Securities Regulation Daily Trading firm sues JPMorgan for spoofing in Treasury futures
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Thursday, May 7, 2020

Trading firm sues JPMorgan for spoofing in Treasury futures

By Anne Sherry, J.D.

The class action springboards off a series of regulatory investigations into spoofing in other markets and the recent revelation that the spoofing extended to Treasury futures.

Breakwater Trading LLC seeks to lead a class of traders in Treasury futures (or options on futures) in suing JPMorgan entities for manipulating the market via spoofing. According to the complaint, the defendants violated the Commodity Exchange Act by entering large orders that they intended to cancel before execution. While the class period began in 2009, the plaintiff maintains that the statute of limitations was tolled until at least February 2020, when JPMorgan filed a 10-K disclosing a regulatory investigation (Breakwater Trading LLC v. JPMorgan Chase & Co., May 5, 2020).

According to the complaint, the plaintiff "was a top 15 liquidity provider for Treasuries" during some parts of the class period, with its spot and futures trading exceeding $1 trillion per year in notional value. The defendants harmed it and other traders in the market by spoofing—placing orders to buy or sell to create the appearance of demand (the "build up" phase), removing those orders from the order book (the "cancel"), and then placing orders in the opposite direction to "sweep" the market.

In 2019 the CFTC and federal prosecutors charged five J.P. Morgan employees with spoofing and other manipulative practices in the precious metals futures markets. The complaint also points to a 2013 settlement between the financial institution and U.S. energy regulators of power market manipulation claims. However, it maintains that the spoofing in Treasuries futures was unknown until JPMorgan filed its 2019 Form 10-K disclosing regulatory investigations into Treasuries manipulation.

The plaintiff characterizes the spoofing conduct as "inherently self-concealing" and says it will be able to flesh out its allegations after an opportunity for discovery. The complaint’s allegations are currently made on information and belief based on DOJ and CFTC enforcement proceedings and press releases; publicly available reports, press releases, and articles; documents made public through private litigation; and the defendants’ SEC filings.

The "self-concealing" nature of the conduct also relates to the statutes of limitations. According to the complaint, the statutes were tolled under the doctrine of fraudulent concealment until the filing of the 2019 Form 10-K. The defendants allegedly concealed their conduct by using private messages and telephone calls, implicitly representing that their price quotes were the product of honest trading, and affirmatively representing via a code of conduct and annual report that they complied with applicable laws and regulations. The conduct was inherently self-concealing because it could only continue for as long as the public remained unaware.

The case is No. 20-cv-03515.

Attorneys: Linda P. Nussbaum (Nussbaum Law Group, P.C.) for Breakwater Trading LLC.

Companies: Breakwater Trading LLC; JPMorgan Chase & Co., J.P. Morgan Clearing Corp., J.P. Morgan Securities LLC

MainStory: TopStory CommodityFutures FraudManipulation GCNNews SecurityFutures NewYorkNews

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