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How to Report Spoofing to the SEC for Whistleblower Awards

Spoofing is a form of market manipulation in which traders artificially inflate the supply and demand of an asset in order to increase profits. Traders involved in spoofing place a large number of orders to buy or sell a particular stock or asset with no intention of executing the orders. This fraudulent trading practice leads other market participants to mistakenly believe that pressure is being applied to respond to that asset and “falsify” other participants to place orders at artificially altered prices.

Spoofing affects prices because the artificial increase in activity on the buy or sell side of an asset creates the impression that the number of investors willing to buy or sell is shifting. Spoofers submit false bids or offers with the intention of canceling before execution in order to be able to execute real orders at a lower price. Spoofers often use automated trading and algorithms to achieve their goals.

The Dodd-Frank Act of 2010 prohibits spoofing, which it defines as “bids or offers intended to cancel the offer or offer prior to execution”. 7 USC § 6c (a) (5) (C). Spoofing also violates SEC rules, including the market manipulation provisions of Section 9 (a) (2) of the Securities Exchange Act of 1934.

Measures to enforce spoofing

In terms of JP Morgan Securities LLC

On September 29, 2020, the US Securities and Exchange Commission announced charges against JP Morgan Securities LLC, a broker-dealer subsidiary of JPMorgan Chase & Co., of fraudulent involvement in manipulative trading in US Treasuries. Under the SEC’s order, certain traders on JP Morgan Securities’ Treasuries Trading Desk placed genuine orders to buy or sell a particular Treasury security while almost simultaneously spoofing orders for the same series of Treasury. placed that the traders did not want to run security on the opposite side of the market. The spoofing orders were intended to create a false appearance of buying or selling interest, which would cause other market participants to trade the real orders at prices that are more favorable to JP Morgan Securities than JP Morgan Securities could otherwise obtain.

JPMorgan Chase & Co. agreed to pay a $ 10 million levy and a $ 25 million civil fine to settle the SEC’s lawsuit. In addition, the US Department of Justice (“DOJ”) and the US Commodity Futures Trading Commission (“CFTC”) have filed parallel lawsuits against JPMorgan Chase & Co. and some of its affiliates for engaging in manipulative trading. In total, the three lawsuits resulted in fines against JPMorgan Chase & Co. totaling $ 920 million, including amounts for criminal reparation, forfeiture, levy, penalties, and fines.

United States of America versus Edward Bases and John Pacilio

On August 5, 2021, a federal jury convicted Edward Bases and John Pacilio, two former Merrill Lynch traders, for participating in a multi-year fraud program designed to manipulate the precious metals market. According to the US Department of Justice (“DOJ”) press release announcing the promotion, the two traders have fraudulently pushed market prices up or down by routinely “spoofing” large orders on the precious metals futures market. Placed markets that they did not want to export.

After manipulating the market, Bases and Pacilio executed trades at cheap prices for their own benefit and to the detriment of other traders. The DOJ’s indictment detailed how Bases and Pacilio discussed their intent to “push” the market by spoofing electronic chat conversations.

On the subject of Nicholas Mejia Scrivener

The SEC recently accused a California day trader of spoofing, placing multiple orders to buy or sell a stock, sometimes at multiple price levels, that he refused to execute. The SEC alleged that the purpose of the false orders was to create the appearance of excessive market interest and induce other actors to trade at artificial prices. The trader then closed real orders at manipulated prices and withdrew the wrong orders. The SEC found that the trader’s conduct violated Section 9 (a) (2) of the Stock Exchange Act of 1934, and the trader settled by agreeing to an injunction and paying in withholding, interest and a civil penalty.

SEC and CFTC whistleblower awards for reporting spoofing

Under the SEC Whistleblower Program and the CFTC Whistleblower Program, a whistleblower who reports spoofing to the SEC or the CFTC may be eligible for an award. These practices can constitute spoofing:

  • Placing orders to buy or sell a stock or asset without intent to execute;

  • Trying to trick other traders into reacting to a particular stock or asset in order to manipulate market prices and profitability;

  • Creating a false appearance of market interest in order to manipulate the price of a stock or asset;

  • Placing deceptively large buy or sell orders only to withdraw those orders as soon as smaller, real orders have been executed on the other side of the market;

  • Use of false orders to favorably influence the price of a stock or an asset (increase market prices if there is an intention to sell or lower market prices if there is an intention to buy), in order to then obtain more ideal prices for a real order.

If information from a whistleblower leads the SEC or CFTC to a successful enforcement action with total fines in excess of $ 1 million, a whistleblower may be awarded between 10 and 30 percent of the total fines received.

Since 2012, the SEC has spent nearly $ 1 billion on whistleblowers and the CFTC has spent approximately $ 123 million on whistleblowers. The SEC’s largest whistleblower awards to date are $ 114 million and $ 50 million, respectively. The largest CFTC whistleblower awards to date are $ 45 million and $ 30 million.

How to Report Spoofing and Earn a Whistleblower Prize

To report spoofing and qualify for a whistleblower award, the SEC and CFTC require whistleblowers or their attorneys to provide their tips online through their tip, complaint, or recommendation portals, or by post / fax form TCRs to whistleblowers Offices to report. Whistleblowers should consider arranging confidential advice with a whistleblower attorney before submitting a report.

The path to receiving an award is long and complex. Experienced whistleblower attorneys can provide critical guidance to whistleblowers during this process to increase the likelihood that they will not only receive but also maximize their awards.

SEC and CFTC whistleblower protection for disclosures about spoofing

The SEC and CFTC whistleblower programs protect the confidentiality of whistleblowers and do not disclose information that could directly or indirectly reveal the identity of a whistleblower. In addition, a whistleblower can send an anonymous tip to the SEC and the CFTC if they are represented by a lawyer. In certain circumstances, a whistleblower may remain anonymous to the SEC and the CFTC until a decision on the award is made. However, the identity of a whistleblower is not made available to the public even at the time it is awarded.

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