A federal jury in Chicago convicted two former traders on JPMorgan’s precious metals desk who had been accused of rigging gold prices, finding they used deceptive orders to manipulate prices.
The convictions are the capstone of a seven-year Justice Department campaign to punish a style of deceptive trading in the futures markets known as spoofing. The quick-fire strategy was prevalent at some Wall Street banks before Congress outlawed counterfeiting in 2010, and persisted even after it was banned, according to prosecutors.
JPMorgan paid $920 million in 2020 to settle regulatory and criminal charges against the bank over trader conduct.
After deliberating for more than eight days, the jury convicted Gregg Smith, once the bank’s top gold trader, and Michael Nowak, the former head of its precious metals desk, on charges including forgery and fraud electronic A sales executive working with them, Jeffrey Ruffo, was acquitted.
Spoofing is defined as sending orders that traders intend to cancel. Mock orders are a ploy to trick the market into thinking that supply or demand has changed. This causes other merchants to update their prices, benefiting the spoofer.
Prosecutors used charts of trades and warrants to show a pattern they said was forgery. Proving the case was more difficult than in some previous counterfeiting trials because the Justice Department did not have chats or other messages to reveal the traders’ intent for their orders. In previous counterfeiting cases, prosecutors found emails showing traders bragging about counterfeiting.
The case against Ruffo was also different: he was not a merchant, but he was nevertheless accused of participating in a conspiracy.
The jury acquitted all three defendants of conspiracy and racketeering charges. The latter count indicated that prosecutors believed the precious metals desk essentially operated as a criminal enterprise within JPMorgan.
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David Meister, Nowak’s attorney, said: “While we are pleased that the jury acquitted Nowak of racketeering and conspiracy, we are extremely disappointed in the jury’s verdict overall and will continue to seek to vindicate his rights in court.”
Guy Petrillo, Ruffo’s attorney, said, “We have always believed in Jeff’s innocence, and we are grateful that these unfortunate charges are behind him.” Attorneys for Smith did not return a request for comment.
In addition to the charts, prosecutors used a trio of cooperating witnesses (former traders at JPMorgan or other banks) who testified over three weeks about how they falsified and watched Smith or Nowak do the same to get better prices on the gold futures trading. and make more money for the bank.
Smith was a quick-fire trader who used his mouse to manually enter and cancel orders so quickly that his colleagues joked that he needed to put ice on his fingers to cool them down, according to trial testimony. Smith faked “all the time,” according to Christian Trunz, a former junior trader who pleaded guilty in 2019 and testified that he learned the tactic by looking over Smith’s shoulder.
Smith’s lawyers told jurors that prosecutors cherry-picked a handful of trades to concoct a misleading theory of why he traded so quickly and so successfully.
Nowak was head of JPMorgan’s precious metals desk during the period examined by prosecutors. He also counterfeited, but less than Smith, according to the merchants who testified.
Prosecutors alleged that the forgery was critical to JPMorgan’s ability to serve hedge fund clients such as Moore Capital Management, Soros Fund Management and Tudor Investment Corporation. Ruffo, who was acquitted, was the bank’s salesman dealing with these big traders and sometimes encouraged the falsification to get them better prices, according to John Edmonds, a former JPMorgan trader who pleaded guilty in 2018 and testified before prosecutors.
Defense attorneys during the trial sought to undermine the credibility of the cooperating witnesses, pointing out that they had misled authorities in the past about their business. Edmonds admitted to lying to FBI agents when they first approached him about his business. Trunz admitted to lying to JPMorgan’s compliance team about the forgery in 2016.
Nowak’s lawyers said the charges against him were not credible. He said he traded differently than Smith and used gold futures to offset the risk of his options positions, they said. After a JPMorgan trader in London was fired for forgery in 2013, Nowak told his traders that if any of them were doing the same, he wanted to know.
The DOJ’s fraud section, which tried the case, won convictions in two earlier counterfeiting trials in Chicago, where the futures exchange operated by CME Group is based. Former gold and silver traders at Deutsche Bank and Bank of America were convicted of counterfeiting-related offenses in 2020 and 2021, respectively.
In the Deutsche Bank case, the defendants were sentenced to one year and one day in prison. The former Bank of America traders have not been convicted. Smith and Nowak will be sentenced at a future date.
Write to Dave Michaels at dave.michaels@wsj.com
This article was published by Dow Jones Newswires, a service of the Dow Jones Group
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