The former CEO of JPMorgan Chase & Co. he ran the bank’s precious metals business for more than a decade, making hundreds of millions of dollars in profits trading everything from silver to palladium. Now, he and two of his former colleagues face a federal grand jury in Chicago on criminal charges related to thousands of so-called forgeries, which prosecutors say were used for years to generate illegal profits for JPMorgan and its top clients. The trial, scheduled to begin Thursday, threatens to expose the inner workings of the famous bank that has long dominated the gold market. The government says Nowak’s firm operated as a criminal enterprise, manipulating prices from 2008 to 2016, placing thousands of trade orders that were never meant to be executed. If convicted, the three men are among the biggest players yet to face jail time for price manipulation. “These are big players,” said Robin Bhar, a former metals strategist at Societe Generale SA who spent more than three decades in the industry. “Going to court gives him a lot more transparency in a very opaque market.” The lawsuit comes after years of a US government crackdown on price manipulation that led JPMorgan to pay $920 million to settle rigging claims two years ago. With a notional value of $330 billion in precious metals derivatives contracts at the end of March, the New York-based bank accounts for 67% of positions placed through U.S. banks. It owns three times as much as the next biggest player, Citigroup Inc., data show. Read more: Inside JPMorgan’s trading desk, the US called a crime ring Nowak, who was also on the board of the body that runs London’s gold market, faces 15 charges including commodity fraud, conspiracy to commit extortion and price manipulation and spoofing — planting false orders in the market to trick others into buying or sale at prices favorable to the bank. Dealer Gregg Smith faces 13 charges, while Jeffrey Ruffo, a salesman, faces two charges. A fourth defendant, businessman Christopher Jordan, is scheduled to be tried separately on Nov. 28. All four have pleaded not guilty and face decades in prison if convicted of all charges. Nowak’s attorney declined to comment, as did federal prosecutors. Attorneys for Smith and Ruffo did not respond to requests for comment. Nowak was arrested in September 2019, sending shockwaves through the world of metals and proprietary trading. Industry insiders told Bloomberg in 2020 that Nowak, an introverted and intelligent young father with a home in suburban Manhattan, had a clean reputation. He was released on $250,000 bond. His arrest was part of a series of prosecutions by the Justice Department since counterfeiting was defined and made illegal under the Dodd-Frank act in 2010. The government has levied more than $1 billion in fines for banks and filed dozens of criminal charges individuals , using transaction records and internal bank chat logs as evidence. Repression of the US In 2021, two Bank of America Corp. bullion traders. were convicted in Chicago. A year earlier, a court found two from Deutsche Bank AG guilty, while others reached deals and cooperated with authorities. The most notorious fraudster was Navinder Singh Sarao, a British trader accused of contributing to the 2010 Flash Crash in the US stock markets. While the cases involved alleged crimes such as commodities fraud or conspiracy, prosecutors have ramped up interest in JPMorgan defendants. They added charges under the Racketeer Influenced and Corrupt Organizations Act, a law more often used against gangs or the mafia. The government alleges members of the precious metals bureau colluded to use illegal trading practices to maximize the bank’s profits and minimize its losses from trading gold and silver. More recently, RICO statutes were used in criminal prosecutions against Bill Hwang, whose Archegos Capital Management collapsed last year, costing the banks billions. “It’s the closest thing we have to a nuclear option in an economic context,” said Eugene Soltes, a Harvard Business School professor who has written about white-collar crime. Read more: Spoofing is a silly name for serious market rigging The government’s witnesses include former JPMorgan employees, including John Edmonds, who told prosecutors about Nowak’s trades in 2018, as well as Armand Nakkab, Kristen Pfeiffer and Christian Trunz, court records show. Another is former Bear Stearns and Bank of Nova Scotia trader Corey Flaum, who pleaded guilty to price manipulation in 2019. The defense witness list includes Tudor Capital trader James Phelan, former Soros Fund Management trader James Ragusa and Moore Capital Management trader Joseph Giunta. The trial will be closely watched by gold market participants eager to learn more about how JPMorgan ran its trading desk, including evidence from internal chat records showing how the team communicated. In a chat entry from May 27, 2008, a bank employee informed Novak that Smith had “just offered it to … sell,” according to the indictment. In another, a colleague warned his teammates that “Greg is bidding on futures trying to get away.” At that time, Smith ordered seven gold futures contracts to be sold while bidding to buy 77, prosecutors said. The activity was visible for 59 seconds before Smith sold three of his contracts and canceled his swarm of buy orders. “I mean,” replied the colleague, “that worked!” JPMorgan, which has already admitted wrongdoing and agreed to cooperate with prosecutors, is fighting to keep some of its internal communications out of the trial, including messages involving Mike Camacho, who headed world medals. Prosecutors said in court they would seek to show jurors communications between Ruffo and former Moore Capital Management fund manager Christopher Pia about an alleged illegal trade. High frequency trading Market insiders say that before Dodd-Frank, counterfeiting, as it is known today, was rampant on Wall Street. Some traders have tried to bluff rivals, such as high-frequency trading firms, to gain an advantage by canceling orders before a trade is executed. “If you have a large order and the algorithms understand that you’re selling and selling and selling, then they’re going to jump in front of you,” said Matthew Mazur, an attorney at Dechert LLP who defended a Deutsche Bank trader in 2020. “If you’re telegraphing to the market what you really want to do, you would be killed.” That argument didn’t work with juries in recent trials where defense attorneys claimed their clients intended to execute their trades but canceled for legal reasons. In the trial for Deutsche Bank traders, their lawyers argued that mocking competitors in the financial markets is no different than bluffing in a high-stakes game of poker. “The defense will say the market is changing and traders wanted to change their minds and make adjustments,” said Soltes, the Harvard professor. “But you have to have a genuine willingness to execute that trade.” The government also plans to bring in experts in algorithmic trading, including David Pettey of Susquehanna International Group LLP. Prosecutors allege the defendants broke the law to try to cheat companies like Susquehanna, whose speed advantage allowed them to get ahead of bankers placing high-value orders. By placing orders to be canceled before execution, the defendants could cause markets to react to a false picture of supply and demand, creating an opening for trades to be completed and moving prices in favorable directions, prosecutors said in their indictment. . The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago) ©2022 Bloomberg LP
