A former precious metals trader at JP Morgan Chase & Co. testified in court that his boss coached him to lie about price-manipulating orders to compliance officers, and advised him to not plead guilty to any charges as prosecutors prepared a case against the firm’s precious metals trading desk.

The testimony came as federal prosecutors in Chicago allege a group of corrupt traders and sales staff at JP Morgan’s precious metals desk was ripping off traders for years using a scheme to spoof orders for metals, and then stop the orders before they went through, in an effort to manipulate the prices of metals prior to making actual trades on behalf of clients.

Lucy Jennings, a prosecutor with the Justice Department’s fraud section told jurors, “This case is about a criminal conspiracy inside one of Wall Street’s largest banks. To make more money for themselves, they decided to cheat.”

The trial against three traders, including the head of the precious metals desk, Michael Nowak, is the latest move in a years-long crackdown the government has been engaged in to eliminate market manipulation and spoofing by high-level traders and big banks.

Unlike past cases alleging trading fraud, in this case the trio of defendants is being accused of a racketeering conspiracy, utilizing the 1970 Racketeer Influenced and Corrupt Organizations Act, the RICO act, which is commonly associated with being used against members of the Mafia and street gangs.

Trader Gregg Smith, executive director of sales Jeffrey Ruffo, as well as desk-head Nowak, have been charged with racketeering conspiracy, conspiring to commit price manipulation, wire fraud, commodities fraud and spoofing from 2008 to 2016. The charges will carry decades in prison for each defendant if they are convicted. Another trader is scheduled to go on trial in November.

Banned in 2010, spoofing orders involves placing massive orders for a commodity to manipulate prices, and then canceling the trades before they can execute. While canceling orders by itself is not expressly illegal, it is illegal if prosecutors can show it was knowingly done as part of a strategy to manipulate prices, and thereby defraud other traders.

Jennings told jurors, “When this trick works, there is somebody else on the other side of the deal that lost. Somebody got ripped off. We will prove that all three defendants knew from day one that this trading was wrong and did it anyways.”

The lawyers for Nowak and Smith hold that making and canceling orders is a standard practice, made necessary by a marketplace where computer generated algorithms are buying and selling commodities in one-millionth of a second. They maintain that to compete, traders have to constantly create and cancel orders, and that they routinely had both buy and sell orders open at the same time. They maintain the government has cherry picked trading data to make it appear they were performing a coordinated strategy of spoofing, but that in reality, looking at all the data, there was no consistency to how it was being done.

David Meister, Nowak’s attorney, said in his opening statement, “The government’s simple narrative doesn’t tell the full story — far from it.”

Meister went on to say he will show evidence which will prove the vast majority of market orders are canceled, and the average lifespan of an order is merely a couple of seconds.

The defense says it will also show there is no evidence in phone calls or chat logs proving what the defendants were thinking when making trades, and thus prosecutors will not be able to prove intent, or what the traders were thinking.

Jonathan Cogan, Smith’s attorney, said, “In order to win this case, the prosecution must prove beyond a reasonable doubt what was going on in Mr. Smith’s mind all those years ago.”

Ruffo’s lawyer says he will show his client was merely involved in sales, and worked with customers. He says Ruffo never placed any orders, wasn’t involved at all in trading execution, and that there was no linkage between profitability of trades and his company compensation.

Prosecutor Jennings however says electronic communications to be presented by the government will show collaboration designed to make sure the spoofed trades impacted the market in their client’s favor. She said the government will present testimony from other traders who worked under Nowak or the other defendants, including another trader who has pled guilty to price manipulation.

That witness appears to be Corey Flaum, a trader who worked with Smith and Ruffo at Bear Sterns before it was acquired by JP Morgan. Prosecutors allege the scheme began there, and that Smith and Ruffo brought the scheme to JP Morgan, where it was adopted by Nowak and others. Flaum pled guilty to attempted price manipulation in 2019.

The unique aspect to the technique brought from Bear Stearns was that traders, instead of placing one large order, would place numerous smaller orders, which in aggregate would have the desired effect, a technique the government refers to as layering. The multiple smaller orders, made in rapid succession, would then be immediately canceled once the order which was to be completed was placed.

Prosecutors allege Smith executed some 38,000 layering sequences, at roughly 20 per day. Nowak tried out the layering technique in 2009, and subsequently used it roughly 3,600 times.

Ruffo, who worked in sales, is alleged to have specifically instructed Smith on how he needed the market manipulated and where it needed to be before executing trades on behalf of clients, specifically at least two hedge funds, Moore Capital Management, and Tudor Investment Corp. Lawyers for Ruffo have said they may call traders from those hedge funds, as well as from another client, Soros Fund Management to testify about the transactions.

For now, prosecutors have called JP Morgan trader Christian Trunz, who spent more than a decade at JP Morgan. He has testified his boss, Nowak, coached him to lie about his actions to compliance officials, and later advised him to not plead guilty as prosecutors were moving in.

Trunz testified that spoofed orders he had placed in the platinum and palladium markets had ignited a four month probe by bank officials. He testified Michael Nowak advised him to mislead investigators when asked about his intent with the trades.

Trunz, 37, testified, “Mike made it clear to me that this was something that could get me fired,” despite the fact everyone at the trading desk was using the strategy. “I wanted to keep my job,” he continued, so lied to bank investigators.

Before meeting with investigators, Nowak told Trunz to say, “every order you put into the market you intended to trade,” despite the fact that was not true. Trunz testified that he and others routinely made large orders in gold and silver which they never intended to trade with the sole objective of manipulating the price. He added, “These trades were the exact trading pattern we’d used for years.”

Trunz went on to emphasize he understood he was being asked to lie and was uncomfortable with it, saying, “I was nervous, shocked. It was a coaching moment and it was, ‘OK. Got it.’ Mike, I think he liked me. This was a way for me to understand how I was going to get through this four-month compliance review and be relatively unscathed.”

After being confronted by FBI agents in an airport coming home from his honeymoon, Trunz said he denied any wrongdoing to the agents, but later became afraid he might be prosecuted. When he approached Nowack with his fears, he said, Nowak told him to stick to his story, saying, “You’re not going to turn around and plead now, are you? We all have our reasons for trading the way we did.” Trunz added, “My impression at the time was that he was trying to protect me, that whatever happens, we’re going to win…to keep me on board,”

On cross examination, defense attorneys pointed out, Trunz was never explicitly told to spoof, or instructed in the practice. Defense attorneys asked, “In all of the years you worked with Mr. Smith, he never once sat you down and in a single conversation said this is how you spoof? Never said I am trying to manipulate the market? Never heard him say I am going to rip people off?”

Trunz replied, “No,” to each question.

Trunz who pled guilty to spoofing conspiracy in 2019 and is cooperating, is the third former trader to testify at the trial.