Three Former JPMorgan Metals and Gold Traders Face Criminal Charges and Jail Time.
They are suspected of manipulating prices between 2008 and 2016.
“Tell Gregg to wake up!”. On January 18, 2012, a disgruntled hedge fund comes to Jeffrey Ruffo, JPMorgan's star salesman in charge of hedge fund clients. He is selling 93,200 ounces of gold at a price that he is not happy with because it is too low.
Gregg Smith, the star trader of the American bank, comes into play.
The operator, who clicks faster than his shadow, enters a flurry of buy orders, which are then quickly canceled. The goal? To make the market believe in the existence of a buying current. The market participants were fooled and the price went up.
The hedge fund, a client of the bank, thus benefits from a higher selling price, created in an artificial and ephemeral manner. Manipulating the order book by unbalancing it punctually in one direction (long or short) was one of the specialties of JPMorgan's traders, the illusionists of the Chicago markets.
The incessant clicking of Gregg Smith, who spent his time entering and then canceling orders at high speed, created a background noise on the desk.
Lucrative manipulations
Two former JPMorgan traders and a salesman are thus suspected of having manipulated prices on the Chicago markets from April 2008 to January 2016, mainly on metals and gold, but sometimes also on American government bonds. With success.
In seven years, phenomenal profits and bonuses were made by the traders:
23.7 million dollars for Michael Nowak, head of metals trading.
9.9 million for Gregg Smith, the gold specialist.
10.5 million for Jeff Ruffo.
The bank also benefited greatly from these lucrative operations. JP Morgan pocketed between 100 and 200 million dollars per year on metals over this period.
According to the justice, it owes part of its profits to this old technique of price manipulation consisting of placing orders and then canceling them, which qualified as spoofing and was only prohibited by Congress in 2010. Trading firms, including high frequency, bank traders, and speculators have already been fined in the United States for this type of price manipulation, including JPMorgan ($920 million in 2020).
Conspiracy and racket
However, this is the first time that the U.S. justice system has deemed it to be a federal crime, conspiracy, and racketeering. The traders acted in concert to the detriment of the markets and other investors. They face years in prison if convicted. The trial that opened in Chicago on July 8, 2022, is turning into a showdown. Given the risks involved, they all deny responsibility or dispute the materiality of the offenses.
They all plead not guilty, and for good reason. In 2016, Michael Coscia, a trader at Panther Energy Trading, was sentenced in Chicago to three years in prison for spoofing and commodities fraud, on fewer and lesser charges than the defendants.
Christian Trunz, a former JPMorgan metals trader between 2007 and 2019, gave damning testimony. Intercepted by the FBI in late 2018 after returning from his honeymoon in Puerto Rico, he quickly realized he'd better cooperate with the law. He admitted at trial that spoofing was a way to mislead other players, especially automatic trading programs.
This technique had the full approval of the head of the metals desk at JPMorgan, Michael Nowak. Nowak had even given tips on how to deceive the bank's investigators when it was investigating suspicious movements in platinum and palladium created by its traders.
Manipulations were also carried out against JPMorgan's clients
The bank dealt with the largest hedge funds, such as George Soros', Louis Bacon's Moore Capital, and Paul Tudor Jones's Tudor. Jeffrey Ruffo would engage with some of his clients to get them the best execution prices for their orders, ensuring the bank very high volumes and commissions.
Thus, when a hedge fund wanted to sell a significant quantity of contracts, traders would try to artificially push up the prices beforehand, so that the fund could sell at the highest price.
Sometimes the traders also acted on behalf of the bank, against their client. November 18, 2008, is a good example. One of JPMorgan's traders traded a derivative product with a counterparty. If the price of an ounce of gold stays below $760 the next day, the bank risks a loss of $1 million. “It's time to play roulette...”, says Michael Nowak in a message to his teams. Once again, the “croupier” Gregg Smith managed to make the casino win: the price miraculously closed at 762 dollars.
Some reading
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