February 1, 2015
Last month, the Department of Justice issued a press release announcing its first prosecution of “Layering,” also known as “spoofing.” According to the press release:
Layering, also known as “spoofing,” is a form of manipulative, high-speed stock trading in which a trader places non-bona fide orders to buy or sell securities and then quickly cancels them before they are executed. The purpose of these non-bona fide orders is to artificially move the price of security up (in the case of non-bona fide buy orders) or down (in the case of non-bona fide sell orders) and to induce other market participants to buy or sell a security at a price not representative of actual supply or demand. While the non-bona fide orders are pending, the trader simultaneously executes trades in an attempt to profit from the artificial movement of the share price that the trader has created.
The defendant is a Canadian man named Aleksandr Milrud. The alleged scheme was executed using a combination of technology and manpower – the use of pre-programmed hotkeys to execute quick trades and multiple overseas individuals using separate IP addresses to avoid detection. Much of the evidence was accumulated through the use of a cooperating witness:
In January 2013, Milrud solicited the assistance of an individual who owned an off-shore broker-dealer (the Foreign-BD) but who, unbeknownst to Milrud, was a cooperating witness (CW) with law enforcement. Milrud sought to open a trading account at the Foreign-BD for use in his layering scheme. Over the course of several consensually recorded calls and meetings between the CW, Milrud and others, Milrud explained his illegal trading strategies in detail. Milrud said he controlled approximately 60 percent of all China-based traders engaged in layering, that his traders used various trading accounts that were not tied to Milrud in any manner and that the layering scheme generated millions of dollars in illicit profits. Milrud explained that to enable his traders to place and cancel many orders quickly, he worked with a software company on programming “hotkeys” – shortcuts for placing and cancelling multiple orders quickly with few keystrokes. Milrud also explained his efforts to avoid detection by law enforcement and regulators, including not discussing business on the phone, communicating through third party liaisons, and using multiple trading and clearing firms and accounts to execute a single securities transaction, a practice he described as “shredding.”
On Aug. 27, 2014, Milrud met the CW at the offices of the Foreign-BD. The meeting was video and audio recorded by law enforcement. Milrud explained his layering scheme in more detail. Milrud stated that overseas stock traders who he controlled simultaneously utilized at least two trading accounts to execute the layering scheme; one account was used to conduct the manipulative layering trading (the Layering Account), which Milrud referred to as the “dirty work,” and another “clean” account (the Profit Account) was used to buy or sell the manipulated stock at a profit during the small window of time in which the stock price had been artificially moved by the “dirty” activity in the Layering Account. According to Milrud, his foreign traders logged into these accounts from different computers and different internet protocol (IP) addresses so that it would not appear as if the same individual was trading through the two accounts and to evade automated fraud detection systems established by the trading platforms. After explaining his manipulative trading strategy, Milrud said, “Regular trading. If I didn’t tell you what I just told you, it would seem like regular trading – you would not know nothing of what I do.” The CW replied, “Will look just like regular buying and selling?” Milrud responded, “Exactly. One hundred percent kosher. If I didn’t tell you everything behind it, you have no way of [knowing].”
During the Aug. 27, 2014, meeting, Milrud agreed to log into his trading platform using the CW’s computer to show the CW his traders’ activity in real time. The CW had been provided by law enforcement with a laptop computer (the FBI Computer), which included software that recorded all activity and keystrokes on the computer. Milrud logged into and remotely accessed his trading system using the FBI Computer. According to Milrud, his overseas traders were controlling the orders and trades that he and the CW were observing on the FBI Computer. The CW then observed multiple real time trades in a number of different securities in both the Layering and Profit Accounts, and orders being placed and cancelled, while Milrud narrated.
Of course, all defendants are presumed innocent until proven guilty, but undercover operations can be great evidence. More on this case can be found in the original press release.