NatWest’s Fraudulent “Spoofing” Schemes (Part II of II)
NatWest’s fraudulent “spoofing” schemes occurred in the primary and secondary markets for U.S. Department of Treasury Securities, including derivatives that tracked the prices of U.S. Treasury Securities for 5-year, 10-year and 30-year Treasury notes and bonds.
Between January 2008 and May 2014, a NatWest trader in London (Trader-1) and NatWest’s broker-dealer in Stanford (trader-2) engaged in a number of schemes to defraud relating to the placement of US Treaasury futures contracts.
Separately, in 2018, two traders (Trader-3 and Trader-4) employed at NatWest’s branch in Singapore engaged in a scheme to defraud in connection with the purchase and sale of U.S. Treasury Securities in the cash market.
In furtherance of their respective schemes, the traders placed orders to buy and sell certain U.S. Treasuries with the intent to cancel those orders before execution as a means to earn profits by deceiving other market participants concerning the existence of genuine supply and demand for U.S Treasuries.
On hundreds of occasions, the NatWest traders placed orders for U.S. Treasuries that they intended to execute (“Genuine Orders”). Sometimes the Genuine Orders were “iceberg” orders, so that other market participants could see only a portion of the order’s full size at any given time. Following those orders, the NatWest traders also placed spoof orders on the opposite side of the market from the Genuine Orders. The spoof orders were intended to inject false and misleading information about the genuine supply and demand for U.S Treasuries. This materially false and misleading information was intended to deceive other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling U.S. Treasuries at quantities, prices and times that they otherwise likely would not have traded. The spoof orders to sell U.S. Treasuries were intended to drive down the prices of U.S. Treasuries.
An example of the fraudulent scheme occurred on June 24, 2013, at 3:45 a.m., when Trader-1 in London placed an iceberg Genuine Order to buy 1000 10-year U.S. Treasury note futures contracts at $125.40625, displaying two contracts to the market. Next, 10.156 second later, Trader-1 placed a spoof order to sell 1000 10-year U.S. Treasury note futures contracts at 125.421875 with fraudulent intent to move the price lower. Shortly thereafter, Trader-1 Genuine Order to buy was filled in its entirety. Three seconds later, Trader-1 cancelled his spoof order.
Trader-1 referenced his deceptive trading practices in electronic chats with NatWest colleagues, especially when his spoof orders were filled by other market participants despite his intentions and before he could cancel them. Trader-1 often mentioned that he feared getting caught for spoofing.
Another example occurred on July 25, 2012, at 10:05 a.m., when Trader-2 in Stamford placed a Genuine Order to buy 10 Ultrabond future contracts at $179.90625. Less than 3 minutes later, Trader-2 placed a spoof order to sell 500 Ultrabond futures contracts at $175.9375. Shortly after that, Trader-2’s Genuine Order to buy was filled. Immediately thereafter, Trader-2 cancelled his spoof order.
The fraudulent trading practices extended to the cash market for U.S. Treasury Securities. On July 2, 2018, Trader-3 in Singapore, placed Genuine Orders to sell 50,000 10-year U.S. Treasury notes at $100.234375. Approximately 13 minutes later, Trader-3 placed a spoof order to buy 500,000 10-year U.S. Treasury notes at $100.21875. Trader-3’s Genuine Order to sell was filled in its entirety. Trader-3 immediately cancelled his spoof orders.
Two supervisors learned about the spoofing conduct. The supervisor suspended two traders in Singapore and ultimately terminated both of them. However, the supervisor advised Trader-3 on how to hide his fraudulent scheme from NatWest compliance personnel.
The supervisor was subject to the DOJ non-prosecution agreement and required to report any illegal conduct by its employees. The supervisor’s attempt to hide the fraudulent conduct could have concealed the criminal conduct. Another supervisor attempted to cover up the illegal market conduct. This supervisor was later terminated from NatWest.
The total losses from the schemes to defraud was approximately $6.7 million.