Opinion ID: 6498324
Heading Depth: 2
Heading Rank: 1

Heading: Manual Spoofing and the Wire Fraud Statute

Text: The first issue on appeal is whether Chanu and Vorley’s manual spoofing conduct violated the wire fraud statute. The defendants frame the “threshold legal issue” as whether spoofing was “already a crime under the general wire fraud statute”—a statute that significantly pre‐dated the relevant 16 Nos. 21‐2242, 21‐2251 & 21‐2666 provision in Dodd‐Frank prohibiting spoofing. See Pub. L. No. 111‐203, § 747, 124 Stat. 1376, 1739 (2010); 7 U.S.C. § 6c(a)(5)(C). Chanu and Vorley are challenging the district court’s denial of their motion to dismiss the indictment for failure to state a claim as well as the legal sufficiency of the evidence to prove wire fraud. We “review questions of law in a district court’s ruling on a motion to dismiss an indictment de novo.” United States v. White, 610 F.3d 956, 958 (7th Cir. 2010) (per curiam). An in‐ dictment must “(1) state[] the elements of the offense charged; (2) fairly inform[] the defendant of the nature of the charge so that he may prepare a defense; and (3) enable[] him to plead an acquittal or conviction as a bar against future prosecutions for the same offense.” United States v. Miller, 883 F.3d 998, 1002 (7th Cir. 2018). We also “review de novo the denial of a de‐ fendant’s motion for acquittal.” United States v. Hernandez, 952 F.3d 856, 859 (7th Cir. 2020). We will “uphold the verdict if any rational trier of fact could have found the essential ele‐ ments of the crime beyond a reasonable doubt.” United States v. Coscia, 866 F.3d 782, 795 (7th Cir. 2017). “Given our defer‐ ence to jury determinations on evidentiary matters, we rarely reverse a conviction for mail or wire fraud due to insufficient evidence.” United States v. Weimert, 819 F.3d 351, 354 (7th Cir. 2016). The wire fraud statute, 18 U.S.C. § 1343, criminalizes the use of wire, radio, or television communications to effect “any scheme or artifice to defraud, or for obtaining money or prop‐ erty by means of false or fraudulent pretenses .…” To convict on wire fraud, the government must prove three elements: “(1) the defendant participated in a scheme to defraud; (2) the defendant intended to defraud; and (3) a use of an interstate Nos. 21‐2242, 21‐2251 & 21‐2666 17 wire in furtherance of the fraudulent scheme.” United States v. Powell, 576 F.3d 482, 490 (7th Cir. 2009). In clarifying the stat‐ utory term “scheme or artifice to defraud,” the Supreme Court has held that materiality of falsehood is an element of the federal wire fraud statute. See Neder v. United States, 527 U.S. 1, 25 (1999). Defendants contest the applicability of the wire fraud stat‐ ute in this case, claiming that the government charged them with wire fraud “in order to retroactively criminalize manual spoofing that pre‐dated the July 16, 2011 effective date of Dodd‐Frank using the 10‐year statute of limitations for wire fraud that affects a financial institution.” By Chanu and Vor‐ ley’s formulation, acceptance of the government’s theory “would transform the federal wire fraud statute into an all‐ purpose law for criminalizing violations of exchange rules— or any trading tactics the government deems to be dishon‐ est—because such violations or tactics could always be char‐ acterized as implied misrepresentations of good faith.” To avoid this outcome, Chanu and Vorley raise two primary ar‐ guments. First, they contend that the wire fraud statute re‐ quires proof of an affirmative (rather than implied) misrepre‐ sentation. And second, even if an implied misrepresentation is enough, the defendants insist that their implied misrepre‐ sentations—i.e., the implied misrepresentation that Chanu and Vorley wanted to fill, not cancel, their spoofing orders— could not be material. To answer whether this manual spoofing conduct violated the wire fraud statute, we ask two questions: Was there a scheme to defraud by means of false representations or omis‐ sions, and were such false representations or omissions mate‐ rial? Answering both questions in the affirmative, we 18 Nos. 21‐2242, 21‐2251 & 21‐2666 conclude Chanu and Vorley’s conduct was within the reach of the wire fraud statute.
tation or Omission In determining the scope of wire fraud, we begin with the statutory formulation of our first prong of inquiry: “scheme or artifice to defraud … by means of false or fraudulent pre‐ tenses, representations, or promises.” 18 U.S.C. § 1343. In United States v. Coscia, 866 F.3d 782, we previously considered whether spoofing amounts to a “scheme to defraud,” alt‐ hough under a similar, but not identical, statute—the com‐ modities fraud statute. Acknowledging the statutory differ‐ ences at play, we separately analyze “scheme to defraud” and “by means of false representation.” Beginning with “scheme to defraud,” the plain meaning of “scheme” is “[a] systemic plan; a connected or orderly ar‐ rangement, esp[ecially] of related concepts” and “[a]n artful plot or plan, usu[ally] to deceive others.” Scheme, Black’s Law Dictionary (11th ed. 2019). The plain meaning of “defraud” is “[t]o cause injury or loss to (a person or organization) by de‐ ceit; to trick (a person or organization) in order to get money.” Defraud, Black’s Law Dictionary (11th ed. 2019). Turning to the specifics of the trading conduct in this case, our decision in Coscia, 866 F.3d 782, is on point. In Coscia, the government alleged that the defendant “commissioned and utilized a computer program designed to place small and large orders simultaneously on opposite sides of the com‐ modities market in order to create illusory supply and de‐ mand and, consequently, to induce artificial market move‐ ment.” 866 F.3d at 785. Noting that the defendant, Michael Nos. 21‐2242, 21‐2251 & 21‐2666 19 Coscia, “engaged in ten weeks of trading during which he placed orders with the clear intent to cancel those orders prior to execution,” this Court concluded that the defendant in‐ tended to inflate and deflate the price of certain commodities and, thus, his conduct amounted to commodities fraud. Id. at 803. Coscia establishes that placing orders on opposite sides of the commodities market with the intent to cancel amounts to a “deceitful” scheme, aiming “to manipulate the market for [the trader’s] own financial gain.” Id. at 797. Nonetheless, Chanu and Vorley attempt to distinguish Coscia. On its facts, they note Coscia used a computer algorithm to engage in high‐frequency trading, id. at 786 (“a mechanism for making large volumes of trades in securities and commodities based on trading decisions effected in fractions of a second”), rather than the manual trades now before us. Because they were en‐ gaged in manual trading, Chanu and Vorley argue that their trades—unlike Coscia’s—were actually tradable due to the length of time they remained active prior to cancellation. Speed at which the spoofing occurred aside, however, we still rejected Coscia’s defense that he “placed real orders that were exactly that, orders that were tradeable,” id. at 790, 797—the same defense Chanu and Vorley now employ. Chanu and Vorley also attempt to distinguish Coscia on statutory grounds. As noted, Coscia was not charged under the wire fraud statute now before us; instead, he was con‐ victed of commodities fraud under 18 U.S.C. § 1348(1).6 6 Coscia was also convicted of violating the anti‐spoofing provisions of the Commodity Exchange Act, 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2). That conviction is not relevant for purposes of our analysis. 20 Nos. 21‐2242, 21‐2251 & 21‐2666 Under the wire fraud statue, “[a] scheme to defraud requires the making of a false statement or material misrepresentation, or the concealment of [a] material fact.” Powell, 576 F.3d at 490 (alteration in original) (citation and internal quotation marks omitted). Under the commodities fraud statute, by contrast, “[f]alse representations or material omissions are not re‐ quired.” Coscia, 866 F.3d at 796. Defendants push for a clear distinction on those underlying statutory grounds. We note, however, that the commodities fraud statute, 18 U.S.C. § 1348, was modeled on the mail and wire fraud statutes—as evi‐ denced by its text and legislative history. Id. at 799 & n.71 (“Several courts have recognized that because the text and legislative history of 18 U.S.C. § 1348 clearly establish that it was modeled on the mail and wire fraud statutes, an analysis of Section 1348 should be guided by the caselaw construing those statutes.” (citation and internal quotation marks omit‐ ted)); see also United States v. Doherty, 969 F.2d 425, 429 (7th Cir. 1992) (holding that “scheme to defraud” has a consistent meaning between 18 U.S.C. §§ 1341 [mail fraud], 1343 [wire fraud], and 1344 [bank fraud]). And the jury instructions we approved in Coscia were adapted from our pattern jury in‐ structions for mail, wire, and carrier fraud. 866 F.3d at 799. Today, we need not decide whether the phrase “scheme to defraud” bears a wholly identical meaning in both the com‐ modities fraud and the wire fraud statutes. Given the com‐ mon ground between these two statutes, it is enough that Coscia establishes that this pattern of trading conduct is de‐ ceitful and aligns with the plain meaning of “scheme to de‐ fraud.” Thus, the fact that Coscia was convicted of commodi‐ ties fraud, and Chanu and Vorley were convicted of wire fraud, is a distinction without a meaningful difference, at least in this case. Nos. 21‐2242, 21‐2251 & 21‐2666 21 Turning to the remaining statutory language, we analyze whether real, at‐risk orders placed with the intent to cancel amount to “means of false or fraudulent pretenses, represen‐ tations, or promises” as stated in 18 U.S.C. § 1343. At the out‐ set, we note that “false representation” encompasses a range of conduct. Beyond affirmative misrepresentations a defend‐ ant knows to be false, the Supreme Court has explicitly held that a material omission can amount to wire fraud. See Neder, 527 U.S. at 24–25. Failure to give the whole story may also be fraud, especially when a defendant actively conceals infor‐ mation. Powell, 576 F.3d at 491. Finally, “[a] half truth, or what is usually the same thing [as] a misleading omission, is action‐ able as fraud … if it is intended to induce a false belief and resulting action to the advantage of the misleading and the disadvantage of the misled.” United States v. Stephens, 421 F.3d 503, 507 (7th Cir. 2005) (some alterations in original) (quoting Emery v. Am. Gen. Fin., 71 F.3d 1343, 1346 (7th Cir. 1995)). An implied misrepresentation is simply an omission by another name. Defendants argue that their readily tradeable bids and of‐ fers are not rendered “false” by their subjective intent to can‐ cel. We agree that by simply placing an order, a trader is not certifying it will never be cancelled. Instead, the order place‐ ment signals a trader’s intent to buy or sell. By obscuring their intent to cancel, through an orchestrated approach, Chanu and Vorley advanced a quintessential “half‐truth” or implied misrepresentation—the public perception of an intent to trade and a private intent to cancel in the hopes of financial gain. We remain unconvinced by defendants’ arguments to the contrary. 22 Nos. 21‐2242, 21‐2251 & 21‐2666 Thus, we find Chanu and Vorley’s actions amounted to a scheme to defraud by means of false representations or omis‐ sions.
We turn finally to the question of materiality. Defendants argue that even if their actions amounted to a misrepresenta‐ tion or omission, those actions cannot be deemed material for the purposes of the wire fraud statute. Wire fraud “requires a material misrepresentation or omission.” Neder, 527 U.S. at 22. In general, “a false statement is material if it has a natural ten‐ dency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed.” Id. at 16. The record clearly establishes that traders employing manual spoofing do so with the aim (and effect) of influenc‐ ing other actors in the trading space. Defendants’ former col‐ league Liew testified that the spoofing illusion “would help Deutsche Bank” while “hurt[ing] other market participants.” Such action is neither customary nor relatively harmless. See Weimert, 819 F.3d at 357 (outlining the bounds of criminaliz‐ ing deceptive misstatements or omissions about a buyer or seller’s negotiating position). Thus, there is no question the traders’ implied misrepresentations were material.