Justice Department Charges Three Traders Over Alleged Metals Contracts Manipulation -- Update

By Dave Michaels and Dave Sebastian

Two traders and one former executive at JPMorgan Chase & Co. were indicted and charged with manipulating prices for precious-metals futures contracts over an eight-year period.

Gregg Smith, Michael Nowak and Christopher Jordan were criminally charged in Chicago federal court and became the latest targets of a government campaign to punish a type of illicit trading known as spoofing. The Justice Department said the scheme was focused on the bank's precious-metals desk, involving offices in New York, London and Singapore, and involved thousands of fraudulent orders intended to benefit the traders' positions.

In addition to spoofing and other federal offenses, the indictment charged all three men with racketeering, a claim that is more typically found in cases against organized crime entities. Authorities said it represents the first time that defendants accused of spoofing electronic derivatives markets have been charged with racketeering.

"Based upon the fact it was conduct that was widespread on the desk, it was engaged in thousands of episodes, that it is precisely the kind of conduct that the RICO statute is meant to punish," Assistant Attorney General Brian Benczkowski said Monday.

Spoofing involves submitting orders to exchanges that traders have no intention of fulfilling, according to regulators. The problematic orders are typically sent in large volume on one side of the market, creating the appearance of greater interest in buying or selling. When spoofers get the trade they want, they cancel the other orders, sometimes leaving their counterparties with a loss.

JPMorgan placed Mr. Smith, 55 years old, and Mr. Nowak, 45 and a managing director at the firm, on leave, said a person familiar with the matter. Mr. Jordan, 47, left the bank in 2009 and subsequently worked as a metals trader at other banks.

An attorney representing Mr. Smith declined to comment. A lawyer for Mr. Jordan couldn't be reached. Lawyers for Mr. Nowak said in a statement that he plans to fight the charges and expects to be exonerated.

"It's truly regrettable that the DOJ decided to go forward with a prosecution of Mike Nowak, who has done nothing wrong," said the lawyers, David Meister and Jocelyn Strauber of Skadden, Arps, Slate, Meagher & Flom LLP.

While the CFTC has settled numerous civil cases related to spoofing charges, prosecutors have a mixed record when it comes to advancing criminal charges.

A jury in Connecticut last year acquitted Andre Flotron, a former UBS Group AG metals trader accused of spoofing futures markets. The Justice Department in April dropped spoofing charges against another defendant, Jitesh Thakkar, after a federal jury in Chicago couldn't reach a unanimous verdict in his trial.

Mr. Benczkowski said Monday that the case against the JPMorgan traders is stronger than prior ones because the alleged misconduct went on for many years, and the government has the backing of "multiple cooperating witnesses."

The JPMorgan traders earned millions of dollars and imposed losses on counterparties totaling tens of millions, said Mr. Benczkowski. He declined to be more specific about the alleged gains from fraud on a call with reporters.

The indictment includes some electronic messages attributed co-conspirators of Messrs. Smith, Nowak and Jordan. One of the men, Christian Trunz, pleaded guilty last month in Brooklyn federal court to one count of conspiracy to engage in spoofing and one count of spoofing. An attorney for Mr. Trunz didn't return a phone message seeking comment.

"So you know its gregg bidding up on the futures trying to get some off, " Mr. Trunz wrote in one message, according to the indictment.

The response from an alleged co-conspirator: "sweet mate."

The Commodity Futures Trading Commission on Monday separately filed a civil enforcement action in the Northern District of Illinois against Mr. Nowak and Mr. Smith.

The other co-conspirator identified in the criminal case, John Edmonds, pleaded guilty in October 2018 to commodities fraud and conspiracy to commit wire fraud, commodities fraud, price manipulation and spoofing.

In a separate statement on Monday, the CFTC said Mr. Trunz settled its civil charges and doesn't face any immediate financial penalties because of his cooperation with the regulatory agency.

Write to Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

September 16, 2019 15:25 ET (19:25 GMT)

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