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Within the JPMorgan Trading Desk, the United States called it a crime ring

(Bloomberg) – Billionaires have Davos. For directors, there is Sundance. For people who mine, trade and ship everything from iron ore to platinum, there is London Metal Exchange Week. It’s a confusion of symposia and drinks, with a lavish lunch organized by JPMorgan Chase & Co. On a balmy October day in 201

8, hundreds of guests walked across a courtyard in the shadow of the Bank of England to a medieval guild hall. for champagne and sashimi courtesy of the bank and its main metal trader, Mike Nowak, who had a lot to celebrate. His global trading desk at JPMorgan has been the hub of gold, silver, platinum and palladium futures contracts representing tens of trillions of dollars in transactions per year. In the mid-1940s, Nowak ran the precious metals desk for more than a decade. He had a young family, a house outside of Manhattan, and a seven-bedroom vacation home a few blocks from the beach in New Jersey, but that world was unfolding. Unbeknownst to Nowak, one of his former employees was turning against him. That same day, the sun had just risen in Brooklyn when a merchant named John Edmonds left for a meeting with federal prosecutors. Edmonds, who had worked at Nowak’s desk for years, took a four-hour car trip to Hartford, Connecticut, where he told authorities that Nowak’s crew didn’t just buy and sell precious metals, but systematically cheat. to help themselves and their top customers. Edmonds admitted committing fraud that day in a sealed guilty plea. Soon, others from the precious metals bank provided accounts, sparking events that led to criminal charges against Nowak and four others from the bank. The testimony of Edmonds and others is also behind a US Department of Justice criminal investigation into the bank itself that people familiar with the matter say will be resolved in the coming days. They said the bank would have to pay about $ 1 billion to settle with the US Department of Justice and the US Commodity Futures Trading Commission. Among the alleged misdeeds is so-called spoofing, which is placing fake orders in the market to induce others to buy or sell at prices that favor the bank. In the authorities’ years-long crackdown on spoofing – which included the conviction of two former Deutsche Bank metal traders in Chicago at the end of last week – the expected penalty for JPMorgan would be many times the size of previous deals. : JPMorgan is ready to pay. $ 1 billion in record spoofing penalty Nowak and three others have pleaded not guilty and are trying to get the charges against them dropped. Nowak and Edmonds’ attorneys declined to comment. JPMorgan, which said it cooperated with the investigation, declined to comment through a spokesperson. The Department of Justice and the CFTC have also declined to comment: accusing Nowak and others, prosecutors are testing an unusual application of a law formulated to fight mobsters, the Racketeer Influenced and Corrupt Organizations Act. Prosecutors say the Nowak’s trading desk was a criminal racketeering operation within the confines of America’s largest bank. Traders on Nowak’s desk have engaged in spoofing as a core business practice, doing it more than 50,000 times in nearly a decade, they claimed. The Department of Justice has famously used the RICO statute to take down mafia bosses and drug gangs. It used other statutes to extort penalties and guilty charges from big banks accused of market manipulation. But it’s been decades since the government attempted to enforce anti-racket law on members of the trading desk of a large bank, putting Nowak and others in the crosshairs once trained on the likes of the Latin Kings and the Gambino crime family. on court documents, public records and interviews with more than a dozen current traders, former traders and others familiar with the situation who asked not to be identified by talking about an ongoing legal matter. Bear Stearns’ marriage Nowak’s operation began in the depths of the financial crisis, which came in the form of a new trading strategy from a node of new colleagues. Nowak had just completed a quick climb to JPMorgan. He joined the bank directly from Duke University in 1996 and had been trading options for natural gas for a few years. Then he headed for the precious metals desk. It was an influential place. JPMorgan owns and stores tens of billions of dollars of gold and silver in its vaults. He is also one of the best traders in markets where investors and speculators trade tens of billions of dollars in futures contracts every day, sending price signals that are collected from gold funds, pawn shops and Indian jewelry bazaars. Nowak rose to the top of the New York trading desk and then, in 2006, also took over the London and Singapore operations. He was 32, and the financial crisis has further expanded Nowak’s mandate. JPMorgan’s acquisition of the staggering Bear Stearns Cos. It meant Nowak’s group would take over Bear’s precious metals desk and some of his traders. Bear’s merchants worked in Midtown Manhattan, right across from Nowak’s office, right across Madison Avenue. On May 27, 2008, the Bear deal was two days away from closing. Nowak was still getting to know his future employees and their culture. That day the Wall Street Journal published the first of a three-day series on what went wrong with Bear: it was a mediation, the paper wrote, “whose culture and fortune were rooted in the iron manipulation of risk by the trading floor “. That morning, Across the street from Nowak, a Bear trader named Gregg Smith performed a series of 15-second keystrokes. 8:39:56: Smith makes an offer to sell seven silver futures contracts. Asks $ 17,575 per ounce. 8:40:06 am: Smith places 13 more bids – not to sell, but to buy 91 contracts. They were priced from $ 17,555 to $ 17,565, just below Smith’s unsatisfied sales offer. 8:40:09 am: Within less than seven-tenths of a second, Smith starts getting buyers for his seven contracts and starts canceling the 13 bids. Just then, Nowak received an instant message from a Bear Stearns manager across the street: “Smith just offered up to … sell.” The timeline of that sale, in which approximately $ 600,000 worth of silver futures changed hands, is described in the debit documents. Documents do not say whether Nowak read the message or whether he otherwise acknowledged the exchange. But more than a decade later, the sequence was singled out by prosecutors as the start of what they described as an eight-year conspiracy. Over the next few months, Nowak brought in many of Bears dealers, including Smith and the manager. who had written the instant message. Smith’s trade was a preview of a technique that prosecutors say has spread to JPMorgan. The 15-second sequence was also a response, prosecutors say, to an issue that had angered the JPMorgan crew: a revival of annoying high frequency traders. With Algos For generations, metals have changed hands in loudly pits where hundreds of traders screamed at prices and obscenities. Nowak, introverted and intelligent, arrived in time for e-commerce and the problems it posed. Companies and individuals with fast internet connections and proprietary algorithms were moving in and out of positions to profit from small daily price changes. Traders of large operations such as JPMorgan found that within a second of offering, their price was often countered by high frequency traders who would have matched and closed a position before traders had a chance to complete their deal. These algorithms not only accelerated trading but also created momentum in the market that pushed prices away from traders’ targets. One way to outsmart them, current and former brokers and traders say, was to submit and remove a bid on the opposite side of the market. This would cause the algorithms to recalculate market supply and demand, leaving traders an opening to close the deal at the price they wanted. a single large order in the face of what they wanted to carry out, according to prosecutors. The turning point for the Bear traders was to place more orders, at different prices, which in total were substantially larger than the authentic order, a technique the government calls layering. Orders, placed in quick succession after the authentic order, would be canceled as soon as the authentic order was executed. Think about how to try and sell a hamburger. Summon a crowd in front of your burger, creating the perception of demand. Once a real customer comes forward and buys the burger, you make the crowd disappear. The layering has worked in the futures markets in part because participants see a flurry of buy and sell offers second by second, but not who makes them. And while a large order may stand out, many small ones may not. This made it important to warn colleagues when layering was in progress. One of Bear’s former traders did just that for a new JPMorgan colleague in early 2009, according to prosecutors. “So you know his gregg is bidding on futures trying to get some discount,” the Bear alum wrote. “In case you were watching some great offers enter the market.” At that time, Smith placed an order to sell seven gold futures while proposing to buy 77. The activity was viewable for 59 seconds before Smith sold three of his contracts and canceled his swarm of orders. of purchase. “Appreesh”, replied the colleague, “it worked!” Smith, a lead gold trader, has performed about 38,000 layering sequences over the years, or about 20 per day, prosecutors said in the documents. (Smith pleaded not guilty and his attorney did not respond to requests for comment.) Nowak himself primarily traded options, but dived into the futures market to cover those positions. He tried layering in September 2009, according to the papers, and continued to use the technique about 3,600 times. The government claims that traders have caused tens of millions of dollars in losses for those on the other side of the transactions and have damaged the market’s integrity. It says JPMorgan’s precious metals trading desk – which brings in up to $ 250 million in annual profits – has generated millions of dollars in illegal earnings. Nowak and Smith’s attorneys declined to comment on their defense strategies. But lawyers in other spoofing and manipulation cases have argued that the ongoing cat and mouse game between traders and algos is understood across the market and that the gains are small on tiny market moves. In this month’s trial by former Deutsche Bank AG traders, defense attorneys compared high-speed trading on futures markets with a competitive card game, saying canceling orders is not spoofing but rather a strategy. of legal bluff. They also argued that the government has carefully selected operations, providing too limited a market environment to establish manipulation. NowakNowak’s Acolyte was a balanced, discreet but helpful manager, several people familiar with his job said. When he saw his merchants outside the office, they said, it was unlikely he was in a late-night bar. A merchant, in an instant message quoted in the documentation, noted that Nowak had come to his children’s birthday parties. One of Nowak’s acolytes on the chair was Edmonds, a native of Brooklyn, a graduate of St. Johns University in Queens, New York. Edmonds started in JPMorgan’s back office and was brought to his desk in 2009. He sat next to a former pit dealer who often asked Edmonds to run his operations, according to Edmonds testimony in a civil lawsuit. That merchant, identified as a co-conspirator in the indictment, is not named or charged in the criminal case. Edmonds’ supervisors and older members at the desk showed him how to layer operations, he later told prosecutors, adding that it was understood on the desk that this was the way to trade precious metal futures. it was on the desk, checking was a constant. The gold and silver bugs – many of them individual investors who bought futures or physical gold and silver as a conservative investment game – claimed the bank was unfairly shifting prices in the spot and futures markets to take advantage. Similar allegations have been raised in civil lawsuits by individuals or companies trading silver futures, such as the lawsuit in which Edmonds provided trading desk testimony. For years, those cases have gone nowhere. And three times, starting in 2004, the Commodity Futures Trading Commission has also looked into allegations of JPMorgan’s manipulation of the silver market. Nowak, who held leadership roles in the LME and the London Bullion Market Association, was asked to explain the bank’s business. In 2010, he sat down for two days of interviews with CFTC investigators, explaining the bank’s trading strategies. “To your knowledge, did JPMorgan traders in the metals group submit bids and offers to the market that they did not intend to execute and then pulled them before they were hit or lifted?” A CFTC investigator asked. “No,” Nowak replied. The CFTC closed the third of these three investigations in 2013 without taking action. JPMorgan cited those CFTC investigations while defending itself from civil lawsuits, accusing plaintiffs of rethinking “implausible theories” about manipulating silver futures that had been rejected by regulators. This is thanks to a federal attorney with a large amount of data and, to Edmonds, a key collaborator, Attorney Avi Perry, an assistant US attorney in Connecticut with a law degree from Yale. Perry did not decide to target the JPMorgan deal as much as the JPMorgan trade found it. Perry began hunting for market manipulation around 2018, as the Justice Department was ramping up its game in the area. For years, prosecutors have been building cases of market manipulation by following up on suggestions and collecting commercial data on suspects. They were now doing deep dives into the raw data to discover targets, analyzing records stored directly with the exchanges. In the real-time fray of futures markets, where deals are made and pulled all day, it is nearly impossible to distinguish potential manipulations. But the government had an advantage. The trade data feed includes each trader’s trading credentials, allowing investigators to spot suspicious patterns and attribute them to individuals. Perry also had a valuable guide to the market. His FBI chief investigator, Jonathan Luca, previously worked as a gold and silver futures trader at Morgan Stanley. Together, they created a screen for precious metals trading data. The idea, according to two people familiar with analysis, was to show sequences where a trader entered and canceled a profusion of orders on one side of the market while executing a trade on the other. The greater the discrepancy between authentic and pulled offers, and the more a given trader did it, they said, the more it would be considered a red flag for potential spoofing. When they ran the screen, JPMorgan traders stood out. LossPerry, at the time, was coming out of a stinging leak in a spoofing case. At the end of 2017, his heads at the Justice Department added him to the team preparing to try an indicted UBS Group AG metals trader. In the mid-1930s, Perry hadn’t handled a forgery charge. The case was already speeding up for trial and there were cracks in it. The trader was indicted in Connecticut even though his trading took place on stock exchanges in Chicago. Most of the charges were dropped and the trader was acquitted. Defense attorneys and even some fraud prosecutors wondered if the government’s spoofing initiative was failing, but Perry’s bosses kept him digging. In 2018, they recruited him for a job at the fraud section of the Department of Justice in Washington, whose prosecutors built some of the largest corporate crime cases in the United States. With trading analysis in hand, he went looking for people who could talk. Edmonds was also notable among JPMorgan traders. Sometimes he had placed orders with up to 400 contracts on the opposite side of a genuine one. It is unclear how Perry and the FBI contacted Edmonds. But they could have done it without raising the alarm within JPMorgan. Edmonds had left JPMorgan in 2017 after turning down the bank’s offer to move to Singapore, and was working at another bank in the fall of 2018. Perry and his team spoke to Edmonds at least twice in the weeks before he left. traveled to Connecticut to enter his secret guilty plea on October 9, 2018, the day of the London party. Several months later, Perry secured the cooperation of one of Bear’s merchants who moved to JPMorgan. Pleading guilty, that trader claimed he personally manipulated operations while working from offices in New York, London and Singapore, and claimed that counterfeiting operations have been a fixture at the bank for nearly a decade. . Although banks often put people on leave when legal action may be pending, Nowak and Smith remained at their desks long after the charges against Edmonds went public in November 2018. Green light for RICOTo prosecutors, prosecutors Evidence fits the model for a racketeering conspiracy a model of illegality over time, with individuals working together to further the goals of the alleged criminal enterprise. However, there was limited precedent in applying the RICO law to commerce and finance. The racketeering charges were leveled against Michael Milken in 1989 but fell when he reached an agreement with the authorities. The statute was successfully enforced in the early 1990s against eight traders in the Chicago Mercantile Exchange soybean pits. To avoid overuse or abuse of the statute, the Justice Department maintains a tight grip on RICO’s allegations. The organized crime and gang section of the department gave Perry the green light. In 2019, Edmonds’ appeal began to retreat in the rearview mirror. In May, Nowak and Smith hosted an intern, the quarterback of Nowak’s alma mater, Duke. That summer, Perry got the government indictment against Nowak, Smith, and a third merchant. He was deposited under seal in the federal court in Chicago, where the trafficking took place. The allegations were made public in September and Nowak appeared in handcuffs at the federal court in Newark, New Jersey, charged with conspiracy to participate or conduct a criminal enterprise racketeering, attempted price manipulation, banking fraud, online fraud, commodity fraud and spoofing. In addition to the half-dozen people who have been charged, government documents refer to seven other people as unspecified co-conspirators. It is unclear whether any of them cooperated or what additional information they may have provided over the next year. Nowak’s arrest caused a shock wave in the world of metals and property trading, several people in the industry said. On paper and by reputation, it was as clean as they came, they said, asking: If it could be examined, couldn’t anyone? Nowak’s trial is underway for next year, according to case documents. The government should be able to use a JPMorgan deal in its favor, said Michael Koenig, a former federal prosecutor who is now a partner of Hinckley, Allen & Snyder and is not involved in the Nowak affair. The bank may be required to offer witnesses and testimony, he said. “The company – and all of its information and all of its staff – is now sitting at the prosecutors’ table,” Koenig said. For more articles like this, visit our site. at bloomberg.com Sign up now to stay up to date with the most trusted business news source. © 2020 Bloomberg LP


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