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United States v. Vorley

United States District Court, N.D. Illinois, Eastern Division

October 21, 2019

UNITED STATES OF AMERICA, Plaintiff,
v.
JAMES VORLEY and CEDRIC CHANU, Defendants.

          MEMORANDUM OPINION AND ORDER

          John J. Tharp, Jr. United States District Judge.

         This case presents the question of whether a scheme to defraud commodities traders by placing “spoofing” orders-orders that the trader intends to withdraw before they can be filled- can constitute wire fraud. The defendants say no, because wire fraud requires the making of a false statement-an express misrepresentation-and the indictment alleges none. That is not the law. The Seventh Circuit, moreover, has already held that spoofing can constitute a “scheme to defraud” under the commodities fraud statute. As there is no material difference between a scheme to defraud under either statute, the answer to the question presented is, yes: the alleged spoofing scheme alleged in the indictment adequately charges violations of the wire fraud statute. And given that the statute has long been recognized to reach implied misrepresentations, and also requires proof of intent to defraud, the defendants' contention that the statute is unconstitutionally vague as applied to the scheme alleged also fails. The defendants also mount a vigorous challenge to whether the defendants' spoofing orders were, in fact, misleading and material, but those are questions for trial. Accordingly, the defendants' motion to dismiss the indictment is denied.

         I. BACKGROUND[1]

         Defendants James Vorley and Cedric Chanu were precious metals traders at Deutsche Bank AB. The indictment alleges that for approximately two years, from December 2009 through November 2011, [2] Vorley and Chanu engaged in a scheme to defraud other traders on the Commodity Exchange Inc. (“COMEX”) that involved interstate wire communications.[3] COMEX used an electronic trading system called “Globex, ” which allowed traders to trade futures contracts from anywhere in the world. During the relevant period, Vorley worked in London; Chanu worked first in London and later Singapore. The Globex servers, however, were located in Chicago and Aurora, Illinois, and that is the basis for venue in this District.

         The indictment alleges that the defendants sought “to deceive other traders by creating and communicating materially false and misleading information regarding supply or demand, in order to induce other traders into trading precious metals futures contracts at prices, quantities, and times at which they would not have otherwise traded, in order to make money and avoid losses for the coconspirators.” Ind. ¶ 4. The mechanics of the alleged scheme are not the focus of the present dispute, so its operation can be briefly described. The defendants would place one or more orders for precious metals futures contracts on one side of the market (bid or offer), intending to cancel the orders before they could be accepted by other traders. The indictment refers to such orders as “Fraudulent Orders” because the defendants did not intend to execute them; instead, these orders were “intended. . . to deceive other traders” about the true supply or demand for the commodity in question. Id. (Since the principal question presented by the defendants motion is whether these orders constituted a scheme to defraud, in lieu of “Fraudulent Orders” this opinion will use the statutory and perhaps somewhat less pejoratively sounding term-“Spoofing Orders”-to refer to these orders; whether they were, in fact, fraudulent will be determined at trial).[4] The indictment alleges that the Spoofing Orders “were material misrepresentations” regarding the defendants' intent to trade those orders. Id. ¶ 11. Contemporaneously with placing the Spoofing Orders, the defendants placed what are referred to as “Primary Orders” on the opposite side of the market. Unlike the Spoofing Orders, the defendants intended to execute the Primary Orders, which involved trades that were (at least to the extent that they were visible to the market[5]) of smaller volume.

         In theory, at least, the defendants profited from the scheme because the Spoofing Orders would deceive other traders about supply and demand, misleading them about the likely direction of the commodity's price and making the defendants' Primary Orders, on the other side of the market, look attractive. Spoofing Orders to buy (bids), for example, would signal (falsely, because the defendants did not really intend to buy) an increase in demand for the commodity in question, thereby putting upward pressure on the market price. Id. ¶ 7. Having delivered this false signal of increased demand to the market, the defendants would then execute Primary Orders that had been placed to sell the commodity (offers) at a lower price than the Spoofing Order bid price but at a higher price than the prevailing market price had been before placement of the Spoofing Orders. Being smaller (at least, so far as was known to the market), the Primary Order would not wholly counteract the price impact of the Spoofing Orders, allowing the defendants to capture some of the spread between the preexisting market price and the inflated price bid in the Spoofing Orders.

         II. ANALYSIS

         The defendants move pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B)(v) to dismiss the indictment for failure to state an offense. They also assert, in the alternative, that the wire fraud statute would be unconstitutionally vague if construed to extend to the defendants' trading activity. In addition, several business and industry organizations have filed briefs as amici curiae in support of the defendants' arguments that the alleged spoofing scheme does not constitute wire fraud.[6]

         A. The Indictment Adequately Alleges the Crime of Wire Fraud.

         An indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.” Fed. R. Crim. P. 7(c)(1). An indictment is adequate if it “(1) states all the elements of the crime charged; (2) adequately informs the defendant of the nature of the charges so that he may prepare a defense; and (3) allows the defendant to plead the judgment as a bar to any future prosecutions.” United States v. White, 610 F.3d 956, 958-59 (7th Cir. 2010). Facts alleged in the indictment must be taken as true, United States v. Moore, 563 F.3d 583, 586 (7th Cir. 2009), but an indictment need not allege facts sufficient to establish all elements of the offense. “In general, an indictment that tracks the words of a statute to state the elements of the crime is acceptable, provided that the indictment states sufficient facts to place a defendant on notice of the specific conduct at issue. White, 610 F.3d at 958-59.[7] And “[w]hen the charge is mail fraud, [8] this court uses a broad rather than a technical standard to determine the sufficiency of an indictment.” United States v. Palumbo Bros., 145 F.3d 850, 868 (7th Cir. 1998).

         The defendants acknowledge that the indictment provides adequate notice of the conduct alleged to have violated the wire fraud statute. Oral Arg. Tr. at 45, ECF No. 91. Their argument is that the indictment fails because it does not allege facts that show that they made any false statements. The defendants contend that because the indictment alleges (concedes, from the defendants' perspective) that the orders the defendants placed on the COMEX were real, at-risk, offers that the defendants were obligated to, and did, fill if they were accepted before the defendants could withdraw them, their conduct in placing those orders could not have violated the wire fraud statute. Their argument is simple: Wire fraud requires a false statement and in placing the Spoofing Orders they made no false statements. Their orders communicated no representation beyond the terms of the orders themselves-that the bidding or offering party would fill the order at the stated terms if the order were accepted before it is canceled. As it is undisputed-the complaint does not allege otherwise-that the defendants intended to, and did, fill any of their orders that were accepted while open on the market, their orders were, they insist, bona fide rather than fraudulent.

         It's not quite that simple. The defendants' arguments come up short in two respects, one legal and one factual. As a question of law, the defendants' argument that a wire fraud conviction requires proof of a false statement is inconsistent with both the history of the wire fraud statute and Circuit precedent. That the indictment alleges no affirmative misrepresentations by the defendants does not mean that the defendants could not have engaged in a scheme to defraud by means of implied misrepresentations. And whether the defendants' Spoofing Orders carried with them any implied misrepresentations is the central fact question presented by the indictment. The defendants insist that real, at-risk, market orders communicate nothing beyond the offer to trade at the terms stated and that the Spoofing Orders did not deceive other traders about anything material to their trading decisions. That factual assault on the allegations of the indictment, however, must be made at trial.

         1. Wire fraud does not require proof of a false statement.

         The defendants maintain that to prove a wire fraud violation, the government must prove that a defendant made a false statement-an affirmative misrepresentation. “Without a false statement or misrepresentation, ” they declare, “there simply is no wire fraud.” Def Br. at 11, ECF No. 76. And because the government concedes that the indictment alleges no false statements, Oral Arg. Tr. at 36, ECF No. 91, if the defendants are right to say that wire fraud requires proof of an affirmative misrepresentation, then the allegations fail to set forth the necessary elements of the crime of wire fraud and the indictment must be dismissed.

         On this point, however, the defendants are simply wrong. The wire fraud statute proscribes not only false statements and affirmative misrepresentations but also “the omission or concealment of material information, even absent an affirmative duty to disclose, if the omission was intended to induce a false belief and action to the advantage of the schemer and the disadvantage of the victim.” United States v. Weimert, 819 F.3d 351, 355 (7th Cir. 2016).[9] And that is precisely what the indictment alleges here: that the defendants did not disclose, at the time they placed their Spoofing Orders, their intent to cancel the orders before they could be executed, inducing by the placement of those orders a false belief about the supply or demand for a commodity, so that the market would move in a direction that favored the Primary Orders, to their benefit and to the detriment of traders in that market who were not privy to the fact that the defendants intended to cancel the Spoofing Orders before they were accepted.

         The scheme alleged in this case is materially the same as the commodities fraud scheme charged in United States v. Coscia, 866 F.3d 782 (7th Cir. 2017). There, as here, the government prosecuted a trader who had executed a scheme to create the illusion of market movement in one direction by placing large spoofing orders that he intended to withdraw from the market before they could be filled while placing orders on the other side of the market that could be filled at a better price as the market reacted to the spoofing orders.[10] Id. at 788-89. After the jury convicted Coscia of violating subsection (1) of the commodities fraud statute, 18 U.S.C. § 1348, the Seventh Circuit upheld the conviction against a challenge-the same challenge the defendants make here- that the scheme was not fraudulent because the spoofing orders “were fully executable and subject to legitimate market risk.” 866 F.3d at 799. Acknowledging the truth of the contention, however, the Court of Appeals rejected its relevance. Even though the spoofing orders were executable until canceled, the court held that the spoofing scheme was nevertheless “deceitful” because at the time Coscia placed the spoofing orders, he intended to cancel them. Id.; see also id. at 800 (the deceitful nature of the spoofing scheme derives from the intent to evade execution of the orders).

         In the face of the Seventh Circuit's unequivocal holding that futures orders placed with an undisclosed intent to cancel them before they are filled can be fraudulent, the defendants acknowledge that “there is some precedent” that spoofing violates subsection (1) of the commodities fraud statute and therefore assume “for the sake of argument” that a scheme to place orders that one intends not to fill constitutes a species of commodities fraud. Def. Br. at 8, 10, ECF No. 76. But, they urge, the failure to disclose such intent is not fraudulent in the context of this case because “mere failure to disclose, absent something more, does not constitute fraud under the mail and wire fraud statutes.” Id. at 10.

         In seeking to limit Coscia's import to commodities fraud charges, the defendants' acknowledgment of the Seventh Circuit's holding is far too grudging. Coscia plainly held that a spoofing scheme can constitute a “scheme to defraud.” 866 F.3d at 796-97. That holding is controlling authority, binding on this Court, and must be confronted head on: A spoofing scheme like the one the defendants are alleged to have engaged in is a scheme to defraud under the commodities fraud statute. The wire fraud statute, like the commodities fraud statute at issue in Coscia, requires proof of a scheme to defraud. Per force, unless a “scheme to defraud” under the commodities fraud statute means something different than a “scheme to defraud” under the wire fraud statute, a spoofing scheme that employs interstate wire communications constitutes wire fraud as well.[11]

         The defendants contend that “scheme to defraud” does mean something different under the wire fraud statute. Wire fraud, they maintain, has a “special requirement”-namely, proof of an affirmative misrepresentation. Oral Arg. 1/24/19 Tr. at 11-12, ECF No. 91. To understand the argument, it is necessary to compare the two statutes. Their language is similar, but their structures are different. The defendants seek to exploit that structural distinction in arguing that the meaning of “scheme to defraud” differs between the two.

         As relevant here, the wire fraud statute, 18 U.S.C. § 1343, makes it a crime to use interstate wire communications to further “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” The commodities fraud statute, 18 U.S.C. § 1348, also proscribes any “scheme or artifice to defraud” or to obtain money or property “by means of false or fraudulent pretenses, representations, or promises, ” but it separates these prohibitions into two subsections. The first, § 1348(1), makes criminal “a scheme or artifice to defraud any person” in connection with a commodity; the second, § 1348(2), makes criminal “a scheme or artifice to obtain, by means of false or fraudulent pretenses, representations, or promises, ” money or property in connection with a commodities transaction.

         At bottom, the defendants ground the distinction they claim between a commodities fraud violation and a wire fraud violation on the premise that the commodities fraud statute defines two species of commodities fraud, one that does not require a false statement and one that does. Whereas subsection (2) of the commodities fraud statute requires proof of an affirmative misrepresentation (“false or fraudulent pretenses, representations, or promises”), they observe that subsection (1), under which the defendant in Coscia was convicted, requires no such proof. The wire fraud statute, they assert, is therefore different; its elements are “distinct from and far more exacting than the elements of subsection 1 of the commodities fraud statute.” Def. Br. at 12. That is so, they contend, because the wire fraud statute-which is not divided into two subsections- does not define two species of fraud, but one. And that single species, the insist, “always” requires a false statement or affirmative misrepresentation. Def. Br. at 11-12, ECF No. 76.

         There is no dispute that commodities fraud under § 1348(1) requires no proof of an affirmative misstatement while § 1348(2) does. So said the Seventh Circuit in Coscia. 866 F.3d at 796.[12] And in arguing that the wire fraud statute, by contrast, sets forth only one offense, the defendants are also on solid ground; the wire fraud statute does not have subparts and neither the government nor the defendants maintain that a violation of § 1343 may be implicitly subdivided into two offenses, one that involves schemes to defraud and another that involves schemes to obtain money or property by means of false or fraudulent pretenses, representations, or promises.” Wire fraud, the defendants correctly maintain, makes it one crime to engage in “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises” by means of interstate wire communications. Where they go astray, however, is in defining that single offense as one that “always” requires proof of “false or fraudulent pretenses, representations, or promises.” That the wire fraud statute does not distinguish between violations predicated on false statements and those that are not-that it does not divide schemes to defraud into two distinct categories as does the commodities fraud statute-does not mean that all wire fraud violations require proof of the former. Rather, it merely means that the wire fraud statute extends to all schemes to defraud involving wire transmissions, including those in which the scheme is carried out by means of false statements. False statements are not required, however, for liability under the mail and wire fraud statutes.

         The somewhat peculiar history of the mail fraud statute reveals the defendants' error. As the Supreme Court explained in McNally v. United States, 483 U.S. 350 (1987), as originally enacted in 1872, the mail fraud statute set forth “a general proscription against using the mails . . . in furtherance of ‘any scheme or artifice to defraud.'” Id. at 356. As such, the statute reached all schemes “to defraud” others of money or property. Id. at 358-59. “[T]he words ‘to defraud, '” the McNally Court further noted, “commonly refer ‘to wronging one . . . by dishonest methods of schemes,' and ‘usually signify the deprivation of something of value by trick, deceit, chicane or overreaching.'” Id. at 358 (quoting Hammerschmidt v. United States, 265 U.S. 182, 188 (1924)). The statute included no requirement that the scheme to defraud include false statements.

         As such, when enacted the mail fraud statute was consistent with the prevailing meaning of what it meant “to defraud”-a paradigmatic common-law term. Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 1999 (2016) (“Escobar”); Carter v. United States, 530 U.S. 255, 266 (2000) (“defraud” is a common-law term). And “it is a settled principle of interpretation that, absent other indication, Congress intends to incorporate the well-settled meaning of the common-law terms it uses.” Escobar, 136 S.Ct. at 1999; see also United States v. Doherty, 969 F.2d 425, 429 (7th Cir. 1992) (citing Felix Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum L. Rev. 527, 537 (1947) (“when a term is ‘transplanted from another legal source, whether the common law or other legislation, it brings the old soil with it”). Indeed, the Supreme Court has expressly held that “Congress implicitly incorporated [the] common-law meaning” of “defraud” into the mail, wire, and bank fraud statutes. Neder v. United States, 527 U.S. 1, 22 (1999).[13] And “when Congress enacted the wire fraud and bank fraud statutes . . . the well-settled meaning of ‘fraud' required a misrepresentation or concealment of material fact.” Neder, 527 U.S. at 22 (emphasis added). “Because common-law fraud has long encompassed certain misrepresentations by omission, ” Escobar, 136 S.Ct. at 1999, it is reasonable to infer that in generally proscribing a “scheme or artifice to defraud” in enacting the original mail fraud statute in 1872, Congress intended to incorporate the common law's prohibition on fraud by omission as well as fraud by affirmative misstatement. Cf. Escobar, at 1999 (prohibition of false or fraudulent claims under the False Claims Act covers frauds by implied misrepresentations by omission as well as by express falsehoods).

         The language on which the defendants premise their argument-“or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises”-was not added to the mail fraud statute until 1909. Contrary to the implication of the defendants' argument, the addition of this phrase was not intended to add a false statement requirement to the elements of mail fraud. As the Supreme Court recounted in McNally, the 1909 amendment merely codified the Court's earlier holding in Durland v. United States, 161 U.S. 306, 313 (1896), that schemes to defraud include “suggestions and promises as to the future.” See 483 U.S. at 358-59. Critical to the question at issue in this case, the McNally court held that the 1909 amendment worked no change to the meaning of a “scheme to defraud” in the mail fraud statute; it merely “made it unmistakable” that the statute reached the schemes described in the amendment “as well as other frauds involving money or property.” Id. at 359 (emphasis added).[14] In other words, frauds involving false statements are only a subset of frauds actionable under the mail fraud statute; the statute reaches “other frauds, ” not involving false statements, as well.

         The Supreme Court subsequently confirmed this understanding in Loughrin v. United States, 573 U.S. 351 (2014), explaining that McNally understood the mail fraud statute to define a single offense: using the mails to advance a “scheme to defraud.” Id. at 359. “The back half” of the wire fraud statute-i.e., the 1909 amendment-the Court held, did not make any substantive change to the meaning of that provision; it merely “clarified that the front [i.e., the “scheme to defraud” provision] included certain conduct, rather than doing independent work.” Id. at 359 (emphasis added). In short, a “scheme to defraud” under the wire statute meant the same thing both before and after the 1909 amendment; the addition of the phrase “by means of false or fraudulent pretenses, representations, or promises” did not limit the crime of mail fraud to schemes accomplished by affirmative misrepresentations. So, yes, the mail fraud statute sets forth “just one offense-using mails to advance a scheme to defraud.” But no, a scheme to defraud does not require proof of an affirmative misrepresentation; frauds by omission were actionable under the mail fraud statute when it was enacted and remain so today.

         Recognizing that a scheme to defraud under the mail fraud statute does not require a false statement, in Coscia the Seventh Circuit expressly approved the district court's use of this Circuit's pattern instructions for mail and wire fraud cases to define the meaning of “scheme to defraud” in the context of a charge of commodities fraud under § 1348(1). As relevant here, the Court of Appeals defined that term as “a plan or course of action intended to deceive or cheat another. A scheme to defraud need not involve any false statement or misrepresentation of fact.” 866 F.3d at 799 n.70 (emphasis added). Given that the Seventh Circuit borrowed the definition of a “scheme to defraud” from the mail and wire fraud instructions, the defendants' contention that Coscia's holding that a spoofing scheme constitutes a scheme to defraud is “irrelevant” to an assessment of the wire fraud charge in this case is plainly wrong. If spoofing can be a scheme to defraud under § 1348(1)-and it can, the Seventh Circuit has held-it can be a scheme to defraud under the wire fraud statute as well.

         Coscia, moreover, represents only this Circuit's most recent confirmation of the equivalence of the meaning of “scheme to defraud” across the federal fraud statutes set forth in Chapter 63 of Title 18; it broke no new ground in that respect. The Seventh Circuit expressly confirmed the same point almost thirty years ago, before the commodities fraud statute had even been enacted. In United States v. Doherty, 969 F.2d 425 (7th Cir. 1992), the Seventh Circuit held that check-kiting constitutes a scheme to defraud under the bank fraud statute, 18 U.S.C. § 1344. The bank fraud statute plainly served as the model for § 1348, the latter-enacted securities fraud statute, which was in turn subsequently amended in 2002 to include commodities fraud. Addressing subsection (1) of the bank fraud statute, which mirrors subsection (1) of § 1348, the Seventh Circuit held that its plain meaning encompasses check-kiting:

The plain meaning of “scheme” is a “design or plan formed to accomplish some purpose, ” or “a plan, design, or program of action to be followed.” To “defraud” means “[t]o practice fraud, ” “to cheat or trick, ” or “to deprive of a right or property by fraud”; “fraud” means “deceit, trickery, or breach of confidence, used to gain some unfair or dishonest advantage.” Check kiting, at root, is a plan designed to separate the bank from its money by tricking it into inflating bank balances and honoring checks ...

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