(3) The Bogucki criminal matter

Separate from its agreement with the Bank, the DOJ brought a criminal action against Bogucki.¹⁴ The DOJ alleged that Bogucki and an unnamed co-conspirator operated a scheme to defraud the Bank’s counterparty of money and property from August through October 2011. According to the Bogucki Indictment, in August 2011, the Bank’s counterparty sought the Bank’s assistance in acquiring a business headquartered in the United Kingdom. To complete the purchase, the counterparty needed to have access to a considerable sum of British pounds. Accordingly, the counterparty consulted with the Bank to purchase FX options that would allow the counterparty to procure sufficient pounds to execute its planned transaction in the UK.¹⁵

The Bank’s counterparty ultimately did not need the FX options to complete its acquisition. The Bogucki Indictment states that in September 2011 the counterparty decided to “unwind” the FX options by selling them back in the FX market in several tranches. Armed with the confidential information that the Bank’s counterparty planned to sell its FX options, Bogucki engaged in trading activity to reduce the value of the counterparty’s FX options in advance of the counterparty’s sale. Bogucki assured the Bank’s counterparty that he and the Bank would help the counterparty maximize the value the counterparty’s FX options. However, as alleged in the Bogucki Indictment, from September 27–30, 2011, Bogucki engineered an extensive effort to sell the Bank’s FX options to depress the value of the counterparty’s positions and create a short position for the Bank. As the counterparty unwound its FX options in an increasingly inhospitable market, Bogucki claimed that he continued to act in the counterparty’s interest to improve the value of the counterparty’s positions. The Government alleged that “[t]he scheme led [the counterparty] to lose millions of dollars in the value of the cable options it had originally purchased and enabled [the Bank] to make millions of dollars by acquiring the options from [the counterparty] at a discounted and favorable price.”¹⁶

The Government argued that Bogucki defrauded the Bank’s counterparty by abusing access to confidential client information and by making materially false statements to the counterparty’s traders in order to advance the Bank’s interests. The Government presented two alternative theories of guilt through wire fraud: (1) misappropriation of confidential information in violation of trust and confidence, or (2) depriving the Bank’s counterparty of its property through material misrepresentations and halftruths. The Court rejected both of these theories, leading to Bogucki’s acquittal.

(a) Misappropriation of confidential information

Despite finding that Bogucki repeatedly misled the Bank’s counterparty, the Court ultimately concluded that the Government failed to adduce sufficient evidence to substantiate the wire fraud claims against Bogucki.¹⁷ The Government argued that Bogucki frequently deceived the Bank’s counterparty about the Bank’s positions vis-à-vis the counterparty’s FX transactions. According to the Government, Bogucki’s false statements met the materiality threshold because they influenced or were capable of influencing the Bank’s counterparty to part with its money or property.

The Court, however, viewed Bogucki’s statements in a different light. While Bogucki exaggerated, omitted, and misstated information concerning the Bank’s interest in FX transactions involving the counterparty, there was no evidence that Bogucki’s representations affected the counterparty’s FX trading behavior. In fact, a trader for the counterparty testified that he knew that Bogucki was simply posturing during their exchanges. Moreover, the counterparty’s trader admitted that he too “BS-ed” and bluffed about FX prices and positions when he transacted with Bogucki. The evidence showed that neither party was entirely forthright, nor did they expect full transparency in their negotiations.

On the contrary, the Bank’s counterparty was a sophisticated market participant that viewed Bogucki as a self-interested, arms-length counterparty.¹⁸ The counterparty understood that banks jockey to change their positions shortly before executing FX transactions, a legitimate practice colloquially referred to as “hedging” or “pre-positioning.” The record evidence suggested that the counterparty had no reason to believe that Bogucki was not hedging or pre-positioning. Ultimately, the Government could not demonstrate that Bogucki’s statements induced the counterparty to enter into FX transactions if the counterparty’s traders suspected all along that Bogucki was not being entirely honest with them. In the Court’s view, Bogucki’s communications were not material.

(b) Material misrepresentations and duty to disclose

Alternatively, the Government claimed that Bogucki and the Bank owed the Bank’s counterparty a fiduciary duty of trust and confidence, a duty that Bogucki allegedly breached.¹⁹ But that theory also was belied by the evidence.²⁰ The Bank and its counterparty entered into FX transactions pursuant to the industry standard International Swaps and Derivatives Association (ISDA) Master Agreement, which clearly established that the Bank and the counterparty did not have a fiduciary relationship and in fact acted on an arms’-length basis and stated that the parties “entered into ‘each transaction as principal and not as agent or in another capacity, fiduciary or otherwise).'”²¹ Thus the ISDA Master Agreement expressly stated that the Bank and its counterparty were independent principals and therefore there was no fiduciary duty owed.

The Court was not persuaded that the Bank owed its counterparty a duty of trust based on the fact that the Bank was privy to confidential information pertaining to the counterparty. Although the counterparty shared sensitive information with the Bank, the counterparty neither asked the Bank to execute a non-disclosure or confidentiality agreement, nor did it attempt to limit the Bank’s trading activity. This was consistent with the notion that the counterparty and the Bank operated as independent counterparties engaging in FX transactions for their own benefit. The Court specifically distinguished these facts from the Johnson case where the duty of confidentiality was found between the trader and the counterparty.²²

The Court ultimately held that the Government could not satisfy the materiality element of wire fraud because the evidence indicated that Bogucki’s statements did not and were not capable of inducing the Bank’s counterparty to engage in FX transactions. The counterparty suspected that Bogucki postured, bluffed, and exaggerated to benefit his employer. The counterparty also understood that Bogucki and the Bank were not bound by a fiduciary duty. There was simply no support for the Government’s contention that Bogucki’s representations, false or not, rose to the level of materiality needed to convince the counterparty to part with its money or property in pursuit of an FX scheme. Absent the materiality element, the Court was forced to acquit Bogucki on all wire fraud charges.

(4) Takeaways from Bogucki

The Bogucki decision illustrates that the Government must be careful to distinguish permissible hedging and pre-positioning from illegal front-running. Under the Johnson or EOX Holdings precedent, if a broker tried to deceive their counterparty or used confidential information, those facts were often enough to bring a front-running or insider trading case against that broker.²³ The Bogucki case, however, suggests that a more exacting analysis is required to determine the materiality of the broker’s representations or the scope of duty owed by a broker to its counterparty under ISDA-documented transactions. The holding in Bogucki indicates that, in the absence of other documentation, an ISDA-documented transaction itself does not establish a fiduciary relationship between the counterparties.

Additionally, it is notable that the CFTC did not bring its own enforcement case against Bogucki or his employer. This may reflect the simple fact that the DOJ had already exacted a large penalty from the Bank, or it may indicate an evolution in the CFTC’s approach to front-running and insider trading and that it is simply easier to bring a case under the wire fraud authorities than under the CEA and the CFTC regulations. The CFTC has been sharply criticized by the industry for bringing insider trading cases into the realm of commodities trading, arguably ignoring the reality and ubiquity of legal pre-hedges. It remains to be seen whether the CFTC will take a consistent approach to analyzing these cases in the future in the context of its enforcement authority.

1. “Here, the Government has pursued a criminal prosecution on the basis of conduct that violated no clear rule or regulation, was not prohibited by the agreements between the parties, and indeed was consistent with the parties’ understanding of the arms-length relationship in which they operated. The Court cannot permit this case to go to a jury trial on such basis.” United States v. Bogucki, No. 18CR00021CRB (N.D. Cal. Mar. 3, 2019).
2. See United States v. HSBC Holdings Plc, No. 1:18cr00030 (E.D.N.Y. filed January 18, 2018), ECF No. 32 and United States v. Johnson, 2017 WL 5125770 (E.D.N.Y. Sept. 21, 2017)) (the Johnson Decision). (In both proceedings, the Government alleged that defendants violated federal wire fraud statutes in furtherance of front-running schemes).
3. 7 U.S.C. 1 et seq, as amended by the Wall Street Reform and Consumer Protection Act of 2010, Public Law 111203, 124 Stat. 1376 (2010) (the Dodd Frank Act).
4. No. 18CR00021CRB (N.D. Cal. Mar. 3, 2019).
5. 18 U.S.C. §§ 1343 and 2 (2012).
6. 18 U.S.C. § 1349 (2012).
7. 18 U.S.C. § 1343, et seq. (2012).
8. 7 U.S.C. §§ 6g, 9(1), 6b(a), and 6(c)(1) (2012).
9. 17 C.F.R. §§ 1.31, 1.35, 155.4(b), 166.3, and 180.1(a) (2018). See also CFTC v. EOX Holdings LLC, No. 1:18cv08890 (S.D.N.Y. filed Sept. 28, 2018).
10. We note the increased number of allegations under U.S. federal wire fraud statutes in instances involving conduct otherwise prohibited by the CEA or where the CFTC is authorized to exercise its exclusive jurisdiction under the CEA. See, e.g., United States v. Bases, No. 18cr48 (N.D. Ill. July 17, 2018), or see e.g., United States v. Vorley, No. 18cr435 (N.D. Ill. July 24, 2018).
11. Letter from U.S. Department of Justice to the Bank (February 28, 2018) (Declination Letter) found at www.justice.gov.
12. Specifically, the DOJ Declination Letter stated that DOJ found that the Bank “(1) traded ahead of large [counterparty] spot and options purchases … increasing the price that [the counterparty] paid …; (2) manipulated the “Bloomberg fix” by purchasing British pounds in a manner which increased the profits of individual traders; traded ahead of [counterparty’s] “unwind” of options …, decreasing the price that [the counterparty] ultimately received from [the Bank]; and (4) actively deceiving [the counterparty] about the causes of market movement during this period.” Declination Letter at p. 1.
13. Declination Letter at p. 2.
14. Indictment, United States v. Bogucki, No. 18CR00021CRB (N.D. Cal. filed January 16, 2018) (Bogucki Indictment).
15. Note that the facts in the Bogucki case are very similar to the facts in the Johnson case.
16. Bogucki Indictment at ¶ 54.
17. The following five elements must be proven to secure a conviction for wire fraud affecting a financial institution:
    • The defendant must have knowingly participated in, devised, or intended to devise a scheme or plan to defraud, or a scheme or plan for obtaining money or property by means of false or fraudulent pretenses, representations, or promises or omitted facts;
    • The statements made or facts omitted as part of the scheme must be material;
    • The defendant acted with the intent to defraud;
    • The defendant used, or caused to be used, an interstate or foreign wire communication to carry out or attempt to carry out an essential part of the scheme; and
    • The scheme affected a financial institution.
18. Note that the Global FX Code refers to FX counterparties to FX dealers as “clients” and imposes strict duties of fair dealing on pre-hedging activities of dealers.
19. “[Bank] and its agents, including BOGUCKI and CC1, owed [the Bank’s counterparty] a duty of trust, confidence,honesty, and disclosure”… See Bogucki Indictment at ¶ 25.
20. The Bogucki court distinguished the facts from those in Johnson stating: “[the Johnson] decision, crucially, turned on the fact that the parties to the FX transaction at issue had entered into a variety of written agreements, including a non-disclosure agreement and a request for proposal. … There are no analogous documents here. In fact, the only written agreement governing this deal was the ISDA, which expressly stated that each party acted as a ‘principal (and not as agent or in another capacity, fiduciary or otherwise).’” See Bogucki at p. 6.
21. Bogucki at p. 3.
22. Bogucki at p. 6.
23. In the Matter of Arya Motazedi, CFTC Docket No. 1602 (CFTC Dec. 2, 2015), In the Matter of Jon P. Ruggles, CFTC Docket No. 1634 (CFTC Sept. 29, 2016), CFTC v. EOX Holdings, LLC, No. 1:18cv08890 (S.D.N.Y. filed Sept. 28, 2018).