UPDATE: 1st Criminal Prosecution of Layering and Spoofing Hits HFT Sphere

January 13, 2015

According to a criminal Complaint unsealed on January 13, 2015, in the District of New Jersey, Aleksandr Milrud, 50, Ontario, Canada, and Aventura, FL, was charged with one count of conspiracy to commit securities fraud and one count of wire fraud in the first federal securities prosecution involving the high-frequency trading ("HFT") strategy of "Layering" or "Spoofing."  The conspiracy purportedly targeted U.S. securities markets with the assistance of  traders based in China and Korea.United States of America v. Aleksandr Milrud (Complaint, DNJ, 15-7001, January 13, 2015).  

In a separate action, the Securities and Exchange Commission ("SEC") filed a civil Complaint charging Milrud with violating and aiding and abetting violations of anti-fraud provisions of federal securities laws and the SEC's antifraud rule, and with liability for the conduct of the traders under his management. Also see Securities and Exchange Commission, Plaintiff, v. Aleksandr Milrud, Defendant (Complaint, 15-CV-00237,DNJ, January 13, 2015).

NOTE: A criminal Complaint merely contains allegations and the Defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law. A civil Complaint merely contains allegations and the Defendant is presumed innocent unless and until proven guilty beyond a preponderance of the evidence in a court of law.

SIDE BAR: Layering or spoofing, is a manipulative practice using high-speed posting of buy/sell orders, which are cancelled before execution. If successfully launched, this scheme deceives other market participants into believing that there are more bidders with more conviction than is the truth. The goal is to move the market in a pre-determined direction favorable to the trader using the illegal practice, who then executes trades that take advantage of the artificially goosed market. 

Doomed From The Start?

From its inception, Milrud's purported plan seemed in trouble because federal prosecutors assert that in January 2013, Milrud solicited the owner of an off-shore broker-dealer (the "Foreign BD") in an effort to open a trading account at that firm; however, since July 2012, that owner was a cooperating witness  (the "CW") with law enforcement. 

As apparently set forth in what are characterized as "consensually recorded" calls and meetings among the CW, Milrud, and others, Milrud is heard explaining his allegedly illegal trading strategy. Among the recorded comments by Milrud are that:
  • he controlled approximately 60% of all China-based traders engaged in layering;
  • his traders used trading accounts that were not tied to Milrud in any manner;
  • the layering scheme generated millions of dollars in illicit profits;
  • a software company was programming "hotkeys" in order to provide shortcuts for the rapid placement/cancellation of multiple orders; and
  • he had implemented a number of practices to avoid detection by regulators and prosecutors, such as no phone discussions, use of third-party liaisons, and the 'shredding" of transactions among multiple trading and clearing firms/accounts. 
The Good, The Bad, And The Ugly

On Aug. 27, 2014, Milrud met the CW at the Foreign BD's office but was unaware that the meeting was video/audio recorded by law enforcement. Among aspects of his scheme that he allegedly discussed were the use of two trading accounts by the overseas traders he controlled to execute the layering - basically a "good" and "bad" account. At the meeting, Milrud logged onto his trading platform via the CW's computer to show the trading. Unfortunately for Milrud, pursuant to the CW's ongoing cooperation, the FBI recorded the online activity and detected the subject accounts. 

In a December 15, 2014, recorded call, Milrud is ostensibly heard bragging that his scheme could generate from $1 million to $50 million per month and had recently yielded about $600,000 in a single day.

CTR-ALT-DEL

If convicted on the criminal charges, Milrud faces a maximum sentence of a $250,000 fine (or twice the gain/loss from the offence), and:
  • 5 years in prison on the conspiracy count; and
  • 20 years in prison on the wire fraud count.
If found guilty of the civil charges, The SEC intends to seek a final judgment ordering Milrud to return his allegedly ill-gotten gains with interest plus penalties and permanently barring him from future violations.