See Chapter 4 of my first book "This Time It's Different - Not!" that describes how commodities get manipulated. I wrote about this more than a decade ago... and it's still going on. Aivars Lode
JP MORGAN Chase & Co. agreed to pay $920 million and admit misconduct tied to manipulation of precious-metals and Treasury markets, regulators said Tuesday.
The settlement resolves investigations by the Justice Department, Commodity Futures Trading Commission and the Securities and Exchange Commission. The fine is the largest the CFTC has ever imposed for spoofing, a type of market manipulation, the agency said.
“Spoofing is illegal—pure and simple,” CFTC Chairman Heath Tarbert said. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are.”
The settlement is just the latest move from prosecutors and regulators that began cracking down on spoofing in 2014. Since then, the Justice Department has charged 20 people with spoofing-related crimes, and banks and other financial institutions have collectively paid more than $1 billion in fines tied to civil and criminal spoofing probes.
The agreement announced Tuesday is particularly notable because it involved claims that traders spoofed to manipulate the price of Treasury securities, one of the largest and most liquid trading markets in the world.
Spoofers enter and quickly cancel large orders in an effort to deceive others about supply and demand. The tactic can move prices in a direction the spoofer favors.
Four former JPMorgan precious-metals traders were charged last year with crimes tied to spoofing, including racketeering, an offense more typically found in cases against organized crime entities. The traders have pleaded not guilty and are fighting the charges. Two other ex-JPMorgan traders pleaded guilty in 2018 and 2019 to crimes tied to spoofing of precious metals futures.
The unlawful trading in gold, silver and other precious metals involved a total of 10 traders, according to Justice Department documents made public Tuesday.
Two traders who formerly worked at Deutsche Bank AG were convicted last week in Chicago federal court of wire fraud tied to spoofing allegations. The traders were acquitted on one count of conspiracy.
Congress outlawed spoofing in the 2010 Dodd-Frank financial overhaul law, making it easier for regulators and prosecutors to punish conduct they believed was manipulative. The Justice Department’s Fraud Section, based in Washington, has been particularly active going after individual traders accused of spoofing.
“Dodd Frank made it very clear, that this is against the law to do and there are now personal consequences—you can go to jail if you spoof,” said Travis Schwab, chief executive of Eventus Systems Inc., a trading surveillance and risk-management software provider. “That really ratchets up the bar who is involved in these cases—that goes to Justice being involved as opposed to just the regulator—and it ratchets up the consequences.”
The agencies’ announcements confirm news of the fine that was first reported last week. The claims include allegations that JPMorgan traders manipulated Treasury securities from 2015 to 2016, the SEC said in a settlement order.
The Justice Department said JPMorgan agreed to a deferred prosecution agreement through which the bank admitted wrongdoing on its precious-metals and Treasuries trading desks. The deal suspends a prosecution of the bank on two counts of wire fraud and requires JPMorgan to cooperate with related investigations and continue improving its compliance and oversight programs.
The SEC’s investigation involved spoofing in the $20 trillion market for Treasury bonds and notes and other securities. The Justice Department’s settlement also covered that conduct.
“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”
The spoofing spanned at least eight years and involved hundreds of thousands of misleading orders in precious metals and U.S. Treasury futures contracts, the CFTC said.
The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits illegally earned.
Five former traders on the bank’s Treasurys desk were involved in spoofing from 2008 to 2016, according to Justice Department documents, which didn’t name the individuals. The traders knowingly entered orders on electronic trading platforms they didn’t intend to fill, hoping the prices would trick other traders into thinking supply or demand was changing.
The traders sometimes entered the misleading orders on one trading venue, hoping to ease the fulfillment of orders on another platform at a better price. Spoofing often tricks computer models that trade using algorithms and may not be able to judge whether orders look genuine or not, regulators say.
Traders sometimes bragged about spoofing Treasury prices in messages they sent to one another, according to prosecutors.
“A little razzle-dazzle to juke the algos,” one trader wrote in a message in 2012, according to prosecutors.
The conduct caused losses of $106 million to others trading Treasury debt and Treasury futures, the Justice Department said. The misconduct in the futures market for precious-metals caused losses of $205 million, prosecutors said.
The SEC said the conduct ended in January 2016, after “certain personnel changes” were made on the desk that traded Treasury securities.
By Dave Michaels - Wall Street Journal
