JPM Pays Record $1 Billion Fine; Admits Spoofing Of Gold And Treasuries

As expected, JP Morgan has just agreed to pay $920 million in fines - a record penality for allegations of systematic market manipulation  - as part of a deferred prosecution agreement with federal prosecutors in Connecticut, bringing to a close a yearslong investigation into "spoofing" and other market manipulation tactics in the precious metals and Treasury markets.

Over the past decade, holding megabank trading desks accountable for routine manipulation of FX, Libor and other markets has been a priority for prosecutors, ever since - it seems - the springtime "flash crash" of 2010 shone an uncomfortable spotlight on 'spoofing' a technique whereby traders submit orders they never intended to fill solely for the purpose of trying to move the price of a given currency, futures contract etc. in a direction that favors one of their positions. For example, a trader who's looking to sell a big slug of front-month gold futures might layer in dozens of "buy" orders to try and push the price up to hit his sell 'offer'. The trick is, traders need to make sure none of these fraudulent offers ever get filled. 

At trial, JPM's former top precious metals trader argued that "spoofing" was an inevitable adaptation by sell-side dealers to fend off high-frequency market makers. One Deutsche Bank trader argued that the behavior was so commonplace, he didn't realize it was wrong, or illegal.

Tuesday's settlement addresses "two distinct schemes to defraud", according to a press release from the DoJ. Under the terms of the DPA, JPMorgan will pay over $920 million in a criminal monetary penalty, criminal disgorgement,= and victim compensation. The criminal  penalty paid by the bank will be credited against payments made to the CFTC under a separate agreement with the CFTC being announced today and with part of the criminal disgorgement credited against payments made to the SEC under a separate agreement with the SEC being announced today.

"For over eight years, traders on JP Morgan’s precious metals and US Treasuries desks engaged in separate schemes to defraud other market participants that involved thousands of instances of unlawful trading meant to enhance profits and avoid losses," said Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division. "Today’s resolution - which includes a significant criminal monetary penalty, compensation for victims, and requires JP Morgan to disgorge its unlawful gains - reflects the nature and seriousness of the bank’s offenses and represents a milestone in the department’s ongoing efforts to ensure the integrity of public markets critical to our financial system."

"JPMorgan engaged in two separate years-long market manipulation schemes," said US Attorney John Durham. "Not only will the company pay a substantial financial penalty and return money to victims, but this agreement requires JPMorgan to self-report violations of the federal anti-fraud laws and cooperate in any future criminal investigations. I thank the FBI for its dedication in investigating these deceptive trading practices and other sophisticated financial crimes."

According to admissions and court documents, between approximately March 2008 and August 2016, numerous traders and sales personnel on JPMorgan’s precious metals desk located in New York, London, and Singapore engaged in a scheme to defraud in connection with the purchase and sale of gold, silver, platinum, and palladium futures contracts (collectively, precious metals futures contracts) that traded on the New York Mercantile Exchange Inc. and Commodity Exchange Inc., which are commodities exchanges operated by the CME Group Inc. Prosecutors identified "tens of thousands of instances" where JPM traders placed fraudulent orders in attempts to manipulate market prices.

Aside from the bank, three JPMorgan traders, Gregg Smith, Michael Nowak, and Christopher Jordan, and one former salesperson, Jeffrey Ruffo have been charged with running a corrupt criminal enterprise within America's largest bank. A

Moreover, between April 2008 and January 2016, traders on JPM's Treasuries desks in New York and London used similar "spoofing" techniques to place fraudulent orders in Treasury futures with the Chicago Board of Trade (another commodity trading venue operated by the CME), as well as for notes and bonds in trading in the spot secondary market for Treasury securities. These traders also routinely misled markets about the price and supply of Treasury securities.

Over the span of eight years, 15 traders at the biggest US bank caused losses of more than $300 million to other participants in precious metals and Treasury markets, according to the court filings. JP Morgan has admitted responsibility for the traders’ actions. The three-year DPA will allow the bank to walk away from the scandal - and two counts of wire fraud - so long as it self-reports any future violations.

Meanwhile,  the woman who was overseeing JPM's global commodity business when some of this wrongdoing was ongoing all this went down wasn't hardy mentioned even once during the proceedings.

Read the DPA below:

JPMDPA by Zerohedge on Scribd