United States v. Vorley, 18 CR 00035

• Decision Date: 21 October 2019
• Docket Number: No. 18 CR 00035,18 CR 00035
• Citation: 420 F.Supp.3d 784
• Parties: UNITED STATES of America, Plaintiff, v. James VORLEY and Cedric Chanu, Defendants.
• Court: U.S. District Court — Northern District of Illinois

420 F.Supp.3d 784

UNITED STATES of America, Plaintiff,

v.James VORLEY and Cedric Chanu, Defendants.

No. 18 CR 00035

United States District Court, N.D. Illinois, Eastern Division.

Signed October 21, 2019

Avi Perry, Cory E. Jacobs, Michael Thomas O'Neill, Pro Hac Vice, U.S. Department of Justice, Criminal Division, Fraud Section, Washington, DC, AUSA, United States Attorney's Office, Leslie Salba Garthwaite, Criminal Division-Fraud Section, Chicago, IL, Pretrial Services, for Plaintiff.

Christopher S. Burrichter, Dechert LLP, Gregory Thomas Fouts, Kenneth Michael Kliebard, Morgan, Lewis & Bockius LLP, Chicago, IL, Matthew L. Mazur, Pro Hac Vice, Siobhan Maria Namazi, Pro Hac Vice, Dechert LLP, New York, NY, Roger Anson Burlingame, Dechert LLP, for Defendant James Vorley.

Aaron M. Katz, Pro Hac Vice, Ropes & Gray LLP, Boston, MA, MICHAEL G. McGovern, Pro Hac Vice, Megan McEntee, Pro Hac Vice, Helen Gugel, Pro Hac Vice, Ropes & Gray LLP, New York, NY, Gregory Thomas Fouts, Kenneth Michael Kliebard, Morgan, Lewis & Bockius LLP, Laura Gaffney Hoey, Ropes & Gray LLP, Chicago, IL, for Defendant Cedric Chanu.

MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr., United States District Judge This case presents the question of whether a scheme to defraud commodities traders by placing "spoofing" orders—orders that the trader intends to withdraw before they can be filled—can constitute wire fraud. The defendants say no, because wire fraud requires the making of a false statement—an express misrepresentation—and the indictment alleges none. That is not the law. The Seventh Circuit, moreover, has already held that spoofing can constitute a "scheme to defraud" under the commodities fraud statute. As there is no material difference between a scheme to defraud under either statute, the answer to the question presented is, yes: the alleged spoofing scheme alleged in the indictment adequately charges violations of the wire fraud statute. And given that the statute has long been recognized to reach implied misrepresentations, and also requires proof of intent to defraud, the defendants' contention that the statute is unconstitutionally vague as applied to the scheme alleged also fails. The defendants also mount a vigorous challenge to whether the defendants' spoofing orders were, in fact, misleading and material, but those are questions for trial. Accordingly, the defendants' motion to dismiss the indictment is denied.

I. BACKGROUND¹

Defendants James Vorley and Cedric Chanu were precious metals traders at Deutsche Bank AB. The indictment alleges that for approximately two years, from December 2009 through November 2011,² Vorley and Chanu engaged in a scheme to defraud other traders on the Commodity Exchange Inc. ("COMEX") that involved interstate wire communications.³ COMEX used an electronic trading system called "Globex," which allowed traders to trade futures contracts from anywhere in the world. During the relevant period, Vorley worked in London; Chanu worked first in London and later Singapore. The Globex servers, however, were located in Chicago and Aurora, Illinois, and that is the basis for venue in this District.

The indictment alleges that the defendants sought "to deceive other traders by creating and communicating materially false and misleading information regarding supply or demand, in order to induce other traders into trading precious metals futures contracts at prices, quantities, and times at which they would not have otherwise traded, in order to make money and avoid losses for the coconspirators." Ind. ¶ 4. The mechanics of the alleged scheme are not the focus of the present dispute, so its operation can be briefly described. The defendants would place one or more orders for precious metals futures contracts on one side of the market (bid or offer), intending to cancel the orders before they could be accepted by other traders. The indictment refers to such orders as "Fraudulent Orders" because the defendants did not intend to execute them; instead, these orders were "intended ... to deceive other traders" about the true supply or demand for the commodity in question. Id. (Since the principal question presented by the defendants motion is whether these orders constituted a scheme to defraud, in lieu of "Fraudulent Orders" this opinion will use the statutory and perhaps somewhat less pejoratively sounding term—"Spoofing Orders"—to refer to these orders; whether they were, in fact, fraudulent will be determined at trial).⁴ The indictment alleges that the Spoofing Orders "were material misrepresentations" regarding the defendants' intent to trade those orders. Id. ¶ 11. Contemporaneously with placing the Spoofing Orders, the defendants placed what are referred to as "Primary Orders" on the opposite side of the market. Unlike the Spoofing Orders, the defendants intended to execute the Primary Orders, which involved trades that were (at least to the extent that they were visible to the market⁵ ) of smaller volume.

In theory, at least, the defendants profited from the scheme because the Spoofing Orders would deceive other traders about supply and demand, misleading them about the likely direction of the commodity's price and making the defendants' Primary Orders, on the other side of the market, look attractive. Spoofing Orders to buy (bids), for example, would signal (falsely, because the defendants did not really intend to buy) an increase in demand for the commodity in question, thereby putting upward pressure on the market price. Id. ¶ 7. Having delivered this false signal of increased demand to the market, the defendants would then execute Primary Orders that had been placed to sell the commodity (offers) at a lower price than the Spoofing Order bid price but at a higher price than the prevailing market price had been before placement of the Spoofing Orders. Being smaller (at least, so far as was known to the market), the Primary Order would not wholly counteract the price impact of the Spoofing Orders, allowing the defendants to capture some of the spread between the preexisting market price and the inflated price bid in the Spoofing Orders.

II. ANALYSIS

The defendants move pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B)(v) to dismiss the indictment for failure to state an offense. They also assert, in the alternative, that the wire fraud statute would be unconstitutionally vague if construed to extend to the defendants' trading activity. In addition, several business and industry organizations have filed briefs as amici curiae in support of the defendants' arguments that the alleged spoofing scheme does not constitute wire fraud.⁶

A. The Indictment Adequately Alleges the Crime of Wire Fraud.

An indictment "must be a plain, concise, and definite written statement of the essential facts constituting the offense charged." Fed. R. Crim. P. 7(c)(1). An indictment is adequate 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, 958-59 (7th Cir. 2010). Facts alleged in the indictment must be taken as true, United States v. Moore , 563 F.3d 583, 586 (7th Cir. 2009), but an indictment need not allege facts sufficient to establish all elements of the offense. "In general, an indictment that tracks the words of a statute to state the elements of the crime is acceptable, provided that the indictment states sufficient facts to place a defendant on notice of the specific conduct at issue. White , 610 F.3d at 958-59.⁷ And "[w]hen the charge is mail fraud,⁸ this court uses a broad rather than a technical standard to determine the sufficiency of an indictment." United States v. Palumbo Bros. , 145 F.3d 850, 868 (7th Cir. 1998).

The defendants acknowledge that the indictment provides adequate notice of the conduct alleged to have violated the wire fraud statute. Oral Arg. Tr. at 45, ECF No. 91. Their argument is that the indictment fails because it does not allege facts that show that they made any false statements. The defendants contend that because the indictment alleges (concedes, from the defendants' perspective) that the orders the defendants placed on the COMEX were real, at-risk, offers that the defendants were obligated to, and did, fill if they were accepted before the defendants could withdraw them, their conduct in placing those orders could not have violated the wire fraud statute. Their argument is simple: Wire fraud requires a false statement and in placing the Spoofing Orders they made no false statements. Their orders communicated no representation beyond the terms of the orders themselves—that the bidding or offering party would fill the order at the stated terms if the order were accepted before it is canceled. As it is undisputed—the complaint does not allege otherwise—that the defendants intended to, and did, fill any of their orders that were accepted while open on the market, their orders were, they insist, bona fide rather than fraudulent.

It's not quite that simple. The defendants' arguments come up short in two respects, one legal and one factual. As a question of law, the defendants' argument that a wire fraud conviction requires proof of a false statement is inconsistent with both the history of the wire fraud statute and Circuit precedent. That the indictment alleges no affirmative misrepresentations by the defendants does not mean that the defendants could not have engaged in a scheme to defraud by means of implied misrepresentations. And whether the defendants' Spoofing Orders carried with them any implied misrepresentations is the central fact question presented by the indictment. The defendants insist that real, at-risk, market orders communicate nothing beyond the offer to trade at the terms stated and that the Spoofing Orders did not deceive other traders about...