JPMorgan slammed with $920m penalty over market manipulation

JP Morgan Chase
The actions of 15 traders caused losses of more than $300 million to other participants in precious metals and Treasury markets, according to court filings, leading the Commodity Futures Trading Commission to impose its biggest monetary penalty ever. [File: Bloomberg]

JPMorgan Chase & Co. admitted wrongdoing and agreed to pay more than $920 million to resolve U.S. authorities’ claims of market manipulation involving two of the bank’s trading desks, the largest sanction ever tied to the illegal practice known as spoofing.

Over eight years, 15 traders at the biggest U.S. bank caused losses of more than $300 million to other participants in precious metals and Treasury markets, according to court filings on Tuesday. JPMorgan admitted responsibility for the traders’ actions. The Justice Department filed two counts of wire fraud against the bank’s parent company but agreed to defer prosecution related to the charges, under a three-year deal that requires the bank to report its remediation and compliance efforts to the government.

The New York-based lender will pay the biggest monetary penalty ever imposed by the Commodity Futures Trading Commission, including a $436.4 million fine, $311.7 million in restitution and more than $172 million in disgorgement, according to a CFTC statement. The CFTC said its order will recognize and offset restitution and disgorgement payments made to the Department of Justice and Securities and Exchange Commission.

Allegations of spoofing on the bank’s precious metals desk emerged more than a year ago, in charges against several traders on the desk. But the settlement announced Tuesday also includes new allegations about spoofing by traders on the bank’s Treasuries desk.

The deal faults the bank for nearly eight years of manipulating prices of Treasury contracts, as well as trading in notes and bonds in the secondary market, that caused $106 million in losses. The government said five now-former JPMorgan traders executed thousands of deceptive trades. None of those traders have been charged publicly.

The accord also ends the criminal investigation of the bank that led to a half dozen employees being charged for allegedly rigging the price of gold and silver futures from 2008 to 2016. Two have entered guilty pleas, and three traders and a former JPMorgan salesman are awaiting trial. In all, according to the settlement deal, 10 JPMorgan traders caused losses of $206 million to other parties in the market.

“For nearly a decade, a significant number of JPMorgan traders and sales personnel openly disregarded U.S. laws that serve to protect against illegal activity in the marketplace,” said Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office.

JPMorgan, in a statement, said it doesn’t expect any disruption of service to clients as a result of the resolutions.

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, a co-president of JPMorgan. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”

The JPMorgan penalty far exceeds previous spoofing-related fines levied against banks, and is the toughest sanction imposed in the Justice Department’s years-long crackdown on spoofing.

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 canceling orders isn’t illegal, it is unlawful as part of a strategy intended to dupe other traders.

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

More than two dozen individuals and firms have been sanctioned by the Justice Department or the CFTC, including day traders operating out of their bedrooms, sophisticated high-frequency trading shops and big banks such as Bank of America Corp. and Deutsche Bank AG.

The Justice Department took a much more aggressive tack with JPMorgan by alleging that the bank hosted an eight-year market manipulation conspiracy with its precious metals desk as a criminal racketeering operation.

While other suspected market cheats have been charged with specific spoofing and manipulation offenses, the Justice Department accused JPMorgan metals traders under the 1970 Racketeer Influenced and Corrupt Organizations Act — a criminal law more commonly applied to Mafia cases than global bank probes.

RICO allows for prosecutors to charge multiple criminal acts involving a group of people in the same case as long as they were part of the same enterprise. The Justice Department said the conspiracy on the JPMorgan metals desk ran from March 2008 to August 2016. The two former metals traders for the bank who have pleaded guilty to fraud charges are cooperating with authorities.

The highest-level individual charged is Michael Nowak, a veteran gold trader who remained active as the global head of JPMorgan’s precious metals desk until he was indicted under seal in August 2019 along with two others. A former JPMorgan salesman who worked with hedge fund clients was later added to the case.

In 2015, JPMorgan pleaded guilty to felony antitrust charges along with several other global banks that paid penalties and admitted to conspiring to rig the price of U.S. dollars and euros. The bank agreed to pay $550 million, but it and other global lenders in the accord felt little lasting hit from markets or customers, undercutting investor fears that a guilty plea would devastate their business.

Shortly after Nowak and other traders were charged under RICO, JPMorgan learned it was the focus of a separate but related criminal investigation into trading of Treasury securities and futures, according to a person familiar with the matter.

-With assistance from Ben Bain.

Source: Bloomberg