In December 2018, a 30-year-old man was detained upon his arrival at Fort Lauderdale Airport and taken to a room where two FBI agents were waiting for him.
The perpetrator panicked and was already on high alert as one of his accomplices had recently pleaded guilty to the crimes. Christian Trunz was not a terrorist or drug dealer, but a mid-level precious metals trader returning from his honeymoon. Importantly, he was also a longtime employee of JPMorgan Chase & Co. the largest bullion-trading bank.
The FBI airport ambush described by Trunz was a crucial step in US prosecutors of JPMorgan's precious metals desk, leading up to last week's climax - the conviction on 13 counts of the man who was once the most powerful figure in the gold market, the desk's former global head Michael Nowak.
The case brought to light how JPMorgan traders, including Nowak and the bank's longtime top gold trader Gregg Smith, had for years allegedly manipulated the markets by placing bogus orders designed to defraud other market participants, mostly algorithmic traders whose high-speed activity had become a major source of frustration.
Nowak has become one of the highest-ranking bankers convicted in the US since the financial crisis, and he faces the prospect of decades in prison, although it could be far less.
Nowak's lawyers contend that Novak was not a "criminal mastermind," and said they would "continue to vindicate his rights in court." Smith's lawyer said during closing arguments last month that his client's orders were legitimate, and there are other explanations to buy and sell futures contracts at the same time on behalf of customers.
It took the government three weeks in court to convince the jury that Nowak and Smith were guilty. (Jeffrey Ruffo, a salesman who was tried with them, was acquitted.)
However, rumors of fraud had been hanging over the JPMorgan trading desk for at least a decade - many years before the FBI first approached Trunz in 2018.
Alex Gerko, the head of the algorithmic trading firm, complained back in 2012 about Smith's gold market activities to CME Group Inc. which owns the futures exchanges where the US alleged thousands of spoof trades took place. But Smith and Nowak continued working at the bank until 2019 when the US unsealed charges against them.
"The wheels of justice are moving, slowly," Gerko tweeted last month.
At the Justice Department, the path to JPMorgan began with a decision to begin a hunt for traders who made bogus offers to buy and sell commodities they never intended to execute. The criminal fraud unit hired data processing consultants to go through billions of lines of trades to spot patterns of market manipulators.
As they were examining the vast amount of data, certain traders stood out. Those traders worked at JPMorgan.
Nowak was arrested in September 2019, causing a shockwave in the metals world, but the pandemic meant it would be another three years until the trial finally took place.
The Justice Department's action against JPMorgan's highest-ranking bullion bankers has been noted in the gold and silver markets, where investors and bloggers have long accused the bank of a large-scale price manipulation scheme. These allegations sparked numerous Commodity Futures Trading Commission investigations, the most recent of which was closed in 2013 after no evidence of wrongdoing was found.
The case against Novak and Smith did not allege a systematic conspiracy to suppress prices, instead alleging that they spoofed markets over very short periods of time, and in both directions, to benefit JPMorgan's most important hedge fund clients.
While the convictions are a victory for prosecutors, the jury rejected the government's most sweeping charges under the Racketeer Influenced and Corrupt Organizations Act, or RICO - that these people were part of a conspiracy and that JPMorgan's precious metals division was a criminal enterprise.
At JPMorgan, Edmonds said the practice was referred to as "clicking" rather than spoofing, and the traders never discussed it as being illegal despite the firm's own compliance policies making it plain. Trunz even spoke of a running joke involving Smith, who would click his mouse so fast to place and cancel orders that his colleagues would urge him to cool down his fingers with ice.
In 2012, Gerco, who is the founder of quantitative trading company XTX Markets Ltd., complained to CME about Smith trading gold futures, quickly entering and canceling orders. CME launched an investigation that dragged on for three years before concluding that he was probably defrauding other participants in this way.
"It took a long time after 2010 to get consistent enforcement," Gerko said in a tweet, referring to the Dodd-Frank act in which spoofing was defined and made illegal.According to Edmonds, after another JPMorgan trader, Michel Simonian was fired in 2014 for spoofing, Nowak called his traders into his office to ask if they were doing the same. No one said anything. The incident shocked Edmonds, he said, as Nowak knew it had been going on for years.
Novak and Smith will not be sentenced until next year. For comparison, two Deutsche Bank AG traders convicted of spoofing in 2020 were each sentenced to about a year in prison.
Last week's conviction represents the pinnacle of the US Department of Justice's fight against the illegal trading practices known as spoofing. So far, prosecutors have managed to convict ten traders at five different banks.
JPMorgan has already paid $920 million to settle the spoofing allegations against it.
"Even though the jury rejected the conspiracy and RICO charges, they will consider this a win," Matthew Mazur, an attorney at Dechert LLP who defended one of the Deutsche Bank traders, said. "This is probably the end of the precious metals sweep that was done, but I do think there will continue to be cases."
Even after the crackdown, some market participants say spoofing still takes place. Previously, when commodity futures were traded in the pits, brokers had to trade face-to-face. Hiding behind a screen makes it much easier to place and pull orders at will.
"We still see spoofing on a regular basis," Eric Zuccarelli, an independent commodities trader who began working on the floor of the New York Mercantile Exchange in 1986, said. "But back then if a person spoofed everybody would come over and punch you in the face and the floor committee would come over and fine you for being a spoofer."
