Thursday, August 25, 2016

Commodities 'spoofing statute' survives constitutional challenge

By Anne Sherry, J.D.

Defendants accused by the CFTC of spoofing activity in futures contracts lost a challenge to the constitutionality of the Commodity Exchange Act and a CFTC regulation. 3Red Trading, LLC, and its principal allegedly engaged in a four-year manipulative scheme by manually placing large orders on one side of the market, then canceling prior to execution. The Northern District of Illinois held that the CEA's spoofing provision, which refers to the activity by that name and then offers a parenthetical explanation, put the defendants on notice as to the conduct it prohibited (CFTC v. Oystacher, August 23, 2016, St. Eve, A.).

Statute not void for vagueness. CEA Section 4c(a)(5)(C) prohibits trading that " is of the character of, or is commonly known to the trade as, 'spoofing' (bidding or offering with the intent to cancel the bid or offer before the execution)." Moving for a judgment on the pleadings in the CFTC enforcement action, the defendants argued that the statute was unconstitutionally vague because it failed to give notice of the conduct it prohibited.

But the court observed that economic regulations are subject to a less stringent void-for-vagueness inquiry, which depends on the context of the specific case at hand and not a hypothetical trader. The CFTC explicitly alleged that the 3Red trader placed both bids and offers with the intent to cancel before execution, and illustrated the unlawful intent by detailing the manipulative trading patterns. Considering these allegations as true, the trading behavior fell within the spoofing statute's parenthetical definition of spoofing. The statute's scienter requirement also mitigated vagueness concerns by narrowing the scope of prohibited behavior and limiting prosecutorial discretion.

Reg. also withstands challenge. The defendants also lost their constitutional challenge to CFTC Regulation 180.1, which prohibits the use of "any manipulative device, scheme, or artifice to defraud." Given the scienter requirement, clear prohibition of manipulative schemes, and relation to the SEC's Rule 10b-5, this rule is not unconstitutionally vague.

Congress properly delegated authority. Finally, the spoofing statute did not represent an unconstitutional delegation of power to the CFTC and federal courts. Congress cannot delegate its legislative power to another branch of government, but the nondelegation doctrine does not prevent Congress from obtaining their assistance. A delegation is constitutionally sufficient if Congress clearly delineates the general policy, the agency that is to apply it, and the boundaries of delegated authority. The congressional findings and statement of purpose with regard to the Commodity Exchange Act satisfy all three requirements with respect to the spoofing statute.

The case is No. 15-CV-9196.