLP's financial and regulatory litigation group in Chicago, the verdict underscores the limitations of these kinds of evidence in proving criminal spoofing cases, which can be highly technical and turn heavily on questions of intent.
"People are very hesitant to convict, particularly on data that is esoteric to them," Schmeltz said. "People want a blinking light, people want something loud and clear."
Spoofing involves making bids or offers that are intended to be canceled before they're executed. These "trick" orders, which may be live on an exchange for just seconds, are supposed to feign the appearance of supply and demand, moving the market and allowing spoofers to execute other orders at better prices.
Although spoofing was outlawed by the 2010 Dodd-Frank Act, it doesn't always look that different from other trading practices that are considered permissible, particularly in markets where the vast majority of all orders are canceled and everyone knows it from the start, according to Benjamin J.A. Sauter, a principal at Kobre & Kim LLP.
When a trader wants to buy or sell a big amount of a particular commodity, for example, the trader is allowed to submit a large hidden "iceberg" order, which is expressly designed to hide from the rest of the market what the true size of the overall planned transaction is. Other traders might make trading decisions with the small visible quantity in mind without knowing that there is actually a much larger quantity on the market hidden from them.
"There's no requirement that you tell the market what's happening in your heart of hearts and what your hopes and desires are about that order while it's in the market," Sauter said. "So what makes hiding your intent from the marketplace perfectly fine in one context and criminal fraud in another?"
The underlying crime that the government claimed was the object of Flotron's alleged conspiracy was technically commodities fraud, not spoofing.
The distinction here is important, according to Sauter. It means the government was pursuing an even more aggressive legal theory that essentially each order, when placed, comes with an implicit representation that a trader doesn't intend to cancel it, Sauter said.
Yet in Sauter's view, that theory is at odds with the reality of the markets that Flotron and his colleagues traded in, where everyone is aware that cancellations are exceedingly common, as well as the nature of Flotron's supposed spoof orders themselves. Under those circumstances, it could be argued that the alleged misrepresentation is not material.
"Many of us who deal with these cases, and I would not be surprised if the jury as well, have real concerns about why these orders should be deemed fraudulent if they actually could have been executed," Sauter said. "There's not a misrepresentation there. They were real orders in a book."
When the government went after high-frequency trader Michael Coscia in what became the first-ever spoofing conviction in 2015, prosecutors were able to persuade a jury of fraudulent intent with the help of the code that Coscia used to implement his trading strategy — the code had been designed to create orders "used to pump market," according to handwritten notes from a programmer that were presented at Coscia's trial.
That helped make the case a "slam dunk," according to Jeffery Brown, a partner at Dechert LLP who specializes in white-collar defense.
"There was an algorithm that bespeaks intent to engage in the type of behavior that qualifies as spoofing, and there was other really direct evidence in that case," Brown said.
Coscia is challenging his conviction and has asked the U.S. Supreme Court to weigh in on, among other things, whether intent can transform otherwise genuine orders into fraud.
But in Flotron's case, there was no such code that prosecutors could focus on at trial — he was a manual trader.
And as Flotron's team stressed during closing arguments, the government didn't have emails or other similar documentary evidence of Flotron having explicitly agreed to engage in spoofing with his colleagues. The two former UBS colleagues who took the stand as cooperating witnesses also didn't testify to having had such an agreement with Flotron.
Instead, the government relied largely on what Brown and other attorneys characterized as more indirect, circumstantial evidence, such as analysis of Flotron's trading patterns, graphs breaking down specific examples of alleged spoof trades and chat transcripts between other traders at the bank that prosecutors argued revealed how widespread spoofing was at UBS at the time.
That left room for Flotron's attorneys to distance him from anyone else's alleged misconduct and to tell a contrasting story about his trades alleged to be spoofing — namely that they weren't fraudulent but rather the normal byproduct of a human trader constantly being pressed to make snap judgments about where the market was headed.
"Any counter-narrative that's plausible may be sufficient, particularly when most people in the world hear these types of trades and their eyes glaze over," Schmeltz said.
Going forward, Brown believes the Flotron case will force other prosecutors to think twice about bringing spoofing cases where the evidence of intent isn't direct.
"If I'm someone bringing a criminal case based on inferences drawn from trading patterns, I am going to look very closely at this verdict and consider very closely whether a jury can be persuaded of guilt beyond a reasonable doubt," Brown said.
Schmeltz predicts that the Flotron case won't deter the government from bringing spoofing cases, though he does believe it will lead prosecutors to favor cases with the kind of concrete, clearer evidence seen in the Coscia case.
"Good facts make good law, they say, right?" Schmeltz said. "They will try to find cases with better facts, better patterns, more of a quantum of pattern evidence."
Sauter also thinks prosecutors will be inclined to more thoroughly vet spoofing cases and take advantage of opportunities to dialogue with potential spoofing defendants before an indictment is made. This kind of communication can be mutually beneficial, according to Sauter, by allowing both sides to kick the tires on a case and address any misunderstandings or misinterpretations before going through all the trouble of a court battle.
"It's really an example of how important it is for the government to think through these complicated cases where there's lots of trading data and the markets move very quickly," Sauter said of the verdict. "The true picture is often much more complicated than it may seem."
The government was represented in the Flotron case by Avi M. Perry, Robert Zink, Michael J. Rinaldi and Matthew F. Sullivan of the U.S. Department of Justice.
Flotron was represented by Marc L. Mukasey, Nathan J. Muyskens and Daniel P. Filor of Greenberg Traurig LLP.
The case was U.S. v. Flotron, case number 3:17-cr-00220, in the U.S. District Court for the District of Connecticut.
--Editing by Rebecca Flanagan and Emily Kokoll.
Update: This story has been updated with counsel information.
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