For years, many in the precious metals industry have held suspicions that JPMorgan’s precious metals trading desk had been manipulating the price of silver and gold.
The majority of the investing public had written off such accusations as a conspiracy theory, unable to verify the reliability of the sources and accusations.
It wasn’t until last August when another JPMorgan director had pleaded guilty to manipulating the price of precious metals that the narrative took on a more credible tone.
And now, the US Department of Justice (DOJ) just confirmed what many in the industry had suspected: that the JPMorgan trading desk had been involved in a "massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants."
A former JPMorgan director (Michael Nowak) and trader (Gregg Smith) were indicted last Monday as a result of the DOJ’s large-scale probe into suspected criminal activities among large institutions in the financial sector.
In addition, 12 other people had already been charged in this ongoing investigation for price rigging.
Assistant Attorney General Brian Benczkowski told reporters: “Based on the fact that it was conduct that was widespread on the desk, it was engaged in thousands of episodes over an eight-year period -- that it is precisely the kind of conduct that the RICO statute is meant to punish.”
The last sentence emphasizes the gravity of the accusation. The RICO Act--short for Racketeer Influenced and Corrupt Organizations Act--is a federal law that was originally designed to prosecute organized crime, most notably the Mafia.
It’s what gives prosecutors the legal firepower to combat and take down criminal enterprises.
The use of this kind of aggressive language sheds some light on how the DOJ views JPMorgan’s manipulation of precious metals prices. It also indicates the possibility of extended penalties and prosecution for the bank.
The unsealed indictment also named a third alleged conspirator--Christopher Jordan--who went on to trade precious metals with Credit Suisse and First New York upon leaving the JPMorgan trading desk a decade ago.
Jordan, Nowak, and Smith were accused of manipulating gold and silver prices in a scheme that obscured markets, causing harm to JPMorgan clients, according to an accompanying DOJ press release.
Assistant Attorney General Brian A. Benczkowski:
"The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants...These charges should leave no doubt that the Department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets."
According to the FBI’s NY Field Office Director William Sweeney, the impact of this scheme likely affected a number of markets that were correlated to metals they were manipulating:
"Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand...Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented. For as long as we continue to see this type of illegal activity in the marketplace, we’ll remain dedicated to investigating and bringing to justice those who perpetrate these crimes."
As two former JPMorgan traders who pleaded guilty to conspiracy and fraud had told prosecutors, the illicit activities surrounding their trading desk was far from a rogue scheme.
One of those traders, John Edmonds, agreed to provide evidence against his former employer:
"While at JPMorgan I was instructed by supervisors and more senior traders to trade in a certain fashion, namely to place orders that I intended to cancel before execution...I was instructed that if a client wished to sell futures I should simultaneously place both bids and offers with the intent of canceling the bids prior to execution...We created market activity which artificially drove the sale price up and induced other market participants to purchase at an inflated price."
During the course of the investigation, prosecutors learned that that price manipulation had been going on for over a decade. A number of the chat logs disclosed in the indictment showed just how common and casual the illicit activities were carried out:
The years after 2008 saw regulators across the globe cracking down on market manipulation in government bonds, interest rates, and foreign exchange. The crackdown in gold and silver price manipulation shouldn’t come as a surprise.
Despite being cognizant of the unethical and illegal nature of their trading activities, these JPMorgan traders reflect the normalized culture of corruption that likely stems from top tier management. Would it be too cynical to say that that’s just the way most institutions in the banking industry works and that it would be naive to think otherwise?
You can download the full indictment from the DOJ website here: https://www.justice.gov/opa/press-release/file/1202466/download