1 00:00:00,000 --> 00:00:03,000 Speaker 1: Bloomberg Law is brought to you by Commonwealth Financial Network, 2 00:00:03,120 --> 00:00:06,360 Speaker 1: home to the industry's most satisfied advisors. Prepared to be 3 00:00:06,400 --> 00:00:08,559 Speaker 1: swept off your feet by the broker dealer r A 4 00:00:08,720 --> 00:00:13,000 Speaker 1: that's been putting relationships first since nineteen Visit Commonwealth dot 5 00:00:13,039 --> 00:00:17,520 Speaker 1: com June thanks Greg. Tricks from the Master. That's what 6 00:00:17,680 --> 00:00:20,200 Speaker 1: David lu typed in a chat after working with a 7 00:00:20,239 --> 00:00:23,840 Speaker 1: colleague at Dortsche Bank to move gold future prices while 8 00:00:23,920 --> 00:00:26,799 Speaker 1: Lou executed a trade. In the course of a year, 9 00:00:26,880 --> 00:00:29,920 Speaker 1: Lou and his colleagues used fake ores more than fifty 10 00:00:29,960 --> 00:00:34,440 Speaker 1: times to try to manipulate prices and illegal practice call spoofing, 11 00:00:34,720 --> 00:00:38,159 Speaker 1: placing orders he intended to cancel in an attempt to 12 00:00:38,200 --> 00:00:42,080 Speaker 1: manipulate the price. Soon Lou can type tricks from the 13 00:00:42,080 --> 00:00:45,440 Speaker 1: co operator into his chats. After pleading guilty to fraud, 14 00:00:45,479 --> 00:00:49,920 Speaker 1: he's become a prime government witness for federal prosecutors investigating 15 00:00:49,920 --> 00:00:53,920 Speaker 1: whether traders at the world's biggest banks conspired to manipulate 16 00:00:54,000 --> 00:00:57,400 Speaker 1: prices and precious medals. Our guest is an expert in 17 00:00:57,440 --> 00:01:01,560 Speaker 1: the area, Professor John Coffee of Columbia off School Jack. 18 00:01:01,760 --> 00:01:06,520 Speaker 1: The Justice Department began looking into spoofing activities at a 19 00:01:06,600 --> 00:01:09,360 Speaker 1: dozen of the biggest global banks about two years ago. 20 00:01:09,840 --> 00:01:13,959 Speaker 1: So how big is this cooperation deal? Well, this is 21 00:01:14,000 --> 00:01:17,480 Speaker 1: the classic pattern for enforcement that you move up the 22 00:01:17,480 --> 00:01:21,279 Speaker 1: food chain. You take the lower ranking trader, you offer 23 00:01:21,400 --> 00:01:24,639 Speaker 1: him a deal, threatened him with potentially a prison sentence 24 00:01:24,680 --> 00:01:28,240 Speaker 1: because this could be even criminally enforced on. At least 25 00:01:28,280 --> 00:01:30,160 Speaker 1: you threatened to throw him out of the industry, and 26 00:01:30,200 --> 00:01:32,960 Speaker 1: then give him a chance to cooperate and name the 27 00:01:33,040 --> 00:01:36,920 Speaker 1: higher ups who directed him. Uh. And again the government 28 00:01:36,920 --> 00:01:40,280 Speaker 1: seemed to feel that this goes above these individual traders, 29 00:01:40,319 --> 00:01:43,480 Speaker 1: that someone higher up wanted the firm to engage in spoofing. 30 00:01:44,440 --> 00:01:46,640 Speaker 1: Jack at risk of asking a stupid question, I'm gonna 31 00:01:46,680 --> 00:01:49,880 Speaker 1: ask ask this question so as I understand it. In 32 00:01:50,000 --> 00:01:54,240 Speaker 1: the the court papers, Deutsche Bank wasn't identified by name, 33 00:01:54,360 --> 00:01:58,240 Speaker 1: just by just as bank A, and then Bloomberg subsequently 34 00:01:58,280 --> 00:02:00,200 Speaker 1: wrote a story saying that you confirmed that it was 35 00:02:00,360 --> 00:02:04,040 Speaker 1: Deutscha Bank. Is that at all unusual? Is there anything 36 00:02:04,080 --> 00:02:06,120 Speaker 1: we can clean from the fact that they didn't actually 37 00:02:06,160 --> 00:02:09,519 Speaker 1: named Deeutsa Bank. No, I don't think it's that unusual. 38 00:02:09,639 --> 00:02:12,640 Speaker 1: You often try to keep the name of the of 39 00:02:12,639 --> 00:02:16,600 Speaker 1: a major bank out of the court papers until you're 40 00:02:16,600 --> 00:02:20,000 Speaker 1: really sure you're going after them. They're probable. Immediate target 41 00:02:20,080 --> 00:02:23,720 Speaker 1: is to go after vice presidents and head traders and 42 00:02:23,960 --> 00:02:27,560 Speaker 1: whoever was running the division. Uh. Then they may ask 43 00:02:27,680 --> 00:02:30,679 Speaker 1: the bank whether it will take corrective action. There'll be 44 00:02:30,720 --> 00:02:33,760 Speaker 1: a negotiation whether or not they will make the bank 45 00:02:33,840 --> 00:02:37,680 Speaker 1: also defended Jack. From what I've read, it seems as 46 00:02:37,720 --> 00:02:40,680 Speaker 1: if there was almost a training program at the bank 47 00:02:40,840 --> 00:02:44,000 Speaker 1: and how to spoof. This guy says he learned from 48 00:02:44,040 --> 00:02:47,359 Speaker 1: other people and then he taught others. You know, it's 49 00:02:47,400 --> 00:02:51,880 Speaker 1: not it is a prevalent practice. Until recently, it wasn't 50 00:02:51,919 --> 00:02:55,480 Speaker 1: even clearly illegal. It's only with the Dodd Frank Act 51 00:02:55,520 --> 00:02:59,560 Speaker 1: in two thousand and ten, the Congress clearly defined spoofing 52 00:02:59,800 --> 00:03:04,280 Speaker 1: on the commodities markets as illegal, and they defined spoofing 53 00:03:04,360 --> 00:03:07,720 Speaker 1: to mean, uh, the placement of buy or sell orders 54 00:03:07,919 --> 00:03:11,919 Speaker 1: with a clear intent to cancel those orders before they're executed. 55 00:03:12,320 --> 00:03:15,160 Speaker 1: That was to create this misleading impression that there was 56 00:03:15,200 --> 00:03:18,200 Speaker 1: either great demand or that there was price movement headed 57 00:03:18,240 --> 00:03:20,920 Speaker 1: in one direction, and that was to induce the other 58 00:03:21,000 --> 00:03:23,720 Speaker 1: side to move its own prices up so that the 59 00:03:23,760 --> 00:03:26,919 Speaker 1: spoofer couldn't effect sell an inflated price or buy it 60 00:03:27,000 --> 00:03:30,160 Speaker 1: a decreased price. You know, as you describe it, that 61 00:03:30,240 --> 00:03:32,440 Speaker 1: sort of sounds like a sort of a classic practice 62 00:03:32,480 --> 00:03:36,240 Speaker 1: I would have expected to always be be illegal. Um 63 00:03:37,040 --> 00:03:39,840 Speaker 1: Am I missing something here? Well, it's part of the 64 00:03:39,840 --> 00:03:43,000 Speaker 1: difference between the derivative markets and the securities markets. You 65 00:03:43,040 --> 00:03:47,400 Speaker 1: can find sec cases that were called anti manipulation cases, 66 00:03:47,560 --> 00:03:50,160 Speaker 1: they go back to two thousand one or two, but 67 00:03:50,280 --> 00:03:54,680 Speaker 1: there was no ability to litigate this in the commodities markets, 68 00:03:54,920 --> 00:03:58,600 Speaker 1: which was much more of a sophisticated market of interacting professionals. 69 00:03:58,920 --> 00:04:02,320 Speaker 1: And it was only with Frank that spool thing became illegal. 70 00:04:02,680 --> 00:04:05,480 Speaker 1: And we've had some criminal cases now. In the leading 71 00:04:05,480 --> 00:04:08,400 Speaker 1: criminal case, you found that the trader actually put in 72 00:04:08,760 --> 00:04:12,360 Speaker 1: four hundred thousand orders within a few month period and 73 00:04:12,480 --> 00:04:16,320 Speaker 1: managed to cancel of them, so they didn't have to 74 00:04:16,600 --> 00:04:19,200 Speaker 1: ever pay on his buy or sell offers, but he 75 00:04:19,200 --> 00:04:22,480 Speaker 1: could convince the market to change his prices. Probably what 76 00:04:22,480 --> 00:04:24,680 Speaker 1: you need to understand is this is a new kind 77 00:04:24,680 --> 00:04:28,160 Speaker 1: of fraud because it's really aimed at fooling the computer. 78 00:04:28,400 --> 00:04:32,480 Speaker 1: On the other side, high speed traders today use algorithms 79 00:04:32,839 --> 00:04:36,000 Speaker 1: that they programmed these algorithms into their computer and they 80 00:04:36,040 --> 00:04:39,560 Speaker 1: make buy or sell decisions and literally a middlesecond uh, 81 00:04:39,560 --> 00:04:42,440 Speaker 1: and those kind of decisions can be influenced by an 82 00:04:42,480 --> 00:04:46,039 Speaker 1: apparent flood of new buyer sell offers even though they've 83 00:04:46,120 --> 00:04:49,160 Speaker 1: not been executed. And that's essentially what's been going on. 84 00:04:49,720 --> 00:04:52,320 Speaker 1: And in this world in which the computer is being cheated, 85 00:04:52,839 --> 00:04:55,159 Speaker 1: the government is now coming in to protect the side 86 00:04:55,200 --> 00:04:59,839 Speaker 1: that's relying on their computer. Jack. Prosecutors are apparently looking 87 00:05:00,080 --> 00:05:05,200 Speaker 1: yawn precious metals trading and planning more criminal spoofing charges 88 00:05:05,400 --> 00:05:08,640 Speaker 1: against Wall Street traders across the markets. What do you 89 00:05:08,640 --> 00:05:13,080 Speaker 1: know about that? Well, of course, the SEC has used 90 00:05:13,120 --> 00:05:16,000 Speaker 1: its favorite weapon, rule can be five for probably a 91 00:05:16,040 --> 00:05:19,400 Speaker 1: dozen or more years, against spoofing, although there they've called 92 00:05:19,440 --> 00:05:23,120 Speaker 1: it anti manipulation. It's the same behavior whether you're dealing 93 00:05:23,200 --> 00:05:26,200 Speaker 1: it in the commodities markets, whether you're dealing it in swaps, 94 00:05:26,520 --> 00:05:30,000 Speaker 1: or whether you're dealing in securities. The attempt to put 95 00:05:30,040 --> 00:05:33,800 Speaker 1: in an order that deliberately deceives the other side into 96 00:05:33,800 --> 00:05:36,520 Speaker 1: believing there's great market depth or that there is real 97 00:05:36,560 --> 00:05:39,880 Speaker 1: price movement going in one direction. There's no social benefit 98 00:05:39,880 --> 00:05:42,120 Speaker 1: and all that. And I don't know that anything is 99 00:05:42,320 --> 00:05:45,679 Speaker 1: being chilled that's at all socially desirable. Again, I pointed 100 00:05:45,720 --> 00:05:48,200 Speaker 1: to ask you that Nkowski a case a few years 101 00:05:48,200 --> 00:05:51,840 Speaker 1: ago he put in four thousands such orders and canceled 102 00:05:52,800 --> 00:05:57,279 Speaker 1: of them. That really does misinform the market about thirty seconds, Jack, 103 00:05:57,360 --> 00:06:00,240 Speaker 1: But I have to ask you this lou out to 104 00:06:00,400 --> 00:06:03,719 Speaker 1: chat to a trader. Look at silver. Basically I sold 105 00:06:03,760 --> 00:06:06,799 Speaker 1: out by just having fake bids. Why are they still 106 00:06:06,839 --> 00:06:11,279 Speaker 1: putting these things in chats? Well, I mean, I think 107 00:06:11,360 --> 00:06:16,360 Speaker 1: that traders often aren't the most law compliant people. They 108 00:06:16,440 --> 00:06:19,200 Speaker 1: only learn to stop doing something when they see one 109 00:06:19,240 --> 00:06:23,359 Speaker 1: of their fellows indicted or otherwise prosecuted. We have just 110 00:06:23,480 --> 00:06:27,280 Speaker 1: seen even more egregious behavior in the attempt to manipulate 111 00:06:27,560 --> 00:06:29,960 Speaker 1: the libor market, or the euro Board market or other 112 00:06:30,040 --> 00:06:34,000 Speaker 1: index markets, and all of these markets. The traders only 113 00:06:34,040 --> 00:06:38,360 Speaker 1: respond once they see see actual prosecutions. I'm afraid the 114 00:06:38,480 --> 00:06:41,520 Speaker 1: law on the books doesn't motivate everybody. But if you 115 00:06:41,680 --> 00:06:45,839 Speaker 1: indictments does, thank you so much. That's Jack Coffey of 116 00:06:45,839 --> 00:06:48,640 Speaker 1: Columbia Law School coming up. When does collusion with the 117 00:06:48,680 --> 00:06:51,880 Speaker 1: foreign government become a crime under campaign finance law?