THREE JPMORGAN METALS TRADERS CHARGED WITH MARKET MANIPULATION / THE FINANCIAL TIMES

Three JPMorgan metals traders charged with market manipulation

US prosecutors allege ‘massive, multiyear scheme’ to defraud customers

Henry Sanderson and Neil Hume in London


US prosecutors have charged three JPMorgan metal traders with a “massive, multiyear scheme” to manipulate markets and warned they were continuing to probe higher echelons at the largest US bank.

Michael Nowak, head of precious metals trading, was charged on Monday along with two colleagues, Gregg Smith and Christopher Jordan, on federal racketeering charges normally used to take down organised crime syndicates.

The indictment alleged that the three traders engaged in “widespread spoofing, market manipulation and fraud” while working at JPMorgan, which along with HSBC dominates global flows of gold and silver trading.

They placed 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”, it said.

The case will increase scrutiny over global precious metals markets and the dominance of large banks such as JPMorgan, with prosecutors indicating more senior executives and other banks are under investigation.

“We’re going to follow the facts wherever they lead,” said Brian Benczkowski, assistant attorney-general. “Whether it’s across desks or upwards into the financial system.”

The Dodd-Frank financial reform law of 2010 imposed criminal penalties for spoofing, the practice of duping other market participants by entering and rapidly cancelling large orders.

This was the first time that federal racketeering charges have been applied in a spoofing case, a derivatives lawyer said.

Mr Nowak, who joined JPMorgan in 1996, is on leave from the bank, according to a person familiar with the matter, as is Mr Smith, a precious metals trader. JPMorgan declined to comment. Mr Nowak’s lawyers at Skadden, Arps, Slate, Meagher & Flom said Mr Nowak had “done nothing wrong” and they expected “him to be fully exonerated”. Mr Smith and Mr Jordan could not immediately be reached for comment.

Between 2008 and 2016, the traders sought to take advantage of algorithmic traders by placing genuine orders to buy or sell futures, some of them so-called “iceberg orders”, that concealed the true order size, the indictment alleged.

At the same time they placed one or more orders that they intended to cancel before executing, so-called “deceptive orders”, on the opposite side, which were fully visible to the market, the indictment alleged.

“By placing deceptive orders, the defendants and their co-conspirators intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets,” the DoJ said.

The DoJ alleged the three men named in the indictment placed deceptive orders for gold, silver, platinum and palladium futures contracts on exchanges run by the CME Group, including the Nymex and Comex exchanges.

In addition, the men also allegedly defrauded JPMorgan’s own clients who had bought so-called “barrier options” by trading precious metals futures contracts “in a way that sought to push the price towards a level at which the bank would make money”, Mr Benczkowski said.

Barrier options are contracts that pay out if the underlying asset breaches a pre-determined price level.

A former JPMorgan trader, Jonathan Edmonds, pleaded guilty to charges of spoofing last November. Another former JPMorgan precious metals trader, Christian Trunz, pleaded guilty in August.

A third trader, Corey Flaum, who worked with Gregg Smith at Bear Stearns before it was acquired by JPMorgan, also pleaded guilty in July, Mr Benczkowski said.

Gold bugs and retail investors have fixated for years on JPMorgan’s precious metals business and its influence over gold and silver markets. “It’s no surprise to me,” said Ted Butler, an independent analyst and persistent critic of the bank’s role in metal markets.


Additional reporting by Gregory Meyer in New York