Back in April, we reported that one of the pillars in the gold-trading business, Bank of Nova Scotia's ScotiaMocatta business was closing after failing to find a buyer in a sale process that had started in late 2017. As we further reported, Scotia was for years the world’s biggest lender to the physical precious metals industry, with a history stretching to the founding in 1684 of London gold dealer Mocatta Bullion, which it bought in 1997. Once a global player with more than 100 staff in offices from New York and London to India and Hong Kong, the bank effectively exited the business in 2018 following the abovementioned strategic review and unsuccessful attempt to find a buyer.
The sudden exit of one of the core precious metal traders left many wondering if some big news was about to hit. Well, that's precisely what happened, because earlier today the Department of Justice announced that Bank of Nova Scotia has agreed to pay more than $127 million in fines to settle criminal investigations into a price manipulation scheme in the price of precious metals that saw the participation of at least four of itw traders.
The fines consist of $60.4 million to the Department of Justice with the remainder going to the CFTC in the form of two monetary penalties of $42 million and $17 million.
“Today, Scotiabank has admitted to their role in a massive price manipulation scheme aimed at falsely manufacturing the prices of precious metals futures contracts to serve the bank’s best interests,” said Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office.
"The bank’s actions were designed to lead others to trade in ways they never would have without what was believed to be legitimate market activity. Scotiabank’s agreement to surrender more than $60 million in criminal fines, disgorgement and victim compensation underscores the severe penalties that can be levied against those who wish to engage in similar, illegal business tactics.”
The Canadian bank agreed to a deferred prosecution agreement (DPA) to settle separate probes by the Department of Justice and the U.S. commodities regulator, the Commodity Futures Trading Commission (CFTC).
According to an agreed upon statement of facts, between January 2008 and July 2016, four precious metals traders employed by Scotia in New York, London and Hong Kong made bogus trades to try to manipulate the price of gold, silver, platinum and palladium futures contracts by engaging in manipulative spoofing of the type demonstrated repeatedly on this website and elsewhere.
“For over eight years, Scotiabank traders placed thousands of orders for precious metals futures contracts in an attempt to manipulate prices for their own and the bank’s benefit and to deceive other market participants,” said Chief Robert A. Zink of the Justice Department’s Criminal Division, Fraud Section. “This deferred prosecution agreement—which includes a criminal monetary penalty at the top of the United States Sentencing Guidelines range, money to compensate victims, and an independent compliance monitor—reflects the seriousness of the offense and the state of Scotiabank’s compliance program, and further helps to promote the integrity of our public markets.”
According to the settlement, "four Scotiabank traders attempted to rig precious metals futures prices in their favor by placing thousands of orders they knew they would cancel before the trades were executed," U.S. Attorney Craig Carpenito said, describing a financial practice known as "spoofing."
"In this way, they sought to illegally manipulate the market to their own advantage and to the disadvantage of other traders."
The bank is also being punished because its compliance department "failed to detect or prevent the four traders' unlawful trading practices," the DOJ said.
"Between August 2013 and February 2016, three Scotiabank compliance officers possessed information regarding unlawful trading by one of the traders ... but failed to prevent further unlawful conduct by this same trader," the Department said.
While it was previously reported that Scotiabank, along with other banks such as JPMorgan and Merrill Lynch had participated in illegal spoofing for the better part of a decade, and was already forced to pay $800,000 in 2018 for the matter, the kicker is that according to the CFTC, the bank made false statements during the organization's investigation necessitating another $77.4 million in payments.
According to admissions and court documents, between approximately January 2008 and July 2016, four precious metals traders located in New York, London and Hong Kong engaged in fraudulent and manipulative trading practices in the markets for gold, silver, platinum, and palladium futures contracts (collectively, precious metals futures contracts) that traded on the New York Mercantile Exchange Inc. (NYMEX) and Commodity Exchange Inc. (COMEX), which are commodities exchanges operated by the CME Group, Inc. One of the traders, Corey Flaum, 42, of Delray Beach, Florida, pleaded guilty on July 25, 2019, to one count of attempted price manipulation in connection with his precious metals futures contracts trading at Scotiabank and another financial services firm, and his sentencing is scheduled for Jan. 27, 2021, before U.S. District Judge Brian M. Cogan of the Eastern District of New York.
Scotiabank did not receive voluntary disclosure credit because it did not voluntarily and timely disclose the offense conduct to the department. In 2016, after one of its futures commission merchants flagged trading by Flaum for possible spoofing, Scotiabank made a voluntary disclosure regarding Flaum to the CFTC. As a result of recordkeeping failures, however, Scotiabank’s disclosure to the CFTC was materially incomplete. As a result, the CFTC was impaired in its ability to fully investigate Flaum’s unlawful trading and discover the true extent of the misconduct. The CFTC, relying on Scotiabank’s incomplete and, ultimately, inaccurate disclosure, entered into a resolution with Scotiabank in 2018 that did not reflect the full extent of Flaum’s conduct (2018 CFTC Resolution). In the 2018 CFTC resolution, Scotiabank received a substantially reduced penalty in recognition of, among other things, its purported self-reporting.
“The consequences of the actions of these traders are far reaching, affecting not only the economy of the United States, but also the world’s financial markets,” said Inspector in Charge Delany De Leon-Colon of the U.S. Postal Inspection Service’s (USPIS) Criminal Investigations Group. “Anyone who thinks that manipulating trading markets to benefit their own bank accounts should see today’s announcement as a significant warning. The U.S. Postal Inspection Service has an extensive history of investigating complex financial fraud schemes in order to protect investors as well as the integrity of the financial marketplace.”
As part of the DPA, Scotiabank has agreed to continue to cooperate with the department in any ongoing investigations and prosecutions relating to the underlying misconduct, to modify its compliance program where necessary and appropriate, and to retain an independent compliance monitor for a period of three years.
"At Scotiabank, we understand that in order to maintain the trust of our stakeholders, we must adhere to trading-related regulatory requirements and compliance policies," the bank said in a statement Wednesday. "We are committed to adhering to these standards."
Sadly, the only thing that Scotia is truly committed to is making sure it does not get caught the next time it is rigging the price of gold.