Front Running Prosecutions Under Us Law
Overview
Front running occurs when a broker, trader, or investment advisor executes orders on a security for its own account while taking advantage of advance knowledge of pending orders from clients, intending to profit at the client’s expense. This practice is illegal under U.S. securities laws.
Relevant U.S. laws include:
Securities Exchange Act of 1934 – Section 10(b) & Rule 10b-5: Prohibits fraud, manipulation, and deceptive practices in securities trading.
FINRA Rules (e.g., Rule 5270): Specifically prohibit front running by brokers.
Commodity Exchange Act (CEA) – for commodities and futures trading: Prevents similar manipulative practices in commodity markets.
Penalties for front running include prison, fines, disgorgement, and bans from the securities industry.
Case 1: United States v. Raj Rajaratnam / Galleon Group (2009)
Summary: Rajaratnam, hedge fund manager, engaged in insider trading and front running, executing trades based on confidential information about large client orders.
Charges: Securities fraud, wire fraud, and conspiracy.
Outcome: Convicted; 11 years in prison, fines over $10 million, and $150 million disgorged.
Significance: Demonstrated that front running coupled with insider trading can trigger severe federal prosecution.
Case 2: SEC v. Theodore R. Turley (2008)
Summary: Turley, a registered broker, front ran customer orders in municipal bond trading, buying bonds ahead of client orders to profit from price movements.
Charges: Securities fraud and violation of FINRA rules.
Outcome: SEC imposed a $500,000 civil penalty and a permanent bar from the securities industry.
Significance: Example of regulatory enforcement even when no criminal prosecution occurs.
Case 3: SEC v. Salomon Brothers (1991)
Summary: Salomon Brothers traders executed large bond trades ahead of customer orders to benefit the firm’s proprietary accounts.
Charges: Violations of Section 10(b) and Rule 10b-5; front running customer orders.
Outcome: SEC penalties included fines of $50 million, and multiple traders were barred from securities industry.
Significance: Early landmark case emphasizing fiduciary duties and prohibition of front running in investment banking.
Case 4: In the Matter of UBS Securities LLC (2005)
Summary: UBS traders front ran trades in equity options, buying ahead of large client block orders.
Charges: SEC enforcement for front running and failing to disclose conflicts of interest.
Outcome: $4.25 million fine, with remediation plans and compliance monitoring imposed.
Significance: Showed that major global financial firms can face significant penalties for front running, even without criminal prosecution.
Case 5: SEC v. Susquehanna International Group (2012)
Summary: SIG traders executed orders in listed options ahead of large customer orders, earning profit at clients’ expense.
Charges: Front running and violations of fiduciary duty under securities law.
Outcome: SEC imposed civil penalties totaling $1.5 million, plus disgorgement.
Significance: Demonstrated that front running is prosecuted across all market types, including high-frequency trading.
Case 6: United States v. Steven A. Cohen / SAC Capital (2013)
Summary: While primarily an insider trading case, evidence showed SAC traders engaged in front running large client trades to enhance proprietary gains.
Charges: Insider trading and front running.
Outcome: SAC Capital paid $1.8 billion in fines, and Cohen personally faced SEC sanctions.
Significance: Reinforced that front running often accompanies broader market manipulation schemes and attracts severe penalties.
Key Takeaways from Front Running Prosecutions in the USA
Illegal Across Asset Classes: Applies to equities, bonds, options, and commodities.
Both Criminal and Civil Enforcement: SEC prosecutions often result in fines and industry bans; DOJ may pursue prison for egregious schemes.
High Penalties: Prison sentences for individuals can exceed 10 years, with millions in fines and disgorgement.
Fiduciary Duty Violations: Front running breaches duties owed to clients, forming the basis for SEC enforcement.
Major Firms Not Immune: Both individual traders and large financial institutions have been penalized.
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