Deutsche Bank Traders Manipulated Precious-Metals Markets Using “Spoof” Orders

Summary

Deutsche Bank was penalized by the U.S. Commodity Futures Trading Commission (CFTC) in January 2018 after regulators found that its precious-metals traders engaged in a scheme to manipulate futures markets using deceptive trading techniques known as “spoofing.” The conduct occurred from at least February 2008 through September 2014 and involved precious-metals futures contracts traded on the Commodity Exchange (COMEX). U.S. CFTC – Deutsche Bank $30 million precious-metals manipulation settlement: https://www.cftc.gov/PressRoom/PressReleases/7682-18 According to the CFTC, Deutsche Bank traders placed large buy or sell orders that they intended to cancel before execution. These fake orders were designed to create a false appearance of market demand or supply and influence other market participants. A trader could, for example, place a genuine smaller order on one side of the market while placing a much larger order on the opposite side that he did not intend to execute. The larger “spoof” order created the appearance of increased buying or selling pressure. After other traders reacted, the Deutsche Bank trader could execute the genuine order at a more favorable price and cancel the deceptive orders. The CFTC found that Deutsche Bank's traders intended to manipulate precious-metals futures prices and sometimes succeeded in doing so, allowing the bank to benefit from artificial prices created by the manipulation. The regulator also identified another form of manipulation involving customer stop-loss orders. Between December 2009 and February 2012, a Deutsche Bank precious-metals trader in Singapore placed orders and executed trades designed to move market prices sufficiently to trigger customers' stop-loss orders for the benefit of his own proprietary trading. In other words, the misconduct was not limited to displaying fake market liquidity. The CFTC found instances in which trading was deliberately conducted to cause Deutsche Bank customers' stop-loss orders to execute, benefiting the trader's position. The CFTC also found serious supervisory failures. Deutsche Bank Securities' electronic surveillance system had actually identified specific instances of potential misconduct, but according to the regulator the bank failed to follow up on the majority of potential misconduct identified by its own surveillance system. CFTC – Broader enforcement action against Deutsche Bank and individual traders: https://www.cftc.gov/PressRoom/PressReleases/7681-18 Deutsche Bank agreed to pay a $30 million civil monetary penalty, cease further violations and implement enhanced training, systems and controls designed to detect and prevent spoofing. At the time, the CFTC said the $30 million penalty was its largest spoofing-related penalty to date. The evidence against individual Deutsche Bank traders became even stronger in subsequent criminal proceedings. In September 2020, a U.S. federal jury convicted former Deutsche Bank precious-metals traders James Vorley and Cedric Chanu of wire fraud affecting a financial institution for their roles in deceptive and manipulative precious-metals trading. U.S. Department of Justice – Two former Deutsche Bank traders convicted: https://www.justice.gov/archives/opa/pr/two-former-deutsche-bank-traders-convicted-engaging-deceptive-and-manipulative-trading According to evidence presented at trial, Vorley and Chanu placed fraudulent orders they did not intend to execute in order to create a false impression of supply and demand and induce other traders to transact at prices, quantities or times at which they otherwise would not have traded. The conduct involved futures contracts for gold, silver, platinum and palladium. The CFTC separately alleged that Vorley and Chanu spoofed repeatedly, coordinated spoofing with other traders on Deutsche Bank's precious-metals desk and taught another trader on the desk how to spoof. Vorley and Chanu were subsequently each sentenced to 12 months and one day in federal prison for their participation in the fraud scheme. DOJ – James Vorley prison sentence: https://www.justice.gov/archives/opa/pr/former-deutsche-bank-commodities-trader-sentenced-prison-fraud-scheme DOJ – Cedric Chanu prison sentence: https://www.justice.gov/archives/opa/pr/second-former-deutsche-bank-commodities-trader-sentenced-prison-fraud-scheme Deutsche Bank's commodities misconduct was also addressed again in its 2021 Deferred Prosecution Agreement with the U.S. Department of Justice. That agreement resolved both a separate FCPA investigation and the bank's precious-metals commodities-fraud conduct. The combined DOJ/SEC resolution exceeded $130 million, although that entire amount should not be attributed solely to precious-metals manipulation, because it also covered the separate FCPA case. U.S. Department of Justice – Deutsche Bank 2021 commodities fraud and FCPA resolution: https://www.justice.gov/archives/opa/pr/deutsche-bank-agrees-pay-over-130-million-resolve-foreign-corrupt-practices-act-and-fraud Company response: Deutsche Bank cooperated with the CFTC investigation and undertook remedial measures. The CFTC specifically recognized the bank's substantial cooperation and proactive remediation and said this resulted in a substantially reduced civil penalty. Deutsche Bank was required to maintain enhanced training programmes, surveillance systems and controls designed to detect and deter future spoofing by its personnel. Key facts: Deutsche Bank precious-metals traders engaged in manipulative trading from at least 2008 through 2014; traders placed orders they intended to cancel in order to create false signals of market supply or demand; the CFTC found that traders intended to manipulate prices and sometimes succeeded; trading was also used to trigger customers' stop-loss orders for proprietary benefit; Deutsche Bank's surveillance systems identified potential misconduct but the bank failed to follow up on the majority of the identified instances; the conduct involved precious metals including gold, silver, platinum and palladium; Deutsche Bank paid a $30 million CFTC penalty; and former Deutsche Bank traders James Vorley and Cedric Chanu were convicted by a federal jury and subsequently sentenced to prison. The case is particularly serious because the misconduct directly attacked the integrity of the market itself. The deceptive orders were specifically designed to make other market participants believe that supply or demand existed when it did not, influencing how those participants traded. The CFTC additionally found that Deutsche Bank's own surveillance system detected potential misconduct but that the bank failed to investigate the majority of those alerts.