Two current and one former JPMorgan Chase employees have been arrested and charged by the FBI for their alleged participation in a racketeering conspiracy in connection with the manipulation of the markets for precious metals.
Michael Nowak, 45, and Gregg Smith, 55, are on leave, making them the third and fourth JPMorgan employees to be connected to the criminal investigation, which has resulted in guilty pleas from two former JPMorgan metals traders.
Christopher Jordan, 47, who left the company in 2009, was an executive director and trader on JPMorgan’s precious metals desk in New York.
All three were arrested as part of a spoofing investigation. Spoofing involves placing bids to buy or offers to sell contracts with the intent to cancel them before execution.
By creating an illusion of demand, spoofers can influence prices to benefit their market positions.
‘The defendants and others allegedly engaged in a massive, multi-year scheme to manipulate the market for precious metals futures contracts and defraud market participants,’ said Assistant Attorney General Brian A. Benczkowski.
Authorities said the alleged criminal activity spanned over eight years and involved thousands of unlawful trading sequences.
Nowak is a managing director and global head of base and precious metals trading in New York for the bank, according to his LinkedIn profile.
According to the source, Nowak was placed on leave around late August. Smith was an executive director and trader on JPMorgan’s precious metals desk in New York.
Authorities said in the thousands of sequences, the employees ‘placed deceptive orders for gold, silver, platinum and palladium futures contracts traded on the New York Mercantile Exchange Inc and Commodity Exchange Inc, which are commodities exchanges operated by CME Group Inc’.
‘This false and misleading information was intended to, and at times did, trick other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling precious metals futures contracts at quantities, prices and times that they otherwise likely would not have traded’, the indictment alleges.
JPMorgan, one of the largest gold trading banks in the world, said in an August regulatory filing it is ‘responding to and cooperating with’ investigations by various authorities, including the Department of Justice, relating to trading practices in the metals markets.
There has been a surge in spoofing-related prosecutions in recent years.
Bank of America Corp’s Merrill Lynch commodities unit, for example, paid $25million in July to resolve actions by the US Commodities Futures Trading Commission and Department of Justice for precious metals spoofing trades between 2008 and 2014.
The Department of Justice already secured guilty pleas from two former JPMorgan metals traders, Christiaan Trunz and John Edmonds.
Authorities said in the thousands of sequences, the employees ‘placed deceptive orders for gold (file image), silver, platinum and palladium futures contracts traded on the New York Mercantile Exchange Inc and Commodity Exchange Inc
The announcement of their pleas, in August 2019 and October 2018, respectively, indicated that they had collaborated on spoofing with their supervisors, who were not named.
Trunz placed ‘thousands’ of orders he did not plan to execute for gold, silver, platinum and palladium futures contracts between 2007 and 2016, and had learned to spoof from more senior traders, the Department of Justice said in August, adding that he was cooperating with ‘the ongoing investigation’.
Nowak and another former JPMorgan trader, Robert Gottlieb, are named as defendants in at least one other civil suit related to metals spoofing at JPMorgan.
A December 2018 class action complaint, for example, said that Edmonds, Nowak, Gottlieb and others made hundreds of spoof orders or more as ‘part of a conspiracy’ with the bank and other internal traders.
An attorney for Gottlieb did not respond to a request for comment. Koch Industries Inc, Gottlieb’s last known employer, did not immediately respond to a request for comment.
JPMorgan has also been sued separately by a group of investors, who said they lost money as a result of the bank spoofing its trades.
In one of the lawsuits brought against the bank by Daniel Shak, a metals trader, Shak estimated he suffered immediate losses of around $25million after he was forced to liquidate his position as a result of JPMorgan’s market manipulation, a court document showed.
The civil suits against JPMorgan have been stayed pending the Department of Justice probe.
Attorneys for Nowak did not respond to a request for comment.
A call to Smith’s number at the bank was answered by an employee at the metals desk who directed questions to the bank’s public relations department. A spokesman for the Department of Justice declined to comment.
All three defendants were charged with one count of conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity; one count of conspiracy to commit wire fraud affecting a financial institution, bank fraud, commodities fraud, price manipulation and spoofing; one count of bank fraud and one count of wire fraud affecting a financial institution.
In addition, Smith and Nowak were each charged with one count of attempted price manipulation, one count of commodities fraud and one count of spoofing.