Trading in Opaque Markets: Fraud, Materiality and Compliance

This is the first segment of an occasional series regarding a group of criminal and civil securities fraud actions involving trading in opaque markets and the lessons that can be drawn the prosecutions


The U.S. Attorney’s Office and the Securities and Exchange Commission have brought four cases against six traders from two firm based on claimed misrepresentations made by traders to sophisticated counter parties. The cases center on trading in opaque markets where the tactics often employed are nothing like making a trade on the New York Stock Exchange.

Each case alleges that the trader violated the federal securities laws. While frequently the government prevails in such cases the results in these actions have been mixed. Two criminal cases have ended with acquittals on most counts – but in one the trader was sentenced to prison while others are involved in post trial motions. The parallel SEC actions are pending.

To examine these cases the following points will be discussed:

· Background: trading cases generally

· The initial indictment and trial 1: Litvak I

· The second indictment: Shapiro

· Trial 2: Litvak II

· Trial 3: Shapiro

· The latest case: Im & Chan

· The future

Background: A Brief Review of Trading Cases

The government frequently prevails in trading cases. Many trading cases are microcap fraud actions or “pump-and-dump” cases such as SEC v. v. BIH Corp., Civil Action No. 2:10-cv-577 (M.D. Fla. Filed Sept. 20, 2010). There the SEC alleged that the defendant engaged in a pump-and-dump manipulation of a microcap firm, reaping over $1 million from unsuspecting investors who ended up with losses. A jury returned a verdict in favor of the SEC.

Similarly, the Manhattan U.S. Attorney’s Office enjoyed a lengthy series of victories in insider trading cases until U.S. v Newman, 773 F. 3d 438 (2nd Cir. 2014). There the government tried to extend its winning record with a criminal insider trading case for illegal tipping against fourth tier tippees. The Second Circuit reversed the conviction, finding incorrect jury instructions and virtually no evidence supporting the elements of a tipping charge. The Court noted that there had never been a criminal prosecution of a fourth tier tippee.

In other high profile trading cases the government has experienced more difficulty. For example, in U.S. v. Cioffi, No. 08-cr-0004 (E.D.N.Y. Filed June 18, 2008) two Bear Stearns traders were charged with lying to customers about the shares being offered in a fund which eventually collapsed as the market crisis heated up. In what was one of the highest profile market crisis cases at the time the jury rejected the government’s claims and returned verdicts of not guilty.

The SEC did little better with its parallel case. SEC v. Cioffi, Case No. 08-cv-2457 (E.D.N.Y. Filed June 19, 2008). While the Commission was able to secure settlements in which the defendants paid disgorgement and penalties the presiding judge termed the deals “chump change” in view of the millions of dollars involved and the investor losses.

The SEC had an equally difficult time which its first action involving security based swaps, SEC v. Rorech, Civil Action No. 09-cv-04329 (S.D.N.Y. Filed May 5, 2009). There the agency charged a Deutsche Bank trader with illegal tipping during cell phone calls about a possible restructuring of the bonds underlying the swaps. The calls had been made on private cell phones rather than house lines, suggesting an effort to avoid detection. Following a bench trial the Court found in favor of the defendant, concluding that conversations of the type had by the trader were typical in the opaque market in which the securities were traded.

Next: Trading RMBS, the initial indictment and trial: Litvak I

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