How the world’s most powerful gold trader had fallen

Target was terrified and already on high alert – one of his associates had recently confessed to crimes he knew he would commit as well. Christian Trunz was not a terrorist or a drug smuggler, but a mediocre merchant of precious metals returning from his honeymoon. Importantly: He was also a longtime employee of JPMorgan Chase & Co.Largest Bullion Bank.

The attack on the FBI’s airport, described by Trunz, was a significant step in the pursuit by US prosecutors of JPMorgan’s precious metals desk, leading up to last week’s climax – the conviction in 13 counts of the man who was once the most powerful man. . gold marketFormer global head of desk Michael Novak.

Viewed with a mix of fascination and fear by precious metals traders around the world, the case has shed light on how JPMorgan traders – including Nowak and the bank’s longtime gold trader Greg Smith – allegedly Manipulating the markets by placing fake orders. Designed to misrepresent other market participants, primarily algorithmic traders, whose high-speed activity became a major source of frustration.

Novak has become one of the most senior bankers to be convicted in the US since the financial crisis, and faces the prospect of decades in prison, though that may be very low.

Nowak’s lawyers argue that Novak was not a “criminal mastermind” and said they will “continue to affirm their rights in court.” A lawyer for Smith said during closing arguments last month that his client’s orders were valid, and there are other explanations for clients to buy and sell futures contracts at the same time.

It took three weeks in court for the government to convince the jury of Novak and Smith’s crime. (Jeffrey Ruffo, a salesman who had been tried with him, was acquitted.)

But whispers of spoofing lingered on JPMorgan’s trading desk for at least a decade—several years before the FBI first contacted Trunz in 2018.

Alex Gerko, head of the algorithmic trading firm, complained in early 2012 about Smith’s activity in the gold market to CME Group Inc., which owns futures exchanges where the US allegedly conducted thousands of spoof trades. But Smith and Novak continued to work at the bank until 2019, when the US dropped the charges against them.

“The wheels of justice are moving slowly,” Gerko tweeted last month.

At the Justice Department, the path for JPMorgan began with the decision to begin hunting down traders who made fraudulent offers to buy and sell items they did not intend to execute. The Criminal Fraud Unit hired data consultants to go through billions of trades to spot the patterns of market manipulators.

Since the vast amount of data was scrutinized, there were few traders who stood out. And he worked at JPMorgan.

With the data in hand, investigators went looking for allies they found in Trunz and his former colleague, John Edmonds. Both relatively junior businessmen pleaded guilty to their own misconduct and agreed to testify against the desk owner.

Novak was arrested in September 2019, which sent a shock wave through the metals world, but the COVID pandemic meant it would take another three years until the end of the trial.

In his testimony, Edmonds, who had taken up an operations role at JPMorgan, described spoofing at the desk as a daily occurrence and felt obligated to participate because it was part of normal strategy.

The Justice Department’s move against JPMorgan’s most senior bullion bankers was celebrated in some corners of the gold and silver markets, where investors and bloggers have long accused the bank of a massive plan to slash prices. . Those allegations prompted several investigations by the Commodity Futures Trading Commission, the most recent of which was closed in 2013 after finding no evidence of wrongdoing.

The case against Novak and Smith made no allegation of a systematic conspiracy to suppress prices, arguing instead that they did it in a short amount of time and in both directions to benefit JPMorgan’s most important hedge fund clients. cheated the markets.

And while the indictment is a victory for prosecutors, the jury rejected the government’s most comprehensive allegation—brought under the Racketeer Influenced and Corrupt Organizations Act, or RICO—that the men were part of a conspiracy and JP Morgan’s precious metals desk. Enterprise was a criminal.

At JPMorgan, Edmonds said the practice was referred to as “clicking” rather than spoofing, and traders never discussed it as being illegal, despite the firm’s own compliance policies being clear. Trunz also spoke of a running joke involving Smith, who would click his mouse to place and cancel orders so fast that his colleagues would urge him to ice his fingers.

In 2012, Gerko, who is the founder of quantitative trading firm XTX Markets Ltd., complained to CME about Smith’s swift entry into gold futures trading and cancellation of orders. CME launched an investigation, which lasted three years before concluding that he was possibly spoofing.

“It took a long time to get consistent enforcement after 2010,” Gerko said in a tweet, referring to the Dodd-Frank Act, which defined spoofing and made illegal.

After another JPMorgan trader, Michelle Simonian, was fired for spoofing in 2014, Novak called his traders to his office to ask if they were doing the same, according to Edmunds. Nobody said anything. The incident shocked Edmonds, he said, as Novak knew it had been going on for years.

During the trial, Novak appeared largely impassioned, his face hidden behind a Covid mask. Industry insiders described him as introverted and like-minded in 2020, and testimonies during the trial portrayed him as a well-known manager who became friends with Trunz while the two moved out of JPMorgan’s London office. worked outside.

During the trial, Trunz was asked if he liked Novak, the former businessman replied: ‘I loved him.’

However, relations became more complicated after officials contacted Trunz. When she considered making a deal with the government, Novak told her no, according to Trunz, who was audibly choked up while testifying.

Defense lawyers portrayed Trunz and Edmonds as unreliable proven liars, testifying against their clients to avoid lengthy prison sentences.

Novak and Smith will not be sentenced until next year. For comparison, in 2020 two Deutsche Bank AG merchants convicted of spoofing were sentenced to nearly a year in prison.

Last week’s sentencing represents the pinnacle of the US Justice Department’s crackdown on the illegal trade practice known as spoofing. So far, prosecutors have managed to indict ten businessmen at five different banks.

JP Morgan has already paid $920 million to settle spoofing allegations against it.

“While the jury rejected the conspiracy and Rico charges, they would consider it a victory,” said Matthew Mazur, a lawyer for Dechert LLP who defended one of Deutsche Bank’s businessmen. “This is probably the end of the sweep of precious metals. It was done, but I think such cases will continue to happen.”

Even after the action, some market participants say that spoofing still occurs. Back when commodity futures were traded in pits, brokers had to trade face-to-face. Hiding behind the screen makes it super easy to place and drag orders at will.

“We still see spoofing on a regular basis,” said Eric Zucarelli, an independent commodity trader who began working on the floor of the New York Mercantile Exchange in 1986. The face and floor committee will come and fix you for being an asshole.”

This story has been published without modification in text from a wire agency feed. Only the title has been changed.

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