The U.S. says the precious metals desk at JPMorgan was a racketeering operation. Now the bank is poised to pay a record penalty for spoofing. Here’s a look behind eight years of alleged conspiracy
By Tom Schoenberg
September 28, 2020, 5:00 PM GMT+9

Billionaires have Davos. For filmmakers, there’s Sundance. For the people who mine and trade and ship everything from iron ore to platinum, there’s London Metal Exchange Week. It’s a blur of symposiums and drinks, with a reliably lavish lunch thrown by JPMorgan Chase & Co. On a balmy October day in 2018, hundreds of guests crossed 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 top metals trader, Mike Nowak.

Nowak had plenty to celebrate. His global trading desk at JPMorgan was the powerhouse in futures contracts for gold, silver, platinum and palladium that account for tens of trillions of dollars in transactions annually. In his mid-40s, Nowak had run the precious metals desk for more than a decade. He had a young family, a house outside Manhattan and a seven-bedroom vacation home a few blocks from the beach in New Jersey.

But that world was unraveling. Unbeknown to Nowak, one of his former employees was turning on him.
Merchant Taylors Hall
Merchant Taylors Hall, where JPMorgan hosted a London Metal Exchange Week lunch on Oct. 9, 2018.
Source: View Pictures/Getty Images

That same day, the sun was barely up in Brooklyn when a trader named John Edmonds set off for a meeting with federal prosecutors. Edmonds, who’d worked for years on Nowak’s desk, took a four-hour car trip to Hartford, Connecticut, where he told authorities that Nowak’s crew wasn’t just buying and selling precious metals, but systematically cheating to help themselves and their top clients. Edmonds admitted to fraudulent trades that day in a sealed guilty plea. Soon, others from the precious metals desk provided accounts, setting off events leading to criminal charges against Nowak and four others from the bank.

Testimony by Edmonds and others also underpins a U.S. Justice Department criminal investigation into the bank itself that people familiar with the matter say will be resolved in coming days. They said the bank is expected to pay around $1 billion to settle with the Justice Department and U.S. Commodity Futures Trading Commission. Among the alleged misdeeds is so-called spoofing, or planting fake orders into the market to steer others into buying or selling at prices that favor the bank. In authorities’ years-long crackdown on spoofing — which has included the conviction of two former Deutsche Bank metals traders in Chicago late last week — the expected JPMorgan penalty would be several times the size of previous settlements.

Read More: JPMorgan Is Set to Pay $1 Billion in Record Spoofing Penalty

Nowak and three others have pleaded not guilty and are seeking to have the charges against them dismissed. Lawyers for Nowak and Edmonds declined to comment. JPMorgan, which has said it’s cooperating with the investigation, declined to comment through a spokesman. The Justice Department and CFTC also declined to comment.

In charging Nowak and others, prosecutors are testing an unusual application of a law formulated to battle mobsters, the Racketeer Influenced and Corrupt Organizations Act. Prosecutors say Nowak’s trading desk was a criminal racketeering operation within the confines of America’s biggest bank. Traders on Nowak’s desk engaged in spoofing as a core business practice, doing it more than 50,000 times over nearly a decade, they said.

The Justice Department has famously used the RICO statute to bring down mafia bosses and drug gangs. It has used other statutes to extract penalties and guilty pleas from big banks accused of market manipulation. But it’s been decades since the government has attempted to apply the anti-racketeering law to members of a major bank’s trading desk, placing Nowak and others in crosshairs once trained on the likes of the Latin Kings and the Gambino crime family.

This account is based on court filings, 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 speaking about an ongoing legal matter.
Bear Stearns Marriage

The troubles at Nowak’s operation started in the depths of the financial crisis, arriving in the form of a novel trading strategy from a knot of new colleagues.

Nowak had just completed a swift climb at JPMorgan. He’d joined the bank straight from Duke University in 1996 and traded natural gas options for a few years. Then he made his way to the precious metals desk. It was an influential spot. JPMorgan owns and stores tens of billions of dollars of gold and silver in its vaults. It’s also one of the top traders in markets where investors and speculators exchange tens of billions of dollars in futures contracts daily — sending price signals that are picked up by gold funds, pawn shops and Indian jewelry bazaars. Nowak rose to the top of the New York trading desk, and then, in 2006, he took over the London and Singapore operations as well. He was 32 years old.

The financial crisis expanded Nowak’s brief further. JPMorgan’s takeover of the teetering Bear Stearns Cos. meant Nowak’s group would absorb Bear’s precious metals desk and some of its traders. Bear’s traders worked in midtown Manhattan, just across Madison Avenue from Nowak’s office.

On May 27, 2008, the Bear deal was two days from closing. Nowak was still getting to know his future employees and their culture. That day’s Wall Street Journal ran the first of a three-day series about what went wrong at Bear: It was a brokerage, the paper wrote, “whose culture and fortune were rooted in the trading floor’s steely manipulation of risk.”

That morning, across the street from Nowak, a Bear trader named Gregg Smith executed a 15-second series of keystrokes.

8:39:56 a.m.: Smith enters an offer to sell seven contracts for silver futures. He asks $17.575 an ounce.

8:40:06 a.m.: Smith places 13 more offers — not to sell, but to buy 91 contracts. They were at prices from $17.555 to $17.565, just below Smith’s unfilled sell offer.

8:40:09 a.m.: Within less than seven-tenths of a second, Smith begins to get buyers for his seven contracts and starts canceling the 13 buy offers.

Just then, Nowak received an instant message from a Bear Stearns manager across the street: “Smith just bid it up to … sell.”

The timeline of that sale, in which about $600,000 worth of silver futures changed hands, is described in charging documents. The filings don’t say whether Nowak read the message or otherwise acknowledged the trade. But more than a decade later, the sequence was singled out by prosecutors as the beginning of what they described as an eight-year conspiracy.

In the following months, Nowak brought over several of the Bear traders, including Smith and the manager who had written him the instant message. Smith’s trade was a preview of a technique that prosecutors say became widespread at JPMorgan.

The 15-second sequence was also a response, prosecutors say, to an issue that had been vexing the JPMorgan crew — an upswing in pesky high-frequency traders.
Troubles With Algos

For generations, metals changed hands in open-outcry pits where hundreds of traders screamed prices and obscenities. Nowak, introverted and brainy, came along in time for electronic trading and the problems it posed. Firms and individuals with fast internet connections and proprietary algorithms were swarming in and out of positions to profit on small daily price moves.

Traders at big operations like JPMorgan’s found that within a second of placing a bid, their price was often countered by high-frequency traders who would match and close a position before the traders had a chance to complete their deal. These algos not only snapped up trades but also created momentum in the market that pushed prices away from the traders’ targets.

One way to outsmart them, current and former brokers and traders say, was to put up and remove an offer on the opposite side of the market. That would cause the algorithms to recalculate market supply and demand, leaving an opening for the traders to get the deal done at the price they wanted.

Read More: Bloomberg’s QuickTake on Spoofing

Early on, some of Nowak’s traders were attempting to counter the algos by placing a single large order opposite the one they wanted filled, according to prosecutors. The Bear traders’ twist was to place multiple orders, at different prices, that in aggregate were substantially larger than the genuine order — a technique the government calls layering. The orders, made in rapid succession after the genuine order, would be canceled as soon as the genuine order was filled. Think of it like trying to sell a hamburger. You conjure a mob in front of your burger joint, creating the perception of demand. Once a real customer steps up and buys the burger, you make the mob vanish.
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Metals futures trading has moved online from open-outcry pits. The New York Mercantile Exchange pit closed in 2015.
Photographer: Spencer Platt/Getty Images

The layering worked in futures markets in part because participants see a second-by-second barrage of offers to buy and sell, but not who’s making them. And whereas one big order might stand out, a lot of small ones might not. That made it important to warn colleagues when layering was in progress. One of the former Bear traders did just that for a new JPMorgan colleague in early 2009, according to prosecutors.

“So you know its gregg bidding up on the futures trying to get some off,” the Bear alum wrote. “Incase you were watching some large bids come into market.”

At that moment, Smith placed an order to sell seven gold futures while placing offers to buy 77. The activity was viewable for 59 seconds before Smith sold three of his contracts and canceled his swarm of buy orders.

“Appreesh,” the colleague responded, “that worked!”

Smith, a lead gold trader, executed some 38,000 layering sequences over the years, or about 20 a day, prosecutors said in filings. (Smith pleaded not guilty, and his lawyer didn’t respond to requests for comment.) Nowak himself primarily traded options, but he would dip into the futures market to hedge those positions. He tried his hand at layering in September 2009, according to filings, and went on to use the technique some 3,600 times.

The government says the traders caused tens of millions of dollars in losses for those on the other side of the transactions and harmed market integrity. It says JPMorgan’s precious metals trading desk — which brings in as much as $250 million in annual profit — generated millions of dollars in unlawful gains.

Lawyers for Nowak and Smith declined to comment about 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 minuscule market moves. In this month’s trial of the former Deutsche Bank AG traders, defense lawyers compared high-speed trading on futures markets to a competitive card game, saying canceling orders isn’t spoofing but rather a legal bluffing strategy. They also claimed the government cherry-picked trades, providing too little market context to establish manipulation.
Nowak’s Acolyte

Nowak was an even-tempered manager who was hands-off yet approachable, several people familiar with his work said. When he saw his traders outside the office, they said, it was unlikely to be at a late-night bar. One trader, in an instant message cited in filings, noted that Nowak had come to his kids’ birthday parties.

One of Nowak’s acolytes on the desk was Edmonds, a Brooklyn native with a degree from St. Johns University in Queens, New York. Edmonds started in JPMorgan’s back office and was brought to the desk in 2009. He sat next to a former pit trader who would often ask Edmonds to execute his trades, according to Edmonds’s testimony in a civil lawsuit. That trader, identified as a co-conspirator in the indictment, isn’t named or charged in the criminal case. Edmonds’s supervisors and more senior members on the desk showed him how to layer trades, he later told prosecutors, adding that it was understood on the desk that this was the way to trade precious metals futures.

For as long as Nowak was on the desk, scrutiny was a constant. Gold and silver bugs — many of them individual investors who bought futures or physical gold and silver as a conservative investment play — claimed the bank was unfairly moving prices in spot and futures markets to benefit itself. Similar allegations were raised in civil lawsuits by people or firms that traded silver futures, such as the suit in which Edmonds provided testimony about the trading desk. For years, those cases went nowhere.

And three times, starting in 2004, the Commodity Futures Trading Commission also looked into allegations of market manipulation of the silver market by JPMorgan. Nowak, who held leadership roles on the LME and the London Bullion Market Association, was asked to explain the bank’s trading. In 2010, he sat for two days of interviews with CFTC investigators, explaining the bank’s trading strategies.

“To your knowledge, have traders at JPMorgan in the metals group put up bids and offers to the market which they didn’t intend to execute and then pulled them before they got hit or lifted?” one CFTC investigator asked.

“No,” Nowak responded.

The CFTC closed the third of those three inquiries in 2013 without taking action. JPMorgan has cited those CFTC investigations while defending against civil lawsuits, accusing plaintiffs of rehashing “implausible theories” of silver futures manipulation that were rejected by regulators.
Screening for Spoofs

Five years passed before Nowak’s operation came under the federal spotlight again. That was thanks to a federal prosecutor with a trove of data and, in Edmonds, a key cooperator.

The prosecutor was Avi Perry, an assistant U.S. attorney in Connecticut with a Yale law degree. Perry didn’t set out to target JPMorgan’s operation so much as JPMorgan’s trading found him.

Perry started hunting for market manipulation around 2018, as the Justice Department was upping its game in the area. For years, prosecutors had built market manipulation cases by following up on tips and pulling trading data on suspects. Now they were doing deep dives into raw data to uncover targets, parsing records filed directly with the exchanges.

In the real-time scrum of futures markets, where offers are made and pulled all day long, it’s nearly impossible to discern potential manipulation. But the government had an edge. The data feed of the trades includes each trader’s exchange credentials, allowing investigators to sort for suspicious patterns and attribute it to individuals.

Perry also had a valuable guide to the market. His lead FBI 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 the analysis, was to turn up sequences in which a trader placed and canceled a profusion of orders on one side of the market while executing a trade on the other. The bigger the mismatch between genuine 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, traders at JPMorgan stood out.
Grappling With a Loss

Perry, at the time, was coming off a stinging loss in a spoofing case. In late 2017, his bosses at the Justice Department added him to the team preparing to try an indicted UBS Group AG metals trader. In his mid-30s, Perry hadn’t handled a spoofing prosecution. The case was already speeding to trial, and cracks were showing. The trader was indicted in Connecticut even though his trading occurred on exchanges in Chicago. Most of the charges were dismissed and the trader was acquitted. Defense lawyers and even some fraud prosecutors wondered if the government’s spoofing initiative was waning.

But Perry’s bosses had him keep digging. In 2018 they recruited him for a job at the Justice Department’s fraud section in Washington, whose prosecutors have built some of the biggest U.S. corporate crime cases. With the trading analysis in hand, he went looking for individuals who might talk.

Edmonds was notable even among the JPMorgan traders. At times he had placed orders with as many as 400 contracts on the opposite side of a genuine one.

It’s unclear how Perry and the FBI approached Edmonds. But they could have done so without raising alarms inside JPMorgan. Edmonds had left JPMorgan in 2017 after declining the bank’s offer to relocate to Singapore, and by the fall of 2018 was working at another bank.

Perry and his team talked to Edmonds at least twice in the weeks before he traveled to Connecticut to enter his secret guilty plea on Oct. 9, 2018, the day of the London party.

Several months later, Perry secured the cooperation of one of the Bear traders who moved to JPMorgan. Pleading guilty, that trader said he personally manipulated trades while working from offices in New York, London and Singapore, and said spoofed trades were a fixture at the bank for nearly a decade.

Even so, at Nowak’s office there was little sign of dark clouds. Although banks often place individuals on leave when legal action may be pending, Nowak and Smith remained at their desks well after the charges against Edmonds were made public in November 2018.
Green Light for RICO

To prosecutors, the evidence fit the template for a racketeering conspiracy — a pattern of illegality over time, with individuals working together to further the goals of the allegedly criminal enterprise. There was limited precedent applying the RICO law to trading and finance, though. Racketeering charges were leveled against Michael Milken in 1989 but dropped when he reached a settlement with authorities. The statute was successfully applied in the early 1990s against eight traders in the Chicago Mercantile Exchange soybean pits.

To guard against overuse or abuse of the statute, the Justice Department keeps a tight handle on RICO charges. The department’s organized crime and gang section gave Perry the green light.

In 2019, Edmonds’s plea began to recede into the rear-view mirror. In May, Nowak and Smith hosted an intern, the quarterback for Nowak’s alma mater, Duke. That summer, Perry secured the government’s indictment of Nowak, Smith and a third trader. It was filed under seal in federal court in Chicago, where the trades took place.

The charges were made public in September, and Nowak appeared in handcuffs in federal court in Newark, New Jersey — accused of conspiracy to participate in or conduct a criminal racketeering enterprise, attempted price manipulation, bank fraud, wire fraud, commodities fraud and spoofing. In addition to the half-dozen people who’ve been charged, the government documents referred to seven more individuals as unindicted co-conspirators. It’s not clear whether any of them have cooperated or what additional information they may have provided in the year since.

Nowak’s arrest sent a shockwave through the the metals and proprietary trading world, several people in the industry said. On paper and by reputation, he was as clean as they came, they said, asking: If he could come under scrutiny, couldn’t anyone?

Nowak’s trial is on pace for next year, according to filings in the case. The government should be able to use a JPMorgan settlement to its favor, said Michael Koenig, a former federal prosecutor who’s now a partner at Hinckley, Allen & Snyder and isn’t involved in the Nowak matter. The bank could be required to offer witnesses and testimony, he said.

“The company — and all its information and all of its personnel — is now sitting at the prosecutors’ table,” Koenig said.

— With assistance by Joe Deaux, Jack Farchy, and Mark Burton