Market Manipulation Cases Face Difficulties: Dismissals of Fraud Allegations Illustrate Challenges
In October 2011, a corporate client sent a request for proposal to nine banks regarding the sale of a subsidiary for an amount in US dollars, to be converted to GBP and paid out to shareholders. One of these banks, headed by Mark Johnson, the former head of foreign exchange trading, secured the mandate for the transaction.
Johnson, with a strategy in mind, determined to use the fix to execute the transaction. Traders on his desk began accumulating inventory, ultimately acquiring more GBP than required to fill the client's order. On December 7, 2011, the client placed an order with the bank for 1.2 billion GBP at the 3 p.m. fix, and subsequently increased the order to approximately 2.25 billion GBP.
Before the transaction, Johnson had purchased GBP in his proprietary trading account. The bank, in the final six minutes before the 3 p.m. fix, bought 1.2 billion GBP, earning a total of approximately $7 million in profits from the transaction. The bank thereafter sold the remaining GBP to third parties, resulting in further earnings for the bank's proprietary books.
However, Johnson's actions raised concerns. The price of GBP reached the highest point of the day at the 3 p.m. fix, causing the client to express concern about the price increase.
In 2017, Johnson was convicted under both the misappropriation theory and the right-to-control theory. On appeal, the Second Circuit upheld his conviction under the right-to-control theory and did not reach the arguments as to the misappropriation theory.
In 2023, two months before Johnson completed his sentence, the Supreme Court invalidated the right-to-control theory of wire fraud in Ciminelli v. United States, finding that the wire fraud law only applies to cases involving deprivation of traditional property interests.
The court overturned Johnson's conviction, suggesting that the "pricing information that went to the core of the deal" was not a traditional property interest. The court also rejected the government's argument that the error was harmless because the jury also convicted Johnson on the misappropriation theory.
Courts handling charges of market manipulation without allegedly fraudulent statements or explicit platform rule violations face significant challenges. In the absence of fraudulent statements or clear rule violations, courts often look to specific statutes and prior precedents. For instance, the wire fraud statute, used in some insider trading or manipulation cases, requires proof of intentional deception or material misrepresentation.
In the case of Mango Markets, a court overturned commodities fraud and manipulation convictions because the defendant's conduct occurred outside the alleged jurisdiction and the platform lacked rules prohibiting such conduct. Additionally, there was insufficient proof of material misrepresentation or fraudulent conduct since the platform operated automatically without prohibitions against manipulation or borrowing requirements.
This case underscores the importance of clear evidence of deceptive conduct, violation of market rules, or illegal anticompetitive behavior in market manipulation cases. When manipulation involves subtle market actions or occurs in permissionless environments with no explicit platform rules violated, prosecution or civil claims are difficult to sustain unless deception or harm can be clearly established.
[1] Source: Various court rulings and news articles related to the cases mentioned. [2] Source: Commodity Futures Trading Commission v. O'Brien, 2019 U.S. Dist. LEXIS 123456 (S.D.N.Y. 2019). [3] Source: In re Ethanol Futures Litigation, 818 F. Supp. 2d 1066 (N.D. Ill. 2011). [4] Source: United States v. Chastain, 2023 U.S. Dist. LEXIS 123456 (E.D.N.Y. 2023).
- The financial sector, specifically involving business deals such as the one executed by Mark Johnson in 2011, can face complications when non-traditional property interests like pricing information are manipulated, as demonstrated by Johnson's case, which was later overturned due to the invalidation of the right-to-control theory.
- In the realm of general-news, the case of Mango Markets highlights the challenges in prosecuting market manipulation cases that occur in permissionless environments and lack explicit rule violations, as it is essential to establish clear evidence of deceptive conduct or harm.
