Market Manipulation Cases Face Challenges: Drop in Fraud Allegations Illustrates Complexity
In a recent ruling, the US Court of Appeals for the Second Circuit overturned the conviction of Mark Johnson, the former head of foreign exchange trading at a large international bank. Johnson was convicted of wire fraud and conspiracy to commit wire fraud in 2017.
The court's decision hinged on the rejection of the government's argument that Johnson's actions were harmless because the jury also convicted Johnson on the misappropriation theory. Judge Jose Cabranes, in part, dissented, finding that the court "devised a new requirement" that the government show that "the information possesses commercial value."
The case revolved around Johnson's alleged attempt to manipulate the 3 p.m. fix price for British pounds. The FX market does not have a closing price like the stock market; instead, vendors publish a "fix" price, which is a benchmark exchange rate for the pair of currencies being traded.
On December 7, 2011, a corporate client requested a plan to sell a subsidiary for US dollars and convert the proceeds to GBP, which was handled by Johnson and his bank. The client placed an order for 1.2 billion GBP at the 3 p.m. fix, which was later increased to approximately 2.25 billion GBP. The bank bought 1.2 billion GBP in the final six minutes before the 3 p.m. fix. Johnson purchased GBP in his proprietary trading account before the transaction, and traders on his desk accumulated more GBP than required to fill the client's order.
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. The court overturned the manipulation convictions based on lack of venue because the prosecution did not introduce sufficient evidence that the offenses occurred in New York.
With respect to the wire fraud charge, the court found that the government had not established a material misrepresentation because the platform did not have rules, instructions, or prohibitions about borrowing, no prohibition against manipulation, no formal requirement that a borrower repay, and no requirement to maintain sufficient collateral.
The Second Circuit agreed with the defendant that "confidential business information must have commercial value to a company to qualify as its property under the wire fraud statute."
Courts approach the challenge of establishing fraud and market manipulation in cases involving micro or open-market manipulations with caution. They require clear proof of a material misrepresentation or breach of a recognized duty that causes harm. Courts are reluctant to extend wire fraud theories where there is no explicit duty or obvious deception beyond market price mechanisms.
Proving fraud or manipulation in such cases demands demonstrating concrete legal duties, actual material deception, and harm rather than relying solely on the existence of price distortions or market impact.
In another case, Mango Markets trader Avraham Eisenberg was charged with commodities fraud, commodities manipulation, and wire fraud by the Department of Justice in January 2023. Eisenberg allegedly stole over $100 million in cryptocurrency by artificially inflating the value of MNGO tokens on three other crypto trading platforms, using the inflated value to secure loans on Mango Markets, and then selling the tokens on the other platforms, causing the MNGO price to fall.
The court's approach has implications for other cases involving market manipulation. Prosecutors often seek alternative avenues to charge market manipulation, such as imposing duties of confidence between arm's-length counterparties or suggesting that the defendant's activities constituted implicit misrepresentations.
In the case of United States v. Chastain, the Second Circuit vacated a wire fraud and money laundering conviction for an NFT marketplace manager accused of misappropriating confidential information. The court found that the government had not established a material misrepresentation because the platform did not have rules, instructions, or prohibitions about the use of confidential information, no prohibition against misappropriation, no formal requirement that the defendant return the misappropriated funds, and no requirement to maintain sufficient collateral.
The overturning of Johnson's conviction highlights the challenges in proving market manipulation and the importance of clear evidence and established legal duties in such cases.
- The overturning of Mark Johnson's conviction and the subsequent case involving Mango Markets trader Avraham Eisenberg underline the significance of clear evidence and established legal duties in proving cases of market manipulation, such as the possession of confidential business information with commercial value, as outlined by the Second Circuit in both Johnson's and Chastain's cases.
- In the realm of finance and technology, investments in businesses require such clear evidence of wrongdoing, as demonstrated in the court's approach to cases of market manipulation, which emphasize the need for explicit duties, actual material deception, and harm, moving beyond just price distortions or market impact.
