United States v. Bases
| Decision Date | 20 May 2020 |
| Docket Number | 18 CR 48 |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. EDWARD BASES and JOHN PACILIO, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Defendants Edward Bases and John Pacilio have been indicted on charges arising from trading practices in the commodity futures markets that the government contends amounted to "spoofing"—that is, placing bids or offers with the intent not to execute them. They did so, the indictment alleges, in order to artificially inflate or deflate market prices and obtain more favorable market positions for their intended transactions. The indictment charges Bases and Pacilio with committing wire fraud affecting a financial institution under 18 U.S.C. § 1343, commodities fraud under 18 U.S.C. § 1348, as well as conspiracy to commit commodities fraud under 18 U.S.C. § 1349. In addition, the indictment charges Pacilio separately with violating the anti-spoofing provision of the Commodity Exchange Act, 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2).
Bases and Pacilio have moved to dismiss the indictment on various grounds. Their principal argument is that bids and offers placed in an open market cannot constitute, as a matter of law, grounds for a charge of wire fraud or commodities fraud. This is so, they contend, because the bids and offers accurately state their terms and can be accepted (and enforced) by anyone in the market that wishes to fill them. But this theory ignores the indictment's allegations (which must be taken as true at this stage) that Defendants never intended to fill the bids and orders in question and placed them solely for the purpose of creating a misleading picture of market conditions that they used to their benefit. For the reasons more fully explained below, Defendants' motions are denied.
Bases and Pacilio have been employed as precious metals futures traders since 2008 and 2007, respectively. Indictment, Count 1 ¶¶ 1(a)-(b), ECF No. 67. They worked at the same bank from June 2010 to June 2011, although they are alleged to have engaged in unlawful conduct before, during, and after that period. Id. ¶¶ 1(a)-(b), 2. According to the indictment, between at least June 2009 through October 2014, Defendants engaged in a fraudulent scheme to artificially move the prices in various precious metals futures markets in a way that facilitated the execution of certain transactions that they wanted to execute. Id. ¶¶ 3-18, 24.
To accomplish this, Defendants placed large orders on one side of a market with the coinciding intent to cancel them prior to their execution for the purpose of driving the price of the commodity futures contracts up or down. (Although the indictment refers to these large orders as "Fraudulent Orders," we will refer to themas the "Subject Orders.") Id. ¶¶ 3-8. At the same time, Bases and Pacilio placed smaller orders that they actually wanted to execute on the other side of the market. (The Court will refer to these smaller orders as the "Purposive Orders.") Id. ¶¶ 9-12.
For example, as described in the indictment, by placing numerous Subject Orders to purchase certain futures contracts (orders to purchase future contracts are called "bids"), Defendants led market participants to believe that there was a greater demand for the contracts than actually was the case; this practice drove the market price of the contracts up. At the same time that they submitted the Subject Orders, Defendants placed Purposive Orders to sell the same futures contracts (orders to sell future contracts are called "offers") at a price just above the then-prevailing market price. By artificially causing the market price to go up using this practice, Defendants increased the likelihood that their Purposive Orders would be filled at a higher price than they would have been able to obtain otherwise. Id. ¶ 10.
The method also worked in the other direction. Defendants placed Subject Orders to sell certain futures contracts (thereby creating an impression of increased supply in the contracts), while simultaneously placing Purposive Orders to buy the same contracts at a price lower than the then-prevailing market price. As other market participants reacted to the Subject Orders, the price of the contracts went down, and Defendants were able to fill their Purposive Orders at the lower price.
In short, the indictment alleges, Defendants' scheme of placing the Subject Orders with the intent not to execute them induced other market participants to buy or sell precious metals futures contracts at times, prices, and quantities that theyotherwise would not have but for Defendants' actions, in a way that benefited Defendants financially. Id. ¶¶ 3, 6, 12. The indictment also claims that, in February 2011, Pacilio engaged in electronic communications with various traders, including Bases and another co-conspirator, acknowledging his efforts to "push" the market by using this trading strategy. Id. ¶¶ 17, 24.
Under Federal Rule of Criminal Procedure 7(c)(1), "[t]he indictment or information must be a plain, concise, and definite statement of the essential facts constituting the offense charged." Fed. R. Crim. P. 7(c)(1). "For each count, the indictment or information must give the official or customary citation of the statute, rule, regulation, or other provision of law that the defendant is alleged to have violated." Id. An indictment satisfies Rule 7(c)(1) if it "(1) states all the elements of the crime charged; (2) adequately informs the defendant of the nature of the charges so that he may prepare a defense; and (3) allows the defendant to plead the judgment as a bar to any future prosecutions." United States v. White, 610 F.3d 956, 958 (7th Cir. 2010).
If an indictment "tracks the words of a statute to state the elements of the crime," it generally suffices, and "while there must be enough factual particulars so the defendant is aware of the specific conduct at issue, the presence or absence of any particular fact is not dispositive." Id. (internal quotation marks omitted). In this way, the pleading requirements in criminal cases are less stringent than those in civil cases. See United States v. Vaughn, 722 F.3d 918, 926 (7th Cir. 2013) ().
That said, just as in the civil context, for the purpose of a motion to dismiss, the allegations in the indictment are accepted as true and viewed in the light most favorable to the government. Clark, 728 F.3d at 623; United States v. Yashar, 166 F.3d 873, 880 (7th Cir. 1999). And "indictments are reviewed on a practical basis and in their entirety, rather than in a hypertechnical manner." United States v. Smith, 230 F.3d 300, 305 (7th Cir. 2000) (internal quotation marks omitted).
Bases and Pacilio seek to dismiss the counts in the indictment on numerous grounds. They attack the sufficiency of the indictment, seek dismissal of a portion of the commodities fraud charges based upon the statute of limitations, and raise constitutional challenges to the fraud and spoofing counts.
Defendants first attack the sufficiency of the indictment with regard to the wire and commodities fraud counts. Each count is addressed in turn.
The federal wire fraud statute proscribes "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises" via the use of wire, radio, or television communication. 18 U.S.C. § 1343. To convict a person under this section, the government must prove that the defendant: "(1) was involved in a scheme to defraud; (2) had an intent todefraud; and (3) used the wires in furtherance of that scheme." United States v. Faruki, 803 F.3d 847, 852 (7th Cir. 2015) (citing United States v. Durham, 766 F.3d 672, 678 (7th Cir. 2014)). Establishing a scheme to defraud "requires the making of a false statement or material misrepresentation, or the concealment of [a] material fact." Id. (citing United States v. Powell, 576 F.3d 482, 490 (7th Cir. 2009)).
As an initial matter, Defendants contend that the indictment fails to adequately plead wire fraud because the government has failed to allege an affirmative misrepresentation of any kind. In Defendants' view, open-market orders, such as the Subject Orders, convey no information other than the price and quantity specified in the orders themselves. And, because the orders accurately depict the terms upon which they can be accepted by counterparties in the market, Defendants assert, such open-market orders cannot form the basis of a misrepresentation claim. Indeed, Defendants add, once a counterparty accepts a bid or offer placed on the electronic exchange (which in this instance was COMEX), the originating party has no choice but to honor the acceptance in accordance with COMEX rules.
As a corollary, Defendants posit that, at best, the indictment's allegations amount only to a fraud by omission—that is, a failure by Defendants to disclose their intent to cancel the Subject Orders at the time that they were placed. However, Defendants note, because they had no legal duty to disclose this information to others in the market, the omission cannot constitute wire fraud as a matter of law.
For the first proposition, Defendants rely upon Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995); United States v. Radley, 649 F. Supp. 2d803 (S.D. Tex. 2009), aff'd, 632 F.3d 177 (5th Cir. 2011); ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007); GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189 (3d Cir. 2001), and CP Stone Fort Holdings, LLC, No. 16-C-4991, 2016 WL 5934096 (N.D. Ill. Oct. 11, 2016). But the problem with this argument is that it misapprehends the contours of the alleged fraudulent...
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