Reed Smith Client Alerts

On February 28, 2019, the United States District Court in the Northern District of California entered a judgment of acquittal as to all counts alleging that Robert Bogucki, a foreign currency exchange (FX) broker at a large international bank, engaged in wire fraud and conspiracy to commit wire fraud related to $8 billion in FX options. The Court held that the United States Department of Justice (DOJ or the Government) failed to demonstrate that Bogucki owed a fiduciary duty of trust to his counterparty and distinguished Bogucki’ actions from “front-running,” an illegal practice in which a broker uses knowledge gleaned from his client to manipulate market prices in his favor before executing the client’s order.1 Bogucki’s acquittal suggests that the Government will have to be more careful in distinguishing legitimate, arms-length FX transactions from prohibited behavior. The Bogucki decision further establishes the boundaries between legal and illegal trading practices in the context of FX front-running, pre-positioning, and pre-hedging, especially in light of the recent Johnson2 decision and the Commodity Exchange Act of 1936 (CEA).3

(1) Summary

In United States v. Bogucki4, a criminal proceeding in the United States District Court of the Northern District of California, Judge Charles R. Breyer acquitted defendant Robert Bogucki on February 28, 2019, on all counts related to wire fraud affecting a financial institution5 and conspiracy to commit wire fraud affecting a financial institution.6 The Court’s acquittal of Bogucki calls into question whether and under what circumstances federal wire fraud statutes7 can be used to prosecute “front-running,” a trading strategy that is also prohibited under the CEA8 and the Commodity Futures Trading Commission’s (CFTC) regulations9 if a broker engages in fraud and manipulation.10

(2) The DOJ Declination Letter

Prior to the Court’s ruling in Bogucki, on February 28, 2018, the Government issued a letter declining to prosecute Bogucki’s employer, an international investment bank and financial services provider (the Bank), for its role in the alleged front-running scheme FX transactions with its counterparty.11 The Declination Letter required the Bank to disgorge $12,896,011 to the U.S. Treasury for allegations involving fraud and market manipulation.12 The Bank also agreed to pay restitution to its counterparty.

Importantly, the DOJ also noted the Bank’s self-disclosure, internal investigation, cooperation, continued compliance, remediation, and further cooperation as key factors in declining to further prosecute the Bank. The DOJ, however, directed the Bank to implement enhanced compliance policies and procedures to safeguard client confidential business information, maintain documentation related to such confidential information, and “address appropriate conduct in responding to potential conflicts of interest with clients that place orders for execution by [the Bank].”13