Three employees, two current and one former, of JP Morgan were charged by the United States Department of Justice in a federal court in Illinois with engaging in a multiyear scheme to manipulate gold, silver, platinum and palladium futures traded on two CME Group exchanges. The prosecutors charged that such conduct constituted racketeering activity in violation of federal law (a “RICO” conspiracy), as well as manipulation, attempted manipulation, commodities fraud and spoofing, among other offenses. The three named individuals were Gregg Smith, an executive director and trader; Michael Nowak, a managing director and Global Head of Precious and Base Metals Trading; and Christopher Jordan, formerly a trader.

According to the indictment, on thousands of occasions between March 2008 and August 2016, the three individuals and others would purportedly place bids or offers on one side of a relevant metals futures market without any intent of execution. On the other side of the market, the defendants would place genuine orders; often these genuine orders were placed as iceberg orders – exposing only a limited portion of the total order to the marketplace. The objective of the non-genuine orders, claimed the indictment, was to affect market prices in a manner likely to induce execution of the defendants’ genuine orders. Two other former JP Morgan traders – John Edmonds and Christian Trunz – were previously criminally charged for their involvement in the bank’s metals trading scheme and pleaded guilty to the charges. (Click here for background regarding Mr. Edmonds plea in the article "Three Traders Plead Guilty to Spoofing Violations" in the November 11, 2018 edition of Bridging the Week. Click here for background on Mr. Trunz's plea.)

In the indictment against the defendants, the DOJ implied that Mr. Smith and Mr. Trunz – who previously were employed by Bear Stearns – brought to JP Morgan a “new style of layering multiple Deceptive Orders at different prices in rapid succession” when JP Morgan acquired Bear Stearns in 2008.

The indictment against the three defendants also claimed that, in September 2010, Mr. Jordan intentionally provided false answers to the Commodity Futures Trading Commission during questioning by an investigator, and in October 2013, Mr. Smith gave false answers to questions from a CME Group investigator. The DOJ additionally claimed that all the defendants falsely affirmed to JP Morgan in compliance attestations that they adhered to the firm's code of conduct when they did not.

Separately, the CFTC filed a parallel civil enforcement complaint in federal court against Mr. Nowak and Mr. Smith based on the same purported incidents, charging spoofing, engaging in a manipulative or deceptive device and attempted price manipulation. The CFTC resolved a distinct administrative complaint against Mr. Trunz also based on the same allegations; Mr. Trunz admitted to the alleged misconduct in his settlement and agreed to be a cooperating witness going forward.

In 2017, Mr. Smith resolved charges brought by Comex that, in July and August 2013, he often entered and cancelled gold futures orders to discover legitimate support or resistance to order prices and not to execute orders. Mr. Smith resolved this matter without admitting or denying any allegations by agreeing to pay a US $95,000 fine and consenting to a 10-business-day all CME Group access ban. (Click here to access a copy of the relevant Comex Disciplinary Notice.)

In another CFTC action alleging spoofing, Heraeus Metals New York LLC and John Lawrence settled an administrative enforcement action brought by the CFTC. According to the CFTC, from approximately May 2017 through January 2018, Mr. Lawrence, a trader at Heraeus – a US affiliate of a global precious metals fabricator and refiner – allegedly engaged in numerous spoofing transactions involving Commodity Exchange, Inc. gold and silver futures contracts. Heraeus suspended Lawrence at the end of February 2018, after it discovered his purportedly illicit activity. To resolve this matter, Mr. Lawrence agreed to pay a fine of US $130,000 and not access US-registered markets for four months. Heraeus consented to pay a fine of US $900,000. The CFTC charged that Heraeus was liable for Mr. Lawrence’s actions as he was their agent; however, in settling with Heraeus, the CFTC acknowledged remediation actions the firm has implemented since March 2018.

Separately, COMEX resolved a disciplinary action against Mr. Lawrence by accepting payment of a fine of US $70,000 and a four-month all CME Group exchanges’ access prohibition.

Legal Weeds: The criminal indictment against the three JP Morgan traders raises the bar in DOJ enforcement actions alleging spoofing by including a RICO charge. The DOJ claimed that the defendants’ ongoing conduct constituted a “pattern of racketeering activity.” In connection with a RICO indictment, the DOJ has the authority to seek a pretrial order to temporarily seize a defendant’s assets and stop the transfer of potentially forfeitable property. Sometimes solely the threat of seizure in RICO actions prompts defendants to resolve their criminal actions early.

Notwithstanding the aggressiveness of the DOJ in orchestrating the indictments against three JP Morgan's traders, it has not faired well in recent trials alleging spoofing-related offenses. Most recently, the DOJ was unable to achieve a conviction of Jitesh Thakkar, the alleged programmer for Navinder Sarao – the purported “Flash Crash” spoofer – where it charged the defendant with conspiracy to commit spoofing and aiding and abetting spoofing. (Click here for background in the article “Mistrial Declared in Prosecution of Purported Programmer for Alleged Flash Crash Spoofer” in the April 14, 2019 edition of Bridging the Week.) Previously, Andre Flotron, a former UBS trader who had been indicted for conspiracy to defraud in connection with purported spoofing‑type trading activity involving Comex-traded precious metals futures contracts, was found not guilty by a jury hearing his case in a federal court in Connecticut. (Click here for background in the article “Former UBS Trader Found Not Guilty of Conspiracy to Defraud for Alleged Spoofing” in the April 29, 2018 edition of Bridging the Week.)

In 2015, the DOJ was successful, however, in prosecuting Michael Coscia of commodities fraud and spoofing in connection with his trading activities on CME Group exchanges and ICE Futures Europe from August through October 2011. He was sentenced to three years in prison for his violation. (Click here for background on Mr. Coscia’s conviction and subsequent appeal in the article “Federal Appeals Court Upholds Conviction and Sentencing of First Person Criminally Charged for Spoofing Under Dodd-Frank Prohibition” in the August 7, 2017 edition of Between Bridges.)