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Monday, October 3, 2022

How the United States Overtook the World’s Most Powerful Gold Trader

Bloomberg – In December 2018, a man in his 30s was stopped upon arrival at Fort Lauderdale airport and taken to a room where two FBI agents were waiting for him.,

Target was terrified and already on high alert – one of his associates had recently admitted to crimes he knew he had committed as well. Christian Trunz was not a terrorist or a drug dealer, but a mid-level precious metals dealer returning from his honeymoon. Importantly: He was also a longtime employee of JP Morgan (JPM), the world’s largest gold bank.

The FBI ambush at the airport, described by Trunz, was a necessary step in US prosecutors’ search for JPMorgan’s precious metals desk, leading to the climax of last week – The 13-count sentence of the man who was once the most powerful man in the gold market was the former global head of the table, Michael Novak.

Viewed with a mix of fascination and fear by precious metals traders around the world, the case illuminated how JPMorgan’s professionals – including Nowak and the bank’s former gold-focused trader Greg Smith – allegedly manipulated the markets for years, placing fake orders designed to deceive other participants, Primarily algorithmic traders whose high-speed activity has become a major source of frustration.

Novak has become one of the oldest bankers convicted in the United States since the financial crisis and faces the prospect of decades in prison, though he could serve a much shorter sentence.

Nowak’s lawyers claim that Novak was not “a crime minded” and said he would “continue to assert his 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 guilt. (Jeffrey Ruffo, a salesman tried with him, was acquitted.)

But rumors of fraud have been swirling around JP Morgan’s trading desk for at least a decade. Several years ago, the FBI first contacted Trunz in 2018.

Alex Gerko, head of the algorithmic trading company, complained in early 2012 about Smith’s activity in the gold market to CME Group Inc., which owns futures exchanges where the US claimed that thousands of counterfeit trades took place. But Smith and Novak continued to work at the bank until 2019, when the US brought charges against them.

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

in the Department of Justice, The path for JPMorgan began with the decision to begin hunting down traders who made false offers to buy and sell items they did not intend to execute., The Criminal Fraud Unit hired data consultants to analyze billions of lines of business to identify patterns of market manipulation.

As large amounts of data were examined, few operators stood out. And Works at JP Morgan,

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 head of the desk.

Novak was arrested in September 2019, which sent a shockwave through the metals world, but the Covid-19 pandemic meant it would be another three years before the trial finally took place.

In his testimony, Edmonds, who started in an operations role at JPMorgan, described desk spoofing as a daily occurrence. And felt obliged to participate because it was part of the general strategy.

The Justice Department’s action against JPMorgan’s top gold bankers was observed in some corners of the precious metals markets, where investors and bloggers have long accused the bank of a massive scheme to manipulate low prices, These allegations led to several investigations by the Commodity Futures Trading Commission, The most recent of which was closed in 2013 after no evidence of wrongdoing was found.,

The case against Novak and Smith made no allegations of a systematic conspiracy to suppress prices, Instead arguing that they deceived the markets in a very short time and in both directions.To benefit JP Morgan’s most important hedge fund clients.

And while the indictment is a victory for prosecutors, the jury rejected the government’s more comprehensive allegation — brought under the Racketeer Influenced and Corrupt Organizations Act, or RICO — that they were part of a conspiracy and that JPMorgan’s Precious Metals Desk Was a Criminal Enterprise,

At JPMorgan, Edmonds stated that the practice was called “clicking” rather than spoofing, and that operators never discussed it as illegal, despite the company’s own compliance policies being clear. Trunz also spoke of a recurring joke in which Smith clicked his mouse so fast and canceled orders that his colleagues encouraged him to ice his fingers.

In 2012, Gerko, who is the founder of quantitative trading company XTX Markets Ltd., complained to CME about Smith’s gold futures trading, quickly registering and canceling orders. CME launched an investigation, which lasted three years before concluding that he was potentially forgery.,

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

After another JPMorgan trader, Michelle Simonian, was fired for spoofing in 2014, Novak called his employees to his office to ask if they were doing the same, according to Edmonds. Nobody said anything. The incident shocked Edmonds, he said, as Novak had known what was 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 intelligent in 2020, and testimony during the trial portrayed him as a much-loved manager who befriended Trunz while both at JPMorgan’s London office used to work.

During the trial, Trunz was asked if he liked Novak, and the former businessman replied, “I loved him.”

However, relations became more complicated after officials contacted Trunz. When he considered making a deal with the government, Novak told him no, according to Trunz, who was audibly choked up during his testimony.

Defense lawyers portray Trunz and Edmonds as unreliable Proven liars who testified against their clients to avoid lengthy prison sentences,

Novak and Smith will not be sentenced until next year. At the level of 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 culmination 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.

JPMorgan has already paid $920 million to settle forgery charges against it.

“Even if the jury rejects the conspiracy and Rico charges, they will consider it a victory,” said Dechert LLP lawyer Mathieu Mazur, who defended one of the Deutsche Bank operators. “This is probably the end of the precious metal scans that were done, but I think such cases will continue.”

Even after the action Some market participants say that counterfeiting still occurs, When commodity futures were traded in pits, brokers had to trade face-to-face. Hiding behind a screen makes it very easy to place and receive orders at will.,

“We still see spoofing regularly,” said Eric Zucarelli, an independent commodity trader who began working on the floor of the New York Mercantile Exchange in 1986. That guy and the floor committee will come and fine you for being an idiot.

— With help from Yvonne Yu Lee.

See more at bloomberg.com

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World Nation News Desk
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