Regulatory and Internal Investigations
Market Manipulation is a mainstay of annual regulator priority lists. Bates frequently assists our clients in internal investigations as well as in investigating allegations brought by U.S. authorities (SEC, CFTC, DOJ), self-regulatory organizations (including FINRA and exchanges), international agencies, and private parties.
We also have substantial experience with matters involving a variety of alleged market manipulation schemes, including (but not limited to) wash trading, match trading, front running, painting the tape, banging the close, and pumping & dumping of thinly traded securities. Most recently, we have been engaged to handle issues arising in high-frequency trading, such as spoofing and layering, as well as in the context of foreign exchange markets.
Bates experts and staff bring high-level expertise when conducting detailed evaluations of the trading at issue, comparing the activity identified to (i) the pattern of trading for the security as a whole and (ii) the historical trading of the alleged manipulator(s). Trading which may otherwise look suspicious may, in fact, be perfectly legitimate behavior after contextualizing the activity. Bates experts can provide invaluable guidance regarding trading strategies, risk management principals, and/or hedging strategies that may also explain the pattern of activity identified, alongside big-data-driven analyses and qualitative reviews of emails, phone calls, and messages conducted by Bates staff.
Examples of Bates Group‘s Capabilities
Bates assisted a client in proactively investigating an issue identified by their internal controls. Our staff and experts completed a comprehensive review of trading activity over a multi-year period for an equity security traded on both U.S. and International exchanges. Bates collected and modeled detailed order book information to evaluate the following characteristics related to the market microstructure of trading in the security across both exchanges:
These same characteristics were evaluated for shifts in market dynamics over time and in comparison to trading on the same exchanges in peer company securities while also noting differences/similarities in trading across the two exchanges. The price impact of potentially noneconomic trading was established, and a formal report was submitted, as well as several reports rebutting the findings of the regulator, culminating in testimony by a Bates expert before the regulator.
Bates experts were called upon to evaluate the conduct of a team of traders within a large global financial institution for a variety of issues, including trading ahead of client orders, inappropriate trade mark up, indications of market manipulation or attempted manipulation, and round-trip trading—in the latter two areas we also considered the behavior and involvement of traders from other major financial institutions. The analysis required a detailed investigation of daily trading, spreads, and quotations on major currencies and currency derivatives, as well as interviews and communication reviews of the alleged involved parties. The report prepared by Bates identified significant failures in the institution’s internal supervisory and control processes and was relied upon in subsequent litigation.
In a recent investigation, Bates was asked to assess the trading of an individual who had accumulated an ownership interest in multiple penny stocks as payment for consulting services rendered. This individual was then alleged to have used both his accumulated ownership and access to company insider information to conduct a classic “pump & dump” of the stock. Bates performed a detailed quantitative assessment of his trading using both publicly available data and Blue Sheets, as well as a qualitative assessment to establish interrelationships between parties via phone records, text message exchanges, and emails. Bates provided detailed timelines of trading activity that included news events, volume, intraday pricing, short interest, and other relevant characteristics. We prepared interactive models showing the relationships between parties, their trading behavior versus the rest of the market, and other demonstratives. We then estimated potential damages following a modified share price inflation methodology. As a result of the work Bates performed, additional potential market manipulators were identified.
On a criminal pump & dump matter, Bates performed the full range of analyses listed above in addition to preparing demonstratives specifically concerning wash or matched trading. During the course of performing our analysis, Bates was informed that several of the alleged manipulators pled not guilty on the basis that they were unaware that the manipulation was taking place. Bates assessed their trading records, Blue Sheet data, and communication records to establish that, at a minimum, they had knowingly participated in wash or matched trading during the manipulated period.
Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.Contact Bates Group