Updated: Aug 28, 2020
The ongoing game of cops and robbers in the precious metals markets was back in the news last week and with more juicy details. Trading scandals are nothing new in these markets but the period from 2007 to 2016 should go down in financial history as the Golden Age of Price Manipulation. In a market that’s featured such craziness as Black Friday, the Hunt Brothers, and the most recent Ghost Collateral scandal, that’s saying something!
As a result of the latest price manipulations, numerous precious metals traders at various institutions have been charged or pleaded guilty to commodities price manipulation, spoofing, commodities fraud, or conspiracy to commit wire fraud. The Department of Justice, the CFTC, SEC, and FBI have all been involved. The government has brought criminal charges (i.e. jail time) against some of the traders.
The facts are shocking even by Wall Street standards
The CFTC announced on August 19 a settlement with Scotia Capital (a sub of Bank of Nova Scotia) regarding its role in precious metal price manipulation over an eight-year period from 2008 to 2016. The exact orders may be found here (Related Links tab):
I urge you to read them. They aren’t long and they tell a great story of greed, arrogance, and incompetence.
The latest. In short, BNS agreed to pay $127 million to settle various criminal and civil allegations stemming from thousands of manipulative orders in precious metals futures as well as making false statements to the CFTC. It also agreed to significantly expand its compliance activities and was ordered to retain an independent compliance monitor for three years. In July 2019, one of Scotia’s metals traders pleaded guilty to attempted commodities price manipulation.
Not surprisingly, last April BNS announced that it was closing its 336-year-old precious metals business (ScotiaMocatta) that it purchased from Standard Chartered in 1997. In an interesting coincidence, Scotia hired JP Morgan in 2018 in a failed attempt to find a buyer for the business. Of course, JPM was another major bank caught up in metals manipulation, among other things.
Since October 2018, numerous members of JP Morgan’s precious metals desks in NY, London, and Singapore have been accused or have pleaded guilty to various commodities fraud, conspiracy, and price manipulation charges brought by the Department of Justice, the SEC, and the CFTC. All of the traders involved came to the bank as part of JPM’s buyout of Bear Stearns. It has been reported that US Authorities are now building a criminal case against the bank itself.
Other major banks were involved as well. In 2018, the CFTC settled charges for spoofing with Deutsche Bank, HSBC, and UBS, all of which paid fines without admitting nor denying the accusations.
The manipulation schemes were widespread and not confined to just gold: silver, platinum, and palladium were also involved. Nor were they limited to just banks. Metals refiner Heraeus and Mitsubishi Corp. settled CFTC spoofing charges in September 2019.
All involved “spoofing,” or entering a bid or offer with the intent to cancel it before execution in an attempt to create an artificial impression of supply and demand, thereby manipulating prices. Spoofing was specifically prohibited in 2010 under the Dodd-Frank act but is notoriously difficult to prosecute. It’s not new: it was going on in open outcry trading pits long before electronic trading took over. In civil cases (CFTC, SEC, FINRA) prosecutors must prove the individual’s intent to cancel the bid or offer; in criminal proceedings (DOJ), they must prove the individual knowingly engaged in spoofing. A high bar – the guilty pleas and settlements described here betray just how serious and obvious the violations were.
Criminal masterminds were not at work here. In the case of Deutsche and UBS, chat room conversations detailed their spoofing activities. Not sure who doesn’t know at this point that all chat room conversations are recorded and monitored, but apparently, they didn’t. Either they were ignorant of that, felt immune to prosecution, or didn’t even know spoofing was a crime. I suspect some combination of the first two.
Embarrassingly, all this manipulation occurred right under the noses of the well populated compliance, back office, and legal teams at JPM, BNS, et al.
In the case of BNS, it’s even worse than it appears: according to the settlement order, they failed to fully identify all accounts and traders to the CFTC over the course of five written submissions to the agency. The bank also made misleading representations regarding the capabilities of its compliance software. As the order states “BNS knew or should have reasonably known that its statements were false or misleading…” It cost BNS dearly: the original fine from the CFTC was only $800,000.
There's more. BNS compliance “had substantial information regarding, but failed to stop, unlawful trading…” As early as 2013, BNS compliance distributed an information deck regarding disruptive trading practices. In response, one trader sought clarification and information from compliance regarding the nature of his trading and went on to describe how he placed a series of orders on one side of the market to trigger execution on the other side. In other words, classic spoofing. In spite of this, and after internal discussions within BNS compliance, nothing was done.
Even more damning, in 2016 one of BNS’s FCMs contacted compliance about suspicious trading that indicated possible spoofing. After looking into it, compliance concluded that the trader “…is just adjusting his exposure to the marketplace.” Needless to say, the three BNS compliance personnel involved have all been terminated (although other than the traders involved, no one else at the bank’s senior levels seems to have suffered). No wonder the agencies came down hard on them.
It’s hard to believe that such blatant violations and incompetence occurred in institutions that spend millions per year on compliance, systems, and legal support, especially after 2008. How does this happen and why will it keep on happening unless certain changes are made? I will answer that in my next blog.
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