DOJ defends testimony of finance professor in spoofing case

Shortly after former JPMorgan traders Gregg Smith, Michael Nowak, Jeffrey Ruffo, and Christopher Jordan sought to exclude the testimony of Prof. Kumar Venkataraman from the upcoming trial, the Department of Justice (DOJ) has responded to the defendants’ arguments.

According to a document filed by the DOJ at the Illinois Northern District Court on August 30, 2021, the testimony of professor Venkataraman is reliable.

Let’s recall that, back in 2019, the DOJ launched criminal proceedings against the former JPMorgan precious metals futures traders. The indictment alleges that the defendants engaged in widespread spoofing, market manipulation and fraud while working at JPMorgan through the placement of orders they intended to cancel before execution in an effort to create liquidity and drive prices toward orders they wanted to execute on the opposite side of the market.

Now, the defendants seek to exclude Professor Venkataraman’s anticipated expert testimony regarding his analysis of their trading activity, and his conclusion that their trading is “inconsistent with an intent to execute and consistent with an intent to cancel,” claiming the testimony is “plainly unreliable and untested.

The DOJ argues that the traders’ Motion has no merit because Professor Venkataraman’s expert testimony is reliable and the defendants’ arguments are simply potential topics for cross-examination, not reasons to take the extraordinary step of excluding expert testimony.

First, the defendants claim that Professor Venkataraman’s analysis is “unreliable cherry-picking” because Professor Venkataraman used 489 trading sequences identified by the United States to inform his “broader analysis” of defendants’ trading activity.

The DOJ says that the defendants fail to articulate any flaws in Professor Venkataraman’s analysis other than the fact that they believe it is “not a reliable methodology.” Professor Venkataraman’s “broader analysis” involved examining whether the indicia of spoofing that appeared in the 489 trading sequences he examined were also present across the broader universe of the defendants’ trading over a multiyear period in order to show that the 489 trading sequences were not anomalous or otherwise unrepresentative of the defendants’ overall trading activity.

Put differently, Professor Venkataraman’s analysis showed that the 489 trading sequences were not cherry-picked or otherwise unrepresentative of the traders’ overall trading patterns.

Second, the defendants take issue with the characteristics that Professor Venkataraman analyzed to reach his opinion regarding Defendants’ trading activity, claiming these characteristics are not indicative of placing an order with the intent to cancel and that this analysis ignores whether these characteristics are consistent with “legitimate trading.”

This argument, according to the DOJ, has no merit because Professor Venkataraman’s approach – identifying large, fully-displayed orders with shorter durations that are opposite smaller, resting orders – is consistent with industry standards and involves trading patterns that are commonly associated with spoofing.

Let’s note that this is not the first disagreement over testimony in this case. The DOJ and the defendants have already clashed over the testimony of former Morgan Stanley trader and current FBI agent Jonathan Luca.