FX waits as former JPMorgan Chase gold trader is sentenced to prison

The former head of JPMorgan Chase's precious metals division and his top gold trader have been jailed for fraud, fraud, and attempted market manipulation.

The so-called "spoofer" is mainly the act of making false quotes during the trading of stocks or futures markets and then quickly withdrawing orders, which in turn leads investors to misjudge the situation and misplace orders. On Tuesday, U.S. District Judge Edmond Chang sentenced the bank's head of gold and silver trading, Michael Nowak, and trader Gregg Smith in Chicago.Prosecutors allege that the two men used a fraudulent trading pattern between 2008 and 2016 to profit from futures contracts such as gold and silver, causing losses of hundreds of millions of dollars to market participants.

Novak was sentenced to one year and one day and Smith to two years, the harshest sentences since the US government cracked down on suspicious trading practices. The two men were found guilty at a trial last year. Smith, 59, was described as"The most prolific con man prosecuted by the government to date"Novak, 49, has been called the "boss" of the scam.

In sentencing, the judge said Smith and Novak clearly knew what they were doing was wrong. Chang told Novak: "You have committed a serious crime. What you have done amounts to spreading lies to the market, and many lies. Market integrity is an important part of financial marekt. These lies have affected the market".

The judge said the prison sentence was to "send a message" that market manipulation would be punished. "I am trying to stop all forms of financial fraud in the market," he said.

In a statement, Nicole M. Argentieri, the acting assistant attorney general, said Smith and Novak had "used their position as the most powerful traders in the global precious metals market to engage in an outrageous effort to manipulate prices for their own benefit," adding that the Justice Department was committed to holding accountable "those who engage in fraudulent and manipulative practices that undermine the investing public's trust in the integrity of our commodities markets."

Prosecutors initially wanted six years for Smith and five for Novak, but said Tuesday they reduced the sentence to about two years. Lawyers for both men argued they should not have been sentenced to prison because neither of them had personally benefited from the deception. They plan to appeal the verdict.

The JPMorgan case is part of a crackdown by federal prosecutors on illegal fraud.Traders place false orders, driving prices up or down, and then quickly cancel orders before they are executed.Smith and Novak used the technique to manipulate gold and silver prices between 2008 and 2016.

The convictions of Mr. Smith, Mr. Novak and Christopher Jordan, another trader convicted in November after two former Deutsche Bank traders and two former Bank of America traders were each sentenced to one year in prison, have handed prosecutors a series of victories in fraud cases against some of Wall Street's biggest banks, including Bank of America, Deutsche Bank and Morgan Stanley.

JPMorgan Chase, the largest US bank, agreed in 2020 to pay $920 million to settle a Justice Department complaint over alleged manipulation of precious metals futures contracts and US Treasury futures contracts, the largest fine against the Financial Institution Group accused of market manipulation since the 2008 global financial crisis. An investment banker familiar with the investigation has revealed that the "spoofing" behavior of JPMorgan traders mainly occurred in two trading links:

One is to place false orders before the announcement of the gold and silver fixing price (benchmark price) and "artificially" affect the market supply and demand relationship, so that the fixing price is as close as possible to the "wishes" of these traders, ensuring that their gold and silver derivatives trading positions have a sudden increase in profits;

The second is to automatically issue a large number of false trading orders through high-frequency trading software during trading hours (first placing orders and then quickly canceling them), causing many market participants to misjudge the situation and make "wrong trades", allowing them to take full advantage of market mispricing to "profit".

The CFTC investigation into silver manipulation by JPMorgan began in 2008, when silver futures plunged more than 24 per cent against gold futures during the March-October subprime crisis.

Prosecutors charged several members of Mr. Novak's JPMorgan-led team. Three of them pleaded guilty and testified against Mr. Novak and Mr. Smith. Witnesses described how Mr. Novak and Mr. Smith routinely placed huge buy and sell orders but never intended to execute them - a tactic to push prices in the bank's favor.

Christiaan Trunz, a former prote ́ ge ́ of Smith and one of the traders who pleaded guilty, told jurors that he also learned about fraud by watching Novak and Smith for years. When Trenz came under scrutiny for his fraudulent trading, he said Novak instructed him to lie to compliance officials and later advised him not to plead guilty because prosecutors were preparing to file criminal charges against executives in the trading unit.

He testified that Smith placed and cancelled fake orders so quickly that his colleagues would joke that he needed to put ice on his fingers to cool them down. "It's an open trading strategy," said Trenz, who sat next to Smith and watched him quickly tap his computer mouse to place orders and cancel trades.

Fraud is common in commodities, where traders make buy or sell offers they never intended to execute, hoping to manipulate prices in the direction they want to profit.The practice became illegal after the passage of the Dodd-Frank Act in 2010, which included several banking and market reforms following the financial crisis.

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