Ex-UBS trader aims to dismiss CFTC “spoofing” case against him

Less than a month after it became clear that a settlement between the Commodity Futures Trading Commission (CFTC) and ex-UBS precious metals trader Andre Flotron is unlikely, the defendant has responded to the allegations against him.

Let’s recall that Flotron, a Swiss national, was employed by UBS from 2008 to 2013 as a precious metals trader.

The CFTC alleges that Flotron engaged in a manipulative and deceptive scheme in the precious metals futures market. Specifically, the CFTC alleges that he repeatedly engaged in the practice of spoofing – placing an order with the intent to cancel it before execution. According to the regulator, the defendant placed large orders that he intended to cancel before execution opposite small orders he desired to execute. By placing the large orders, the defendant intended to send market participants a false signal of increased supply or a false signal of increased demand and thereby trick market participants into executing against his smaller orders.

The CFTC seeks a permanent injunction, civil monetary penalties and other equitable relief.

On Friday, June 22, 2018, Flotron filed a Motion to dismiss and a supporting Memorandum with the Connecticut District Court.

The documents, seen by FinanceFeeds, state that the CFTC failed to plead the circumstances constituting the alleged fraud with the particularity required by the Federal Rules of Civil Procedure. The CFTC alleges that “typically” Mr. Flotron’s fraudulent orders were entered at a certain price level, that “at times” he would enter additional “genuine” orders, and that he “usually” cancelled the fraudulent order after the genuine orders were filled. According to the defense, this language is hedging and noncommittal.

According to the defendant, he has no way to defend himself against a scheme that “usually” involves one type of conduct but “at times” might include something else.

Also, the spoofing claim in Count One and the anti-manipulation claim in Count Two should be dismissed, according to the defendant, because the statutes are void for vagueness as applied to Flotron. The CFTC’s claims are said to push the boundaries of both statutes well beyond their legal limits to encompass legitimate and commonplace market activity. According to the defense, Flotron engaged in entirely lawful and legitimate trading practices –entering orders and then subsequently filling or cancelling orders.

The defense notes that after the passage of Dodd-Frank, the CFTC and market participants both recognized that the scope and meaning of the “anti-spoofing” provision were unclear. While the clause includes a brief parenthetical next to the term “spoofing” – “bidding or offering with the intent to cancel the bid or offer before execution” – this language, if taken literally, would capture vast amounts of legitimate and normal trading activity that could not be considered a criminal or regulatory violation, or the type of conduct intended to be encompassed by the statute, the defense says. For instance, traders frequently place orders into the market with the expectation that they may be cancelled, sometimes very quickly, if no counterparty chooses to execute against them.

It was not until May 2013 that the CFTC issued final interpretive guidance. This interpretive guidance and policy statement stated that “a spoofing violation will not occur when the person’s intent when cancelling a bid or offer before execution was . . . part of a legitimate, good-faith attempt to consummate a trade.”

This guidance came just months before the end of the period of alleged misconduct, and after five of the individual instances of alleged spoofing referenced in the complaint against Flotron. Thus, the CFTC’s guidance cannot cure the vagueness problems described in the complaint, the defense argues.

The defense insists that Flotron’s alleged conduct was comprised of nothing more than manually placing orders on COMEX, and then subsequently manually cancelling some of those orders prior to execution. Flotron is said to have never employed any algorithms or other systems to ensure that these orders were cancelled prior to execution, and he and UBS always fulfilled their contractual obligations in regard to any completed executions. Thus, according to the defense, Flotron had no reasonable basis to believe that his trading activity could possibly subject him to an enforcement action for violations of the Commodity Exchange Act.

The case is captioned Commodity Futures Trading Commission v. Flotron (3:18-cv-00158).