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Department of Justice sets sights on individuals outside of the U.S. for corporate wrongdoing

Following the announcement in the so-called "Yates Memo", U.S. Department of Justice, Individual Accountability for Corporate Wrongdoing (2015), (named for its author, Deputy Attorney General Sally Yates) that the U.S. Department of Justice has made it a priority to investigate and prosecute individuals for corporate wrongdoing, many questioned the potential impact of the new policy outside of the U.S. Recently, U.S. prosecutors have shown a willingness to pursue criminal cases against individuals outside of the U.S. for violations of U.S. law stemming from conduct occurring outside of the U.S.

In a March 23, 2016 decision, a UK court denied accused "Flash Crash" trader Navinder Sarao's attempt to resist extradition to the U.S. to stand trial on criminal fraud charges for engaging in a manipulative trading practice known as "spoofing". In its ruling, the court rejected Sarao's argument that spoofing is not illegal under UK law. "Spoofing" is a form of market manipulation that occurs when a trader submits bids or offers "with the intent to cancel the bid or offer before execution", 7 U.S.C.§ 6c(a)(5)(C), usually to create either a false appearance of market liquidity, or an artificial price movement upwards or downwards, Anti-disruptive Practices Authority, 78 Fed. Reg. 31,890, 31,896 (May 28, 2013).

In a 22-count grand jury indictment, Sarao was charged with altering an automated computer trading program to submit and later cancel offers to sell large volumes of S&P index futures at prices higher than the market offer rate, where there was little risk of executing a trade. Sarao's orders were allegedly intended to create false sell-side downward price pressure that allowed Sarao to then purchase the same S&P index futures at artificially low prices. After his purchase, Sarao would reverse the direction of his spoofing, creating artificial buy-side upward price pressure that allowed him to sell the newly purchased futures for an artificial profit.

U.S. prosecutors claim that Sarao used these and other spoofing techniques to make USD 40 million between 2009 and 2014. U.S. prosecutors also allege that Sarao's trading contributed to conditions that caused the "Flash Crash" on May 6, 2010, when the Dow Jones Industrial Average plunged nearly 1,000 points in minutes before recovering.

The UK court's ruling stands in contrast with U.S. prosecutors' less successful extradition efforts. In May 2015, a Spanish court declined to order the extradition of former JPMorgan executive and Spanish citizen Javier Martin-Artajo. Martin-Artajo faced market manipulation and other criminal financial fraud charges in the U.S. for his role in the infamous USD 6 billion trading loss involving the trader known as the "London Whale".

The Department of Justice's pursuit of Sarao and Martin-Artajo could suggest an expansion of the application of the guidelines set forth in the Yates Memo beyond the U.S. borders.

Legal and Regulatory Risk Note
United States