A court in Chicago convicted the former head of the JPMorgan Chase & Co. precious-metals business, Michael Nowak, and his top gold trader Gregg Smith, of manipulating the gold markets for profit for years. It was a win for the government in a long crackdown on what it refers to as the act of spoofing orders to manipulate commodity prices.
The traders were found guilty by a federal jury after a three week trial and eight days of deliberations. Prosecutors presented to the court evidence including detailed trading records, chat logs, and testimony by fellow traders which together painted a picture of Nowak and Smith used fake orders to move the prices of precious metals up and down prior to engaging in trades between 2008 and 2016.
A third defendant, Jeffrey Ruffo, who was a salesman, and argued he never placed any trades, was acquitted of charges he took part in the conspiracy.
The case was the biggest yet brought by the government in its crackdown on spoofing. Nowak, the managing director in charge of the desk, and Smith, his top trader, were both convicted of fraud, spoofing, and market manipulation. Although the government maintained the precious metals desk at JP Morgan was being run as a criminal conspiracy, the jury acquitted all defendants of a separate racketeering charge, due to a lack of documented communications showing intent.
During closing arguments, prosecutor Avi Perry said, “They had the power to move the market, the power to manipulate the worldwide price of gold.”
Nowak and Smith will be sentenced next year, according to US District Court Judge Edmond Chang. Each could receive decades in prison, though they may be sentenced to far less. In a previous case, two Deutsche Bank traders who were convicted of spoofing were only sentenced to a year in prison.
Spoofing was made illegal under the Dodd-Frank Act in 2010. It involves traders making numerous “spoofed” trades to alter the prices of commodities, before making a final trade at the manipulated price. Then the traders cancel the initial spoofed orders before they close and are completed, so they do not have to make any trades at unmanipulated prices. They leave the final trade open, which then closes at the manipulated price, defrauding the party on the other side of the trade.
Nowak’s lawyer, David Meister, said in an emailed statement, “While we are gratified that the jury acquitted Mr. Nowak of racketeering and conspiracy, we are extremely disappointed by the jury’s verdict on the whole, and will continue to seek to vindicate his rights in court.”
Guy Petrillo, Ruffo’s lawyer, said in an emailed statement, “Mr. Ruffo, his family and we always believed in Jeff’s innocence and are grateful that these unfortunate charges are now behind him.”
In 2020, JP Morgan paid $920 million to settle Justice Department spoofing allegations against it. It was the biggest fine by any institution accused of market manipulation going back to the financial crisis.
The Justice Department has now convicted 10 traders at Wall Street financial institutions, including JPMorgan, Merrill Lynch & Co., Deutsche Bank AG, The Bank of Nova Scotia, and Morgan Stanley.
Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division said in a statement, “Today’s conviction demonstrates that no matter how complex or long-running a scheme is, the FBI is committed to bringing those involved in crimes like this to justice.”
This had been a closely watched case. Phil Streible, the chief market strategist at Blue Line Futures said, “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. 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.”
The trial had featured testimony from former co-workers who said they participated in or had knowledge of the spoofing activity. John Edmonds and Christian Trunz, two traders, testified all three defendants were involved in market manipulation at JPMorgan. Corey Flaum, another trader, testified Smith and Ruffo had engaged in the same behavior at Bear Stearns, before it was acquired by JPMorgan in 2008.
The case was US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)
