Financial services firm Tower Research Capital will pay a combined $67.4 million in settlements with the Department of Justice and the Commodity Futures Trading Commission to resolve criminal charges related to a scheme involving thousands of instances of unlawful trading activity in U.S. commodities markets by three former traders.
As part of the settlement agreements, Tower will pay $32.6 million in restitution, $10.5 million in disgorgement, and a $24.4 civil monetary penalty—the largest total monetary relief ever ordered in a spoofing case, according to the CFTC. Additionally, Tower entered into a deferred prosecution agreement with the Department of Justice, filed Nov. 6 in the Southern District of Texas charging the company with commodities fraud.
“Traders at Tower Research Capital fraudulently placed thousands of bogus orders they never intended to execute—to deceive other market participants and move the market for their own benefit,” said Assistant Attorney General Brian Benczkowski of the Justice Department’s Criminal Division. “This agreement includes monetary penalties, the return of unjust profits, and compensation of victims to protect our nation’s commodities markets from manipulation.”
Tower also agreed to, among other things, conduct appropriate reviews of its internal controls and policies and procedures and to modify its compliance program, where necessary, to ensure it is designed to deter and detect violations of the Commodity Exchange Act and commodities fraud statute.
According to court documents filed as part of the DPA, from approximately March 2012 until December 2013, three traders who were members of a single trading team at Tower engaged in a scheme to defraud other participants in the markets for E-Mini S&P 500, E-Mini NASDAQ 100, and E-Mini Dow futures contracts (collectively, E‑Mini futures contracts). The S&P 500 and NASDAQ 100 future contracts were traded on the Chicago Mercantile Exchange, while the Dow futures contracts were traded on the Chicago Board of Trade.
On thousands of occasions throughout this period, the traders fraudulently placed orders to buy and sell the E-Mini futures contracts with the intent to cancel those orders before execution, including an attempt to profit by deceiving other market participants. By placing these orders, the traders intended to, and did, inject false and misleading information about the genuine supply and demand for E-Mini futures contracts into the markets, which deceived other market participants into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand.
This false and misleading information was intended to, and at times did, trick other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling E-Mini futures contracts at quantities, prices, and times they otherwise likely would not have traded. The Justice Department and Tower have filed a joint motion, which is subject to approval by the court, to defer for the term of the DPA any prosecution and trial of the criminal information filed against Tower.
Numerous significant factors contributed to the Department’s criminal resolution with Tower, including the company’s cooperation with the United States and Tower’s extensive remedial efforts. Tower also swiftly moved in early 2014 to terminate the three traders, made significant investments in sophisticated trade surveillance tools, increased legal and compliance resources, revised the company’s corporate governance structures, and changed its senior management.
The CFTC order imposes additional remedial and cooperation obligations in connection with any CFTC investigation pertaining to the underlying conduct. “I’ve been clear that the CFTC will be tough on those who break the rules,” said CFTC Chairman Heath Tarbert. “This case reflects that commitment, as well as the continued importance the agency is placing on parallel efforts with our law enforcement partners. A robust combination of criminal prosecution and regulatory enforcement is essential to preserving market integrity and protecting our market participants.”
Since learning of the traders’ misconduct, according to the CFTC order, Tower has “proactively engaged in remedial measures relating to its futures trading,” including the reorganization and enhancements of its supervisory structure and compliance program through, among other things:
- Substantial investments in staffing and resources for Tower’s legal and compliance teams;
- Updated policies, procedures, and supervisory structures with a specific emphasis on the prohibitions against spoofing;
- Expanded compliance training on spoofing and market manipulation, including annual compliance training to all traders that covers spoofing, and the issuance of bulletins and alerts regarding new regulatory developments and enforcement cases; and
- Significant investments in sophisticated trade surveillance tools that are supported by a dedicated compliance staff and a team of in-house developers.
The three traders are Kamaldeep Gandhi, Krishna Mohan, and Yuchun (Bruce) Mao, a citizen of the People’s Republic of China. As part of the investigation, the Justice Department obtained an indictment against Mao in October 2018 with charges pending in the Southern District of Texas.
On Nov. 2, 2018, Gandhi pled guilty to two counts of conspiracy to engage in wire fraud, commodities fraud, and spoofing. His sentencing is scheduled for Feb. 7, 2020, before Southern District of Texas U.S. District Judge Ewing Werlein. On Nov. 6, 2018, Mohan pleaded guilty to one count of conspiracy to engage in wire fraud, commodities fraud, and spoofing, and his sentencing is scheduled for Feb. 13, 2020, before U.S. District Judge Gray Miller of the Southern District of Texas.