The US Department of Justice and Commodity Futures Trading Commission (CFTC) have charged five traders with spoofing and market manipulation offences in precious metals.

Gregg Smith, Michael Nowak and Christopher Jordan were all charged for their alleged participation in a racketeering conspiracy and other federal crimes in connection with what the authorities claim was the manipulation of markets for precious metals futures contracts, which spanned over eight years and involved thousands of unlawful trading sequences.

Although the authorities do not name the bank at which the men worked, all three were employed by JP Morgan at the time of the alleged offences.

The three were charged with one count of conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity (commonly referred to as RICO conspiracy); one count of conspiracy to commit wire fraud affecting a financial institution, bank fraud, commodities fraud, price manipulation and spoofing; one count of bank fraud and one count of wire fraud affecting a financial institution. In addition, Smith and Nowak were each charged with one count of attempted price manipulation, one count of commodities fraud and one count of spoofing.

As alleged in the indictment, between approximately May 2008 and August 2016, the defendants and their co-conspirators were members of JP Morgan’s global precious metals trading desk in New York, London and Singapore with varying degrees of seniority and supervisory responsibility over others on the desk. As it relates to the RICO conspiracy, the defendants and their co-conspirators were allegedly members of an enterprise – namely, the precious metals desk at JPM – and conducted the affairs of the desk through a pattern of racketeering activity, specifically, wire fraud affecting a financial institution and bank fraud.

The indictment alleges that the defendants engaged in widespread spoofing, market manipulation and fraud 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. In thousands of sequences, the defendants and their co-conspirators allegedly placed deceptive orders for gold, silver, platinum and palladium futures contracts traded on the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX), both of which are owned and operated by CME Group.

By placing deceptive orders, the authorities say the defendants and their co-conspirators allegedly intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets, and to deceive other participants in those markets into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand. This false and misleading information was intended to, and at times did, trick other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling precious metals futures contracts at quantities, prices and times that they otherwise likely would not have traded, the indictment alleges.

As also alleged in the indictment, the defendants and their co-conspirators defrauded the bank’s clients who had bought or sold barrier options by trading in a manner that attempted to push the price towards a level at which the bank would make money on the option (barrier-running), or away from a price level at which it would lose money on the option (barrier-defending).

The indictment also identifies two former JP Morgan precious metals traders, John Edmonds and Christian Trunz, as being among the defendant’s co-conspirators. Edmonds worked at JPM on the precious metals desk from 2004 to 2017 – in October 2018 he pleaded guilty to one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, price manipulation and spoofing. Trunz is a former precious metals trader at JPM who worked at the bank from 2007 to August 20, 2019, on which day he pleaded guilty to charges of one count of conspiracy to engage in spoofing and one count of spoofing.

“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants,” says assistant attorney general Brian Benczkowski.  “These charges should leave no doubt that the Department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”

FBI assistant director in charge William Sweeney, adds, “Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand. Not only did their alleged behaviour affect the markets for precious metals, but also correlated markets and the clients of the bank they represented. For as long as we continue to see this type of illegal activity in the marketplace, we’ll remain dedicated to investigating and bringing to justice those who perpetrate these crimes.”

For his part, CFTC director of enforcement James McDonald says, “The charges announced today strike at the core of our agency’s mission to preserve market integrity and to protect those who participate in our markets from fraud and manipulation. Well-functioning commodity and derivatives markets should work for all Americans – these markets ensure the stability in prices that customers have come to expect, and the economic growth Americans enjoy.

“But these markets will not work if participants lack confidence in their integrity,” he adds. “That is why we at the CFTC have redoubled our efforts to detect, investigate, and prosecute misconduct that undermines market integrity, like that alleged here.”

Colin Lambert

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