Securities Snapshot November 05, 2019

District Of Illinois Denies Motion To Dismiss Wire Fraud Charges Against Precious Metals Traders In Spoofing Case


District of Illinois Denies Motion to Dismiss Wire Fraud Charges Against Precious Metals Traders in Spoofing Case; Founder and CEO of Biotech Firm Convicted of Securities Fraud; U.S. Financial Regulatory Agencies Join Global Financial Innovation Network; Central District of California Reverses Prior Decision and Dismisses Securities Class Action Against Video Game Company.

On October 21, 2019, the District of Illinois denied a motion to dismiss the indictment in U.S. v. Vorley, et al., charging two former Deutsche Bank traders, James Vorley and Cedric Chanu, with wire fraud. The indictment alleged that, for two years, the traders “spoofed” the precious metals market – i.e., the traders allegedly “would place one or more orders for precious metals futures contracts on one side of the market (bid or offer), intending to cancel the orders before they could be accepted by other traders.” The traders allegedly placed orders on the opposite side of the market at the same time to profit from the movement in market price caused by the spoofing orders.

The traders moved to dismiss the indictment, arguing (among other things) that they could not be held liable for wire fraud because the indictment alleged no false statement (i.e., affirmative misrepresentation). The court disagreed: “The wire fraud statute proscribes not only false statements and affirmative misrepresentations but also the omission or concealment of material information, even absent an affirmative duty to disclose, if the omission was intended to induce a false belief and action to the advantage of the schemer and the disadvantage of the victim.”  Recognizing that the Seventh Circuit already had held in United States v. Coscia, 866 F.3d 782 (7th Cir. 2017), that spoofing could constitute a “scheme to defraud” under the commodities fraud statute, the court concluded that spoofing also could constitute a “scheme to defraud” under the wire fraud statute because “there is no material difference between a scheme to defraud under either statute.” The court explained:

Fraud and deceit are not legitimate market forces. Fundamentally, markets are information processing systems. The market price is only as “real” as the data that inform the process of price discovery. By the same token, the market price is “artificial” when the market is misinformed. As alleged, the spoofing orders created artificial prices by injecting misleading information into the market that the defendants intended to induce a false belief and resulting action to the advantage of the misleader and the disadvantage of the misled. As such, the spoofing orders fit comfortably within the ambit of the wire fraud statute’s prohibition on false and misleading statements in furtherance of a scheme to defraud.


On October 28, 2019, a Boston jury convicted Frank Reynolds, the founder and CEO of biopharmaceutical company PixarBio, on one count of securities fraud and three counts of obstructing an agency proceeding. The government alleged that Reynolds and his associates engaged in a scheme to defraud investors by making false and misleading statements about PixarBio and engaging in manipulative trading of its shares. These false and misleading statements allegedly portrayed Reynolds as a successful inventor with a product that would end “thousands of years of morphine and opioid addiction.” Reynolds was arrested in 2018 along with PixarBio’s vice president of investor relations and another associate, both of whom testified against Reynolds after pleading guilty.

At trial, the prosecutors told jurors that Reynolds tried to become a billionaire “by tricking investors into believing that he was the Steve Jobs of biotech.” A key government witness testified that Reynolds falsely claimed that he was in serious negotiations with Purdue Pharma LP about purchasing or investing in PixarBio and lied about curing his own paralysis. Reynolds also falsely told investors that PixarBio was valued at $1 billion and made false statements that PixarBio had raised more than $30 million, when in fact that number was only around $7 million. In addition, the government’s witness testified that Reynolds and his associates engaged in trades to inflate artificially PixarBio’s stock price.

Reynolds’ sentencing is scheduled for February 2020. He faces up to twenty years in prison.  He is also facing a pending civil action brought by the SEC, alleging investor losses of over $12.7 million. 


On October 24, 2019, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation announced that they were joining the Global Financial Innovation Network. GFIN, which formally launched in January 2019, is an international organization comprised of 50 financial authorities, central banks, and other international organizations worldwide. GFIN seeks “to foster greater cooperation among financial authorities on a variety of innovation topics, regulatory approaches, and lessons learned.” 

In their announcement, the U.S. financial regulatory agencies explained that their participation in GFIN furthered their efforts “to enhance regulatory clarity and understanding for all stakeholders and promote early identification of emerging regulatory opportunities, challenges, and risks” and enhanced their abilities “to encourage responsible innovation in the financial services industry in the United States and abroad.”


On October 18, 2019, in Hamano v. Activision Blizzard Inc., the Central District of California reversed its prior decision and dismissed a putative securities fraud class action against video game distributor Activision. The plaintiff stockholder alleged that Activision fraudulently concealed the impending termination of its longtime licensing agreement with video game developer Bungie LLC in December 2018. The complaint alleged that Activision materially misled investors by failing to disclose the companies’ “negotiations to end the licensing agreement” and the “problems with the[ir] relationship” in public statements and filings in the second and third quarters of 2018.

Activision moved to dismiss the suit, arguing that plaintiff failed to allege sufficient facts to support a strong inference of fraudulent intent, or scienter, required under the Private Securities Litigation Reform Act. In September 2018, the court refused to dismiss the suit, holding that plaintiff had adequately pleaded securities fraud claims. Activision sought reconsideration of that decision, asserting that the court had not determined whether plaintiff met the heightened pleading standard for scienter required by the PSLRA.

The court then reversed its prior decision, holding that it had misapplied the heightened pleading standard and finding that plaintiff’s allegations that Activision knew the relationship with Bungie was ending at the time it issued the allegedly misleading statements failed to raise the requisite strong inference of scienter. Each of plaintiff’s factual allegations, the court held, had “equally-plausible non-culpable explanations.” For instance, a shift of development resources away from Bungie’s products could have been motivated by non-nefarious reasons. Similarly, a contentious earnings call between Activision and Bungie did not show an intent to end the relationship, particularly where tension about the quality and financial performance of a particular franchise “could support an equally plausible inference that both Bungie and Activision were still seriously invested in [that franchise’s] future.” Further, the court held that Bungie’s own actions in securing investment from other sources, which could be evidence of Bungie’s preparation to leave the relationship, were irrelevant to Activision’s own intent to terminate. Thus, the court concluded that “[i]nferring scienter from these sparse allegations would require impermissible speculation,” and dismissed the complaint without prejudice. The court allowed plaintiff twenty-one days to amend and noted that failure to comply with the court’s order could result in dismissal with prejudice.