JP Morgan Big Hitters Face Jail Time

This week sees the big hitters of JP Morgan facing jail time for manipulation of precious metals over the last decade. Given that not a single banker went to jail in the aftermath of the GFC, any actual time behind bars for the trio of Michael Nowak, Gregg Smith and Jeffrey Ruffo would send a powerful message to major commercials with heavy paper shorts on the COMEX. All of them have been charged before, but the banksters have managed to avoid the long hand of the law until now.  

The key concept is ‘Spoofing’, which is where a large number of trades are placed with no intention of any of them ever being executed. The aggregate of these market signals creates a false picture of demand or an exaggerated sense of pessimism in the market. As a major bank with inside knowledge of where concentrations of stop-loss limit orders are built up, they were able to force automatic selling of large numbers of market participants by providing the initial stimulus for the price to drop, and then buying back positions later at depressed prices. Much of the trading has been happening in low volume periods when Asian markets and the London market are closed. 

The trial is expected to last for five weeks, with prosecutors calling on three other former traders to testify against their old colleagues acting as cooperating witnesses. Each of these former JP Morgan employees have previously pleaded guilty to related charges. There is also scope for victims of the manipulation to stand trial.

One such former employee is John Edmonds, who worked at the bank until 2017. In a statement, he explained: “Our job was to do whatever it takes to make money,” and using spoof trades to manipulate prices for all sorts of precious metals was an almost daily method for generating profit. “Everyone at the time did it on the desk and it worked.” He was taught how to ‘spoof’ while at the bank. While the technique didn’t always work, it worked well enough that almost everyone on the trading desk made use of it on a weekly basis. Edmonds was the first trader to cooperate with authorities, he pled guilty in 2018. 

Michael Nowak has been the Global Head of Base and Precious Metal Trading since 1996, not a low level fall guy. Jeffrey Ruffo, was previously executive director and salesperson 2008-2017) on the bank’s Precious Metals desk in New York and hedge fund specialist. Gregg Smith, gold trader was charged previously alongside Nowak in 2019. It isn’t denied by either side that the Wall Street bank engaged in spoofing as a core part of their business, doing it more than 50,000 times over the decade from 2008 to 2018. By using these strategies, the team were able to make massive profits

Federal Prosecutors have argued this week that the precious metals trading desk of JP Morgan Chase & Co. has been manipulating gold and silver markets for the benefit of the bank and its clients for years. In 2019 the usual suspects were charged along with Christopher Jordan (another executive director) for defrauding customers and conspiracy to manipulate markets over multiple years. The bank was fined $920 million, but incredibly have been able to continue as the custodians of SLV, the largest NYSE listed ETF tracking the silver spot price.

They are facing criminal charges under the 1970 Racketeer Influenced and Corrupt Organizations Act - more commonly used against the Mafia than a wall street bank. Specifically, the charges allege that the traders scammed the market for years with ‘spoofing’ trades. The three are facing up to decades in actual served jail time, rather than just a slap on the wrist.

The defendants lawyers argue that the orders were certainly made, and cancelled, but without proof of what was going through the traders minds when they made the trades, it can’t be proven beyond a reasonable doubt that they were never planning to go through with the trades.

However, witnesses earlier this week included Christopher Jackman, a consultant hired by the Department of Justice to analyse the raw data sources from the Chicago Mercantile Exchange (CME), and the chat logs from JP Morgan traders, show that they knew exactly what they were doing, and could move the markets at their will. They detailed specific sequences where the orderbook of JP Morgan made up more than a third of all of the buy or sell orders, with sequences being executed within less than a minute in total.

The precious metals world will be watching closely as money is no object for those chosen few who have the resources to manipulate the price of physical metal through derivatives that outnumber the real underlying metal by a factor of a minimum of 100:1. Significant jail time and potentially even the banning of participation in the market by corrupt and criminal actors may lead to… free market price action. 

In the meantime, gold and silver are available at prices that have cooled significantly over the last week either online, over the phone or in store.