Securities and Commodities Fraud

The Federal Bureau of Investigation (FBI) describes securities fraud as criminal activity that can include high-yield investment fraud, Ponzi schemes, pyramid schemes, advanced fee schemes, foreign currency fraud, broker embezzlement, hedge-fund-related fraud, and late-day trading.

The FBI defines commodities fraud as the illegal sale or purported sale of raw materials or semi-finished goods that are relatively uniform in nature and are sold on an exchange (e.g., gold, pork bellies, orange juice, and coffee). The perpetrators of commodities fraud entice investors through false claims and high-pressure sales tactics. Often in these frauds, the perpetrators create artificial account statements that reflect purported investments when, in reality, no such investments have been made. Instead, the money has been diverted for the perpetrators’ use. Additionally, they may trade excessively merely to generate commissions for themselves (known as “churning”). Two common types of commodities fraud include investments in the foreign currency exchange (Forex) and into precious metals (e.g., gold and silver).

Examples of security and commodity fraud prosecutions:

NatWest Markets Plc (D. Conn.)

In December 2021, NatWest Markets Plc (“NatWest”), a London, England-based global banking and financial services firm, pleaded guilty to wire fraud and securities fraud charges in connection with various fraud schemes in the markets for U.S. Treasury securities and futures contracts.

In each scheme, NatWest traders engaged in spoofing by placing orders with the intent to cancel those orders before execution, attempting to profit by deceiving other market participants through injecting false and misleading information regarding the existence of genuine supply and demand in the market. The spoof orders were designed to artificially push up or down the prevailing market price so that the NatWest traders could trade more profitably or more easily on the other side of the market. In some instances, one of the NatWest traders took advantage of the close correlation between U.S. Treasury securities and U.S. Treasury futures contracts and engaged in cross-market manipulation by placing spoof orders in the securities market in order to profit from trading in the futures market, or vice versa.

Fraud Section Year In Review 2021United States Department of Justice

United States v. Joseph Kostelecky (D.N.D.)

In October 2021, Joseph Kostelecky, formerly the executive vice president of U.S. operations at a publicly traded Canadian oil services company, pleaded guilty to perpetrating a scheme to fraudulently inflate the company’s reported revenue, which resulted in shareholder losses in excess of $886 million. As part of his guilty plea to wire fraud and securities fraud, Kostelecky admitted that he engaged in the scheme to defraud while serving as the highest-ranking U.S. executive of Poseidon Concepts Corporation (Poseidon) from approximately November 2011 to December 2012. Kostelecky admitted that, in his role, he caused Poseidon to falsely report approximately $100 million in revenue from purported long-term contracts with oil and natural-gas companies that were Poseidon’s customers. Kostelecky’s misconduct included fraudulently directing Poseidon’s accounting staff at the U.S. corporate headquarters in Colorado, as well as its field office in North Dakota, to record revenue from such contracts and then assuring management that the associated revenue was collectable, when he knew that the contracts either did not exist or that the associated revenue was not collectable. After Poseidon reported a partial write-down of uncollectable accounts in its financial statements, resulting in a drop in the company’s stock price, Kostelecky fraudulently caused the issuance of a public filing falsely reporting that he had purchased a substantial number of shares of the company, when in fact he had made no such purchase. When the inflated revenue came to light at the end of 2012, Poseidon’s stock price plunged and the company was forced into bankruptcy, causing over $886 million in shareholder losses. Kostelecky admitted that he perpetrated the scheme to inflate the value of the company’s stock price and to enrich himself through the continued receipt of compensation and appreciation of his own stock and stock options.

Fraud Section Year In Review 2021United States Department of Justice

In United States v. Edward Bases and John Pacilio (N.D. III.)

In August 2021, following a two-week trial, a federal jury convicted Edward Bases and John Pacilio of conspiracy to commit wire fraud affecting a financial institution and substantive counts of wire fraud affecting a financial institution in connection with their manipulation of the precious-metals futures market. Pacilio also was convicted of commodities fraud. The evidence at trial established that Bases, a former senior trader employed at Deutsche Bank and Bank of America in New York, and Pacilio, a former senior trader employed at Bank of America and Morgan Stanley in New York, fraudulently pushed market prices up or down by routinely placing large “spoof” orders in the precious-metals futures markets that they did not intend to fill. Bases and Pacilio did so in order to manipulate prices for their own gain and the banks’ gain, and to defraud other traders on the Commodity Exchange Inc. (COMEX) and the New York Mercantile Exchange Inc. (NYMEX), both of which are exchanges run by the CME Group Inc. (CME). Court documents and witness testimony also showed that Bases and Pacilio taught other traders how to engage in the practice of spoofing, which involves placing orders on the exchange that, at the time they were placed, were not intended to be executed. As a result of the scheme, other market participants were induced to trade at prices, quantities, and times that they otherwise would not have traded.

Fraud Section Year In Review 2021United States Department of Justice