Once again, the Department of Justice’s (DOJ) efforts to hold a trader accountable for misrepresentations made during negotiations met with stiff resistance from the courts. On March 4, 2019, Judge Charles Breyer of the Northern District of California granted Robert Bogucki’s motion to dismiss the indictment in the middle of his criminal trial, ruling that the Government failed to prove that Bogucki’s statements could not possibly amount to fraud because there is no expectation of truth in the discussions between Bogucki and his customer. Judge Breyer’s ruling parallels the Second Circuit’s highly publicized 2018 repudiation of the DOJ’s attempts to prosecute Jessie Litvak, a former bond trader, for similar misrepresentations made in connection with trading residential mortgage-backed securities.

In a 13-page opinion whose brevity suggests the Court’s impatience with the Government’s case, Judge Breyer summarily rejected DOJ’s contention that Bogucki, the former head of foreign exchange (“FX”) trading at Barclays PLC (“Barclays”) in New York, defrauded one of Barclays’ counterparties by manipulating the price of FX options ahead of that company’s unwinding of those options through Barclays. In acquitting Bogucki, Judge Breyer relied on the same logic used to overturn Litvak’s conviction and those of his fellow bond traders in 2018: in an industry known for posturing, puffery, and outright lying, the likelihood of defrauding a sophisticated investor in an arms-length transaction is virtually non-existent.

The transactions at issue stemmed from the counterparty’s 2011 acquisition of a $10.3 billion British company. UK regulations required the counterparty to certify that it had sufficient funds in GBP to complete the transaction. As a hedge against any drop in value of USD between the counterparty’s certification date and the acquisition date, the counterparty purchased £6 billion GBP/USD FX options (also known as “cable” options) from Barclays pursuant to the parties’ International Swaps Dealers Association (“ISDA”) Agreement. ISDA Agreements typically cover all over-the-counter derivatives transactions between a bank and its counterparty. Ultimately, the value of the dollar held and the counterparty did not exercise its options. The counterparty instead opted to “unwind” the options by (i.e., sell them back into the FX market) by selling them to Barclays, itself an FX market maker. The unwind would occur over several tranches and would be governed by the terms of the ISDA Agreement. Prior to and during the unwind, Barclays took short positions in cable options. In doing so, Barclays not only created a hedge for itself in advance of the massive repurchase, but also depressed the price of the cable options it had agreed to repurchase from the counterparty.

After a lengthy investigation, DOJ determined that Barclays traders had taken adverse positions to its counterparty during the unwind but then misrepresented and concealed this fact from the counterparty. As the head of Barclays’ FX trading desk, Bogucki interfaced with the counterparty regarding repurchasing the options. According to the January 16, 2018 indictment, Bogucki falsely assured the counterparty that Barclays would act in the counterparty’s best interest, would stay out of the cable options market until all of the counterparty’s tranches were sold, and inaccurately stated that Barclays did not have a short position in the cable options. Bogucki was charged with wire fraud and conspiracy to commit wire fraud for his misrepresentations.

At Bogucki’s trial, DOJ presented two theories of guilt. As summarized by the Court, “[t]he crux of the Government’s first theory is that Barclays received confidential information about [the counterparty]’s plan to unwind its options that was not revealed to other banks, and the sharing of that information created a duty of trust and confidence.” The Government’s second theory was that Bogucki affirmatively lied to Barclay’s counterparty, and that the lies were material and detrimental to the counterparty.

In rejecting both theories, Judge Breyer found that the ISDA Agreement, which expressly stated each party acted as a “principal (and not as agent or in another capacity, fiduciary or otherwise),” obviated any implied duties between Barclays and its counterparty. Judge Breyer further found that, regardless of whether Bogucki had made any misleading or false statements to the counterparty, there was no evidence the counterparty had relied upon or had reason to believe such statements. First, the counterparty’s own representative testified that he not only knew Bogucki was not always honest, but also that he himself “bluff[ed]” when speaking with Bogucki. In the context of such a relationship, Judge Breyer held no reasonable juror could conclude that the counterparty would be influenced by Bogucki’s “half-truths,” so they could not constitute the basis of fraud. Second, the short sales themselves amounted to nothing more than a common and legal practice known as “pre-positioning” designed to minimize Barclays’ risk in advance of repurchasing the options from its counterparty. DOJ’s own expert witness confirmed this understanding. Moreover, the government could point to no laws or regulations prohibiting such trades in the FX markets.

When he handed down his decision, Judge Breyer chided DOJ for “assum[ing] the role of nanny of the FX options market.”  In his decision, Judge Breyer ruled DOJ overreached its authority by “pursu[ing] 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.”

Between this harsh commentary and the resulting dismissal, Bogucki is a significant setback for the DOJ.  The decision calls out the Government for bringing a naïve understanding of market realities to its prosecutions. Going forward, in an industry well known for its lack of candor, the DOJ will be hard-pressed to establish fraud in connection with arms-length transactions between sophisticated investors.