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Can a tough negotiation stance cross the line into fraudulent conduct? That was the key question in the fraud prosecution of Robert Bogucki, a former Barclays trader.
This month, Judge Charles R. Breyer of Federal District Court in San Francisco dismissed the market manipulation case against Mr. Bogucki before the jury rendered its verdict.
In 2017, Mr. Bogucki was charged with wire fraud and conspiracy to commit wire fraud for his role in what prosecutors said was a so-called front-running scheme.
He had structured transactions that enabled Barclays to profit at the expense of one of its corporate clients, Hewlett-Packard. The case revolved around Hewlett-Packard’s acquisition of Autonomy, a British software firm, in 2011.
As part of the deal, Barclays carried out a large and complex options and currency trade. Prosecutors said Mr. Bogucki had misused his knowledge of the transactions to make trades that reaped millions of dollars.
As it typically does in such prosecutions, the Justice Department cited chat sessions in which Mr. Bogucki wrote about how Barclays would “spank the market” and “hammer the market lower” to make money ahead of the Hewlett-Packard transaction.
But the case foundered on a key element in proving fraud: The bank’s conduct was not “material” to Hewlett-Packard. In other words, even if Mr. Bogucki misled the company, it was doing the exact same thing with him, so neither side actually expected the other to act in its best interests regardless of what was said.
Is it really permissible to lie when negotiating a deal with a client? Apparently, the answer is yes, at least when the two sides engage in arms-length bargaining.
Judge Breyer pointed to the testimony of Zac Nesper, a Hewlett-Packard employee responsible for its foreign exchange trading. As a government witness, Mr. Nesper admitted that he “was not entirely truthful with Barclays,” and that he had understood that what Barclays was “posturing” rather than being “entirely honest.”
Crucial to Judge Breyer’s decision was the fact that the bank was not acting as a fiduciary or agent of the company, nor did it have any duty to protect its interests. Barclays was acting like any other participant in the foreign exchange market by hedging its position before undertaking the transactions on behalf of Hewlett-Packard. So when it sought to profit ahead of the trades, it was simply using the sharp-elbowed tactics of any trader in the market.
Because neither side expected the other to tell the truth, there was no fraud. Fraud cases require some deception, but if you expect that you will not be told the truth, then you cannot be misled.
By taking the rare step of dismissing the case before it reached the jury, Judge Breyer sent a strong message to the Justice Department that business tactics that benefit one side are not always fraudulent, even if a defendant makes silly statements in chat sessions.
The mail and wire fraud statutes are broad and can encompass a number of questionable business practices if one party is misled about the value of an asset or the terms of an agreement. But when it comes to the negotiation of a deal, the courts have taken a hands-off approach if one side makes statements that are not truthful.
In United States v. Weimert, a 2016 decision by the federal appeals court in Chicago, the judges reversed the conviction of a former bank official who had misled both sides about his potential involvement as an investor in a property deal. The appeals court explained that “buyers and sellers negotiate prices and other terms.”
“To state the obvious,” it added, “they will often try to mislead the other party about the prices and terms they are willing to accept. Such deceptions are not criminal.”
So does anything go in a negotiation? The answer, at least as far as the federal fraud statutes are concerned, is that you can lie to your heart’s content so long as it is arms-length bargaining between two sophisticated parties.
When Barclays assisted Hewlett-Packard, neither side could be described as lacking knowledge about the foreign exchange markets, both engaged in deliberately deceptive tactics to protect their positions, and because misstatements are an expected part of the negotiations, there was no fraud.
The Justice Department’s record in trying to prove a crime when sophisticated parties negotiate the terms of their agreement has been less than stellar.
In October, three British traders were acquitted of charges that they had fixed prices in the foreign exchange market, despite being part of a group that nicknamed itself “The Cartel.”
In May, the federal appeals court in Manhattan overturned the second conviction of Jesse Litvak, a former bond trader at Jefferies convicted of misleading clients of the firm about the prices paid for residential mortgage-backed securities. Much like Judge Breyer in Mr. Bogucki’s case, the appeals court found that Mr. Litvak was not acting as a fiduciary or agent of the clients, so any misstatements about the price paid were not sufficient to prove fraud.
Judge Breyer’s decision is another nail in the coffin for prosecutors trying to prove that traders are engaged in fraud when they mislead those on the other side of the deal, at least when those traders are bargaining for the best terms but know the other side is not there to protect them.