Ex-JPMorgan Gold Traders Get Prison for ‘Prolific Spoofing’

The former head of JPMorgan Chase & Co.’s precious-metals desk and his top trader were sentenced to prison for spoofing, fraud and attempted market manipulation.

(Bloomberg) — The former head of JPMorgan Chase & Co.’s precious-metals desk and his top trader were sentenced to prison for spoofing, fraud and attempted market manipulation.

Michael Nowak, who ran gold and silver trading at the bank, and trader Gregg Smith were sentenced Tuesday in Chicago by US District Judge Edmond Chang. Nowak received a term of one year and one day while Smith was given two years, the stiffest sentence yet in a recent government crackdown on questionable trading practices.

Both men were convicted at a trial last year. Smith, 59, was described as “the most prolific spoofer that the government has prosecuted to date” while Nowak, 49, has been called “the boss” behind the scheme.

In imposing sentence, the judge said Smith and Nowak clearly knew what they were doing was wrong.

“This is a serious offense that you committed,” Chang said to Nowak. “What happened here was the equivalent of putting out lies — and many lies — into the market. Market integrity is a crucial component to the financial markets. These lies moved the market. It’s not like they had zero impact.”

Read More: JPMorgan Gold Traders Found Guilty After Long Spoofing Trial 

The prison sentences were intended to “send a message” that market manipulation will be punished, the judge said. “I’m trying to deter all forms of financial fraud in the market,” he said. 

Chang ordered Nowak to start his sentence on Oct. 23 and Smith on Jan. 15. Lawyers for both men said they planned to appeal their convictions.

Smith and Nowak “used their positions as some of the most powerful traders in the worldwide precious metals markets to engage in an egregious effort to manipulate prices for their benefit,” Acting US Assistant Attorney General Nicole M. Argentieri said in a statement, adding the Justice Department was committed to holding “accountable those who engage in fraud and manipulation that undermines the investing public’s trust in the integrity of our commodities markets.”

Prosecutors had initially sought sentences of six years for Smith and five years for Nowak, but on Tuesday said they were revising those down to around two years. Both men’s lawyers argued that they should be spared jail because neither gained personally from the spoofing.

The JPMorgan case is part of a crackdown by federal prosecutors on illegal spoofing, where traders place bogus orders to move prices up or down and then quickly cancel them before they can be executed. Smith and Nowak used the technique to manipulate gold and silver prices from 2008 to 2016.

Convictions for Smith, Nowak and a third trader who was found guilty in November, Christopher Jordan, capped a string of wins by prosecutors in spoofing cases targeting some of Wall Street’s biggest banks, including Bank of America Corp., Deutsche Bank AG and Morgan Stanley. Two former Deutsche Bank and two former Bank of America traders previously each received one-year sentences.

JPMorgan, the largest US bank, agreed in 2020 to pay $920 million to settle the Justice Department’s allegations against it — by far the biggest fine by any financial institution accused of market manipulation since the 2008 global financial crisis. 

Read More: Spoofing Is a Silly Name for Serious Market Rigging: QuickTake

Prosecutors charged several members of the team Nowak led at JPMorgan. Three of them pleaded guilty and testified against Nowak and Smith. The witnesses described how Nowak and Smith routinely placed huge buy and sell orders they never intended to execute — part of their strategy to push prices in the direction that would profit the bank.

Christiaan Trunz, a former Smith protege and one of the traders who pleaded guilty and cooperated, told jurors that he learned to spoof by watching Nowak and Smith for years. When Trunz came under scrutiny for his own spoof trades, he said Nowak coached him to lie to compliance officials and later counseled him against pleading guilty as prosecutors were preparing criminal charges against top executives on the trading desk.

Trunz testified that Smith was so fast at placing and canceling bogus orders that his colleagues would joke that he needed to put ice on his fingers to cool them down.

“This was an open strategy on the desk,” said Trunz, who sat next to Smith and watched him click his computer mouse rapidly to place and cancel trades. “It wasn’t hidden.”

Read More: JPMorgan Trader Spoofed So Fast He Should Ice His Fingers

Spoofing was common in the commodity world, where traders would place a buy or sell offer they never intended to executive — hoping to manipulate prices in the direction they wanted to make a profit. The practice became illegal after passage of the 2010 Dodd-Frank Act, which included several banking and market reforms in the wake of the financial crisis.

At trial, Smith’s lawyer said his client’s orders were legitimate, and that there were other explanations to buy and sell precious metals contracts at the same time on behalf of customers. 

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago).

(Updates with comment from judge, statement from Justice Department official.)

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