By Joe Deaux

The former head of the JPMorgan Chase & Co's precious-metals business and his top gold trader have been convicted in Chicago on charges they manipulated markets for years, handing the US government a win in its long crackdown on bogus “spoofing” orders.

Michael Nowak and Gregg Smith were found guilty by a federal jury after a three-week trial and more than eight days of deliberations. 

Prosecutors presented evidence that included detailed trading records, chat logs and testimony by former co-workers who “pulled back the curtain” on how Nowak and Smith moved precious-metals prices up and down for profit from 2008 to 2016.
A salesman on the desk, Jeffrey Ruffo, was acquitted of charges he participated in the conspiracy.

Justice Department victory

The case was the biggest yet by the US Justice Department, which alleged the precious-metals business at JPMorgan was run as a criminal enterprise. 

Nowak, the managing director in charge of the precious-metals desk, and Smith, its top trader, were convicted of fraud, spoofing (placing and then quickly cancelling buy or sell orders to create the illusion of demand or supply), and market manipulation. 

“They had the power to move the market, the power to manipulate the worldwide price of gold,” prosecutor Avi Perry said during closing arguments.

US District Court Judge Edmond Chang said Nowak and Smith will be sentenced next year. Each faces decades in prison, though it may be far less. Two Deutsche Bank AG traders convicted of spoofing in 2020 were each sentenced to a year in jail.

JPMorgan, the largest US bank, agreed in 2020 to pay US$920m to settle Justice Department spoofing allegations against it, by far the biggest fine by any financial institution accused of market manipulation since the financial crisis.

The men placed and then quickly cancelled buy or sell orders to create the illusion of demand or supply. (Image: Getty)

The criminal case against some of the biggest players in the precious-metals markets was closely watched. Spoofing became illegal with the passage of the Dodd-Frank Act in 2010.

“It’s something that’s been on the minds of many people that were involved in the precious-metals markets in that point in time, and I would say this verdict closes a chapter,” said Phil Streible, chief market strategist at Blue Line Futures. 

“This kind of thing had been going on for at least 15 years or more with people waiting for justice, and I never thought it would ever get closed.”

Dennis Kelleher, co-founder and chief executive officer at Better Markets, an organisation advocating stricter financial regulation, said the verdict “should signal to Wall Street’s biggest financial firms and executives that they are not above the law”.

Witness testimony
The star witnesses at the criminal trial were former co-workers who said they participated in the spoofing activity over years. Traders John Edmonds and Christian Trunz testified about market manipulation by all three defendants at JPMorgan, while trader Corey Flaum described similar behaviour when he worked with Smith and Ruffo at Bear Stearns, before it was acquired by JPMorgan in 2008.

The JPMorgan case wasn’t a complete victory for prosecutors. All three defendants were acquitted of violating the Racketeer Influenced and Corrupt Organizations Act, a law more commonly used against gangs or the Mafia. Jurors didn’t agree with prosecution claims that the JPMorgan precious-metals desk was run as a criminal enterprise. No witnesses or chat logs presented during the trial showed the defendants openly discussing their intent to spoof.   

Previous convictions of former precious-metals traders at Deutsche Bank and Bank of America Corp.’s Merrill Lynch unit involved only spoofing-related crimes.  

Racketeering charges also are part of the federal government’s case against Bill Hwang, whose Archegos Capital Management collapsed last year and cost banks billions.

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