Alleged Market Manipulation Cases Face Complexities, as Evidenced by Dropped Fraud Accusations
In a significant ruling, the US Court of Appeals for the Second Circuit has overturned the conviction of Mark Johnson, the former head of foreign exchange trading at a large international bank. The case, known as Johnson v. United States, was based on allegations that Johnson manipulated the 3 p.m. fix price for British pounds in 2011.
Johnson's conviction was overturned in 2023, with the court finding that the "pricing information that went to the core of the deal" was not a traditional property interest. The court's decision reflects a broader trend in court rulings, which emphasize the importance of evaluating the economic reality, intent, and harm caused by trading behavior, rather than mere technical compliance with platform rules.
The 3 p.m. fix is a benchmark exchange rate for the pair of currencies being traded in the foreign exchange (FX) market. Unlike the stock market, which has a closing price, the FX market does not have a closing price. Instead, vendors publish a "fix" price.
In the case of Johnson, traders on his desk had accumulated more British pounds (GBP) than required to fill the client's order before it was placed. This accumulation was through a practice known as pre-hedging, where market participants often accumulate currency prior to the fix to ensure they have enough to fulfill large orders.
The client, a corporate entity, had requested proposals from nine banks for selling a subsidiary and converting the funds to GBP. On December 7, 2011, 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.
Johnson and the bank secured the mandate and decided to use the fix to execute the transaction. The bank bought 1.2 billion GBP in the final six minutes before the 3 p.m. fix, causing the GBP price to reach the highest point of the day. This price increase caused the client to express concern about the price increase.
However, the bank sold the remaining GBP to third parties, resulting in earnings for the bank's proprietary books, totaling approximately $7 million in profits from the transaction.
The Second Circuit's ruling in the Johnson v. United States case echoes the court's approach in other cases, such as United States v. Chastain, where the court vacated a wire fraud and money laundering conviction for a manager of an NFT marketplace who was accused of misappropriating confidential information. The court overturned the commodities fraud and commodities manipulation convictions based on lack of venue because the prosecution did not introduce sufficient evidence that the offenses occurred in New York.
Meanwhile, in a separate case, Mango Markets trader Avraham Eisenberg was charged with commodities fraud, commodities manipulation, and wire fraud in January 2023. Eisenberg allegedly stole over $100 million in cryptocurrency by manipulating the MNGO price on Mango Markets and other crypto trading platforms.
The Second Circuit has also ruled that confidential business information must have commercial value to a company to qualify as its property under the wire fraud statute. In the case of Eisenberg, the court found that the government had not established a material misrepresentation to support a wire fraud charge against him.
These cases highlight the complex nature of market manipulation and the importance of courts examining the actual impact of the conduct on the broader market, rather than relying solely on whether the trading activity violates express platform rules or appears as legitimate use of platform functionalities. Regulators and courts thus emphasize substance over form, focusing on whether the conduct undermines market integrity or defrauds investors even when platform rules are silent or ambiguous.
- The overturned conviction of Mark Johnson, a former head of foreign exchange trading, has sparked discussions about the role of technology in finance, particularly in the foreign exchange market, where benchmark exchange rates like the 3 p.m. fix play a significant role.
- Understanding the intricate world of investing, it's worth noting the Second Circuit's decision in the case Johnson v. United States highlights the importance of evaluating the economic reality and intent of trading behavior, rather than mere technical compliance with platform rules.
- In the realm of modern business, the complex nature of market manipulation is evident, as seen in the cases of Mark Johnson, the Mango Markets trader Avraham Eisenberg, and managers of NFT marketplaces, where courts focus on the actual impact on the market, rather than just adherence to explicit platform rules.
