Support Swells for Developer in Spoofing Software Case

A petition in support of Chicago software developer Jitesh Thakkar has passed its initial goal of 1,500 signatures.

The petition can be seen on Change.org and is addressed to four US senators including House Financial Services chairwoman Maxine Waters. As of 11am ET on Monday, 1,557 people had added their signature, and the site updated the goal to 2,500.

John Lothian, who leads a media and financial services company in Chicago, started the petition to bring attention to the case of Thakkar, the founder and chief architect of software development company Edge Financial Technologies.

Thakkar is the subject of an ongoing civil enforcement case by the Commodity Futures Trading Commission (CFTC), which is seeking penalties in an Illinois district court. The CFTC alleges that Thakkar is liable for crimes committed by another person using software designed by his company.

The CFTC declined to comment on an ongoing enforcement case.

The agency’s complaint filed in the court says that Edge, a small business that Thakkar founded in 2007, built custom software for Navinder Singh Sarao. Using the software, Sarao, a London-based day trader, placed thousands of spoof orders on the E-mini S&P 500 on CME’s Globex platform. Sarao pled guilty to spoofing in 2016. He has not yet been sentenced.

The Justice Department and the CFTC charged Thakkar in February 2018, alleging that he knowingly conspired with Sarao. His criminal case in April ended in a hung jury, after which the DoJ dropped its charges. During the trial, Sarao himself testified that Thakkar had not been aware of what Sarao was doing.

The CFTC, however, is persisting with its parallel civil enforcement action against Thakkar.

In September, Thakkar’s defense attorney, Renato Mariotti, filed a motion for summary judgement in the district court. A judge denied the motion, saying it was premature, and so the case continues.

Thakkar is refusing to settle, at the cost of his savings and his company, Lothian tells WatersTechnology, as settling would be tantamount to an admission of guilt. Lothian says he was inspired to create the petition by what he sees as Thakkar’s courageous fight to regain his professional reputation.

Lothian says he does not know Thakkar well, but felt driven to help him by a sense of injustice.

“Jitesh is a respected member of the community. He is somebody that has given his time for this industry. He was part of a subcommittee with the CFTC TAC [Technical Advisory Committee]… With the petition, I wanted to bring a certain amount of pressure to bear on the CFTC because they are using the power of the federal government to force this guy to accept a settlement,” he says.

Thakkar was a member of the TAC’s subcommittee on high-frequency trading from 2012 to 2014.

Lothian is hoping his petition will bring pressure to bear on the CFTC to drop the charges against Thakkar. Signatories include people who say they are friends of Thakkar, but also feature those who are apparently working in the financial technology industry and are worried about the precedent a settlement could set.

“Technology makers should not face persecution because their tools have been improperly used. Does anyone go after Apple because a drug deal was organised on an iPhone?!” says one comment in the petition.

“His prosecution flies in the face of common sense and could set a very dangerous precedent for all software development,” says another.

Lothian agrees, saying the CFTC should think carefully about the possible long-term impact of a settlement.

“If they were to convict him of this, now everyone that touches a piece of software that has anything to do with trading is potentially liable at some point for what traders do with that software. And they will all of a sudden have to have some kind of an insurance policy for every software developer or technologist involved. And that raises the cost of software development and will slow innovation, just at a time when we have this whole fintech renaissance.”

CFTC’s complaint

The CFTC says in its complaint that Sarao worked closely with Edge from October 2011 to develop a customized trading application. Edge was still modifying the tool at his request as late as 2015, the CFTC alleges.

Crucially, the tool included a feature called Back of Book, which Sarao requested because it would allow him to place spoof orders on Globex, the CFTC says.

This function modified Sarao’s orders so that they would remain at the back of the queue at each price level on Globex, where they were less likely to be executed, and it automatically cancelled Sarao’s entire order before it could be executed, the CFTC says.

“Using the Back-of-Book function, Trader A [Sarao] was able to place large spoof orders, often at or near the best bid or offer, that injected false information about supply and demand for the E-mini S&P and tricked other market participants into trading based on Trader A’s spoofing,” the complaint says.

While Thakkar himself did not build the application, he directed employees to do so and oversaw the development, the complaint says. Sarao wanted amendments made to the tool that would have made it clear what he planned to do with it, according to the CFTC complaint, especially if the person building the tool was an experienced developer of financial technology, which Thakkar was.

The CFTC says Sarao gave Thakkar very specific instructions during the ongoing build of the product. During the project, for example, Sarao told Thakkar that he planned to use the back-of-book function, with its automatic cancellation feature, to trade the E-mini S&P.

In short, the CFTC contends that Thakkar knew what Sarao was doing with the Edge application and that Thakkar is therefore as responsible as Sarao under the agency’s regulations.

Judgement in 2020

Thakkar’s attorney counters that the CFTC’s case against Thakkar is thin. Mariotti says Thakkar did not program the software himself and never met Sarao. In hindsight, perhaps, and from a high level, he says, it seems clear what Sarao was intending to do with the software, but in the day-to-day process of building the application it would not necessarily have been so clear.

“Sarao was in the UK. He never met my client. They spoke sometimes on the phone and Jitesh was not the one writing the program,” Mariotti tells WatersTechnology. “This is not a standard that we should be holding developers to, that they get into the minds of their customers when working on a project.”

Mariotti was the first person to investigate and prosecute a spoofer, having secured the conviction of trader Michael Coscia in 2015. Sarao’s was only the second such conviction.

Now, as the defense on the other side of a case, Mariotti says the government is misusing the precedent he himself set.

“This whole process has been difficult for Jitesh. It was devastating for him to be arrested in front of his wife and children, to have been indicted and for people to believe he was a criminal. He lost a lot of customers; he has had to let his employees go; he had trouble finding new employment,” Mariotti says.

“Many people would have agreed to some sort of settlement. But Jitesh doesn’t think he should allow the CFTC to conclude that he has done something wrong when he doesn’t believe that he has.”

Mariotti says the discovery process in the case now has to be completed, after which he will file another motion for summary judgement. He had argued in his initial motion that no more discovery was needed, as the criminal case had already developed the entire record.

The deadline for discovery is the end of February 2020. A ruling will probably come halfway through 2020 at the earliest, Mariotti says.