Jail Time for JP Morgan Precious Metals Manipulators

The official press release from the US Justice department confirms that Gregg Smith and Michael Nowak have been found guilty and sentenced to two years and one year and one day respectively for manipulating the precious metals market. According to Bloomberg government prosecutors had originally wanted Smith to spend six years in jail, but this was reduced to 23 months for an undisclosed reason. Smith’s defence argued that he shouldn’t need to go to prison because he didn’t benefit personally. One wonders how they’d be able to prove that given that Smith received bonuses related to financial performance and he was only trading precious metals during that period. Similarly, Nowak was originally facing five years behind bars. This longer period was also mysteriously reduced down to a sentence of 12 months and one day.

The pair have also been fined $50,000 and $35,000 respectively for:

“engaging in fraud, attempted price manipulation, and spoofing as part of a market manipulation scheme that spanned over eight years, involved tens of thousands of unlawful trading sequences, and resulted in over $10 million in losses to market participants.” 

As per Bloomberg: Spoofing typically involves flooding derivatives markets with orders that traders don’t intend to execute to trick others into moving prices in a desired direction. The practice has become a focus for prosecutors and regulators in recent years after lawmakers specifically prohibited it in 2010. While submitting and then cancelling orders isn’t illegal, it is unlawful as part of a strategy intended to dupe other traders."

As we covered previously, the persistently low spot prices of precious metals (in the face of supply and demand fundamentals) have sent many miners to the wall as the costs of production remained higher than the spot price for extended periods. The “$10 million in losses to market participants” is not a realistic amount. When we covered the $200 million payday for the CFTC Whistleblower - we also covered why the US commodities watchdog would be able to offer up such a bounty in the first place. The scale and impact to market participants had already been demonstrated to be at least as much as close to $1 billion as that was JP Morgan’s fine when found guilty of spoofing and price-rigging

“As today’s sentencing demonstrates, the FBI and its partners remain committed to investigating and bringing to justice anyone who attempts to manipulate our financial markets for their own selfish gain,” said Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division. “In order to maintain economic security, investors in equity and commodities markets must have confidence that exchanges are operated in a transparent and equitable manner, and that investments are free from manipulation and fraud. Today’s outcome should serve as a reminder that the FBI remains highly focused on combatting bad actors conducting sophisticated fraud schemes targeting the securities and commodities markets.”

While the sentiment is appreciated, realistically the result will only encourage more bad practice as the jail terms and fines don’t really bear any relation to the personal profit these two traders have enjoyed over the last 15 years.  

The other question is why JP Morgan is still allowed to trade gold and silver futures when they have been found guilty at the highest levels of management. While the fraud was going on from approximately May 2008 until August 2016, Smith was an executive director and trader on JPMorgan’s precious metals desk in New York, and Nowak was a managing director and ran JPMorgan’s global precious metals desk. They were not rogue traders though,  as numerous former employees throughout their trading team testified back during the original trial in 2020.

Surely this organisation isn’t trustworthy enough to operate the NYSE:GLD and NYSE:SLV ETFs that claim to back their issued shares with gold and silver. If they were really serious about bringing confidence to markets that commodities aren’t fixed, they would make leveraged derivative trading illegal.

Perversely the upside is that buyers of physical gold and silver bullion have enjoyed possibly suppressed prices without the derivative risk.  As we saw very clearly in 2011 for silver, when their games break, as fundamental supply & demand inevitably overcome their tricks, the price gains can be spectacular. These prosecutions and now jail time may well see this becoming sooner rather than later.