Under federal law, individuals are liable for fraud when they manipulate markets for securities, swaps, commodities, or futures. The SEC defines manipulation as “intentional conduct designed to deceive investors by controlling or artificially affecting the [trading] market[s].” Fraudsters use various techniques to affect the supply of or demand for these investment products. According to the SEC, common manipulation schemes include:
- spreading false or misleading information;
- improperly limiting the number of publicly available shares; and
- rigging quotes, prices, or trades to create a false or deceptive demand.
Recently, the CFTC and SEC have stepped up their enforcement to prevent these schemes. In fact, the CFTC has even issued new rules that specifically target market manipulation. The detection of these schemes is critical to maintaining public confidence in the integrity of financial markets.
Manipulation Schemes and SEC/CFTC Enforcement Actions
There are many market manipulation schemes that may qualify for an award under the CFTC and SEC Whistleblower Program. Recent enforcement actions suggest the agencies may focus on three types market manipulation:
- Benchmark Rates Manipulation;
- Pump-And-Dump Schemes; and
- Spoofing Schemes; and
Benchmark Rates Manipulation
In a benchmark-rate-manipulation scheme, individuals seek to increase or decrease impartial global reference rates for their own financial gain. This misconduct is typically associated with U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX) benchmark-swap rates, LIBOR, Euribor, and other foreign interest-rate benchmarks.
Citibank Ordered to Pay $250M for Benchmark Manipulation
On May 25, 2016, the CFTC ordered Citibank to pay $250 million for attempted manipulation and false reporting of USD ISDAFIX benchmark-swap rates. The CFTC uncovered numerous instances of Citibank’s USD ISDAFIX misconduct through the bank’s exotic traders’ instant messages.
Notably, as of May 25, 2016, the CFTC has imposed more than $5.08 billion in penalties in its investigation of global benchmark-rate manipulation. Over $1.8 billion of these penalties has been imposed on 6 banks for misconduct relating to foreign-exchange benchmarks, while over $3.21 billion has been imposed for misconduct relating to ISDAFIX, LIBOR, Euribor, and other interest-rate benchmarks.
USB and HSBC Agree to Pay $28M to Settle Allegation of Benchmark Manipulation
On July 11, 2017, USB Group AG and HSBC Holdings agreed to pay $28 million to settle allegations that the banks manipulated an interest rate used to set terms for swap transactions. In total, 14 banks have been accused of the wrongdoing and, as of July 11, 2017, 10 of 14 banks have settled for more than $408 million, including:
- Goldman Sachs: $56.5M
- JPMorgan Chase: $52M
- Bank of America: $50M
- Credit Suisse: $50M
- Deutsche Bank: $50M
- Royal Bank of Scotland: $50M
- Citigroup: $42M
- Barclays: $30M
In a pump-and-dump scheme, individuals seek to boost a company’s stock (which they own) by issuing false or misleading statements to the marketplace. Lately, these statements have been disseminated through social media, such as Facebook and Twitter, as well as on bulletin boards and in chat rooms. After “pumping” up the stock through these false or misleading statements, the promoters then “dump” their shares to quickly profit from the misinformation.
SEC Uncovers $78 Million Pump-And-Dump
On November 15, 2015, the SEC uncovered a $78 million pump-and-dump orchestrated by Marley Coffee’s CEO, Shane Whittle. Whittle had secretly gained control of millions of the company’s shares by using a reverse merger and spreading the stock to offshore entities controlled by three accomplices to the scheme. After acquiring the stock, Whittle initiated fraudulent promotional campaigns, which caused the stock price to soar. Whittle then sold the fraudulently pumped-up stock and made millions of dollars in illicit profits.
According to the complaint, the SEC sought injunctions, disgorgement of profits, prejudgment interest, and penalties; the SEC also sought penny-stock bars against all of the individuals and an officer-and-director bar against Whittle.
Scottish Trader Sends False “Tweets” in a Pump-And-Dump Scheme
In another enforcement action, the SEC brought charges against a Scottish trader whose false “tweets” caused the stock prices of two companies to drop sharply and triggered a trading halt in one of those companies. The scheme involved the trader’s deceptively creating Twitter accounts of well-known securities research firms and posting false statements about the two companies. Specifically, he posted a series of tweets indicating that Audience Inc. was under investigation by the DOJ. He also tweeted that Sarepta Therapeutics Inc. was under investigation by the FDA. As a result, the companies’ stock plunged 28% and 16%, respectively.
According to the SEC’s complaint, the trader was charged with securities fraud and was subject to disgorgement and a monetary penalty.
SEC Prosecutes Telemarketing Boiler Room Scheme
On July 12, 2017, the SEC brought a complaint charging thirteen individuals with operating cold calling scams that cheated seniors out of more than $10 million using threatening and deceitful sales techniques to pressure victims into purchasing penny stocks. The telemarketers directed their customers to place trades at a certain price and would then purchase opposing sell orders, thereby enabling them to make instant profit of millions of dollars. Reminiscent of scenes from the movie The Wolf of Wall Street, the sales tactics were especially aggressive. As an example of the strong-arm tactics employed in this scheme, the complaint alleged that one of the telemarketers told a victim who called to complained, “I am tired of hearing from you. Do you have any rope at home? If so tie a knot and hang yourself or get a gun and blow your head off.”
In a spoofing scheme, individuals use algorithms or other means to outpace other market participants and manipulate markets in their favor. Under the Dodd-Frank Act, spoofing is defined as “the illegal practice of bidding or offering with intent to cancel before execution.” In a typical spoofing scheme, high-frequency traders use algorithms to place a substantial amount of bids or offers on a particular security or commodity with no intention of executing. By placing these bids or offers, the traders create the illusion of demand, which subsequently drives up the trading price. Alternatively, traders also use algorithms to cancel a substantial number of bids or offers, to create the illusion of exchange pessimism. This drives down the trading price. Traders are able to profit from this manipulation by synchronizing their buying and selling with the resultant market fluctuations.
CFTC Orders High-Frequency Trader to Pay $2.8M
In the first case under Dodd-Frank’s anti-spoofing law, the CFTC ordered Panther Energy Trading LLC and high-frequency trader Michael Coscia to pay $2.8 million for illegally placing and quickly canceling bids and offers in futures contracts. The new anti-spoofing law carries a $1 million fine for each instance of spoofing. The law also carries a $250,000 fine for each count of commodities fraud.
Citigroup Global Markets, Inc. Charged $25M for Spoofing
On January 19, 2017, the CFTC charged Citigroup $25 million for spoofing in the U.S. Treasury futures markets and for failing to diligently supervise the activities of its employees and agents in conjunction with the spoofing orders. According to the agency’s Order, Citigroup’s unlawful conduct occurred between July 16, 2011 and December 31, 2012 when five of Citigroup’s traders engaged in spoofing more than 2,500 times.
CFTC Director of Enforcement Aitan Goelman commented: “Spoofing is a significant threat to market integrity that the CFTC will continue to vigorously investigate and prosecute. Additionally, as this action shows, registrants with supervisory responsibilities must provide their employees with sufficient training and have in place adequate systems and controls to detect spoofing. Failure to do so will have significant consequences.”
SEC and CFTC Whistleblower Bounties
Under the SEC and CFTC Whistleblower Programs, whistleblowers may be eligible for monetary awards if they voluntarily provide the SEC or CFTC with original information about violations of federal laws that leads either agency to bring a successful enforcement action that results in monetary sanctions exceeding $1 million.
Dodd-Frank Whistleblower Rewards and Bounties
Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected. On September 22, 2014, a whistleblower was awarded more than $30 million for providing key information that led to a successful enforcement action.
The SEC and CFTC Whistleblower Programs also protect the confidentiality of whistleblowers and do not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act and Sarbanes-Oxley Act protect whistleblowers from retaliation by their employers for reporting violations of securities laws.
CFTC and SEC Whistleblower Reward Attorneys
For more information about the SEC Whistleblower Program, download Zuckerman Law’s eBook: SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award