As I have said on many occasions, fraud can indeed take on many faces. In the end, given a lack of oversight, the right opportunity, the need and the ability to rationalize, there is a remarkable similarity to virtually every scandal.
The main difference between the trading and supervisory team at the JP Morgan Metals desk, namely Gregg Smith, Michael Nowak and Christopher Jordan and crooked aluminum siding (precious metals) salesmen is money (lots of it) and the finest lawyers that money can buy. The Department of Justice has called their activities “racketeering,” a serious indictment indeed.
The Scheme
Assistant Attorney General Brian A. Benczkowski characterized the scandal in this manner (please note the italics are mine):
“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants. These charges should leave no doubt that the Department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”
The FBI Assistant Director in Charge William F. Sweeney Jr. added:
“Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand. Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented.”
The defendants, given the power of the gold and silver (precious metals) markets they controlled allegedly engaged in a pattern of racketeering activity, wire fraud conspiracy, sending out fake materials to clients and price manipulation.
From 2008 to 2016, the three traders plus several people identified as co-conspirators, were employed by JP Morgan occupying the trading desk in New York, London and Singapore.
According to the DOJ: “the defendants and their co-conspirators were allegedly members of an enterprise—namely, the precious metals desk…and conducted the affairs of the desk through a pattern of racketeering activity, specifically, wire fraud affecting a financial institution and bank fraud.”
Manipulation of the Public
In their position, they placed fake orders that were canceled before the buy or sell orders were executed. In other words, they could drive prices of precious metals where they wanted.
According to the Justice Department, “By placing Deceptive Orders, the defendants and their co-conspirators allegedly intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets, and to deceive other participants in those markets into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand.”
When the false orders were spotted by unknowing investors, the investors reacted. The scheme was highly complex, but the reason behind it was not so complex: greed. There was a back and forth between the traders and their conspirators pushing prices up and down between banks.
If a “group of us” could manipulate the price of any item, from orange juice to pork bellies to jellybeans at Easter, the laws of supply and demand would obviously kick-in.
In this alleged fraud of precious metals, because the scheme was so sophisticated, and the activity involved multiple locations, multiple banking institutions, and supervisory personnel, they had the perfect opportunity to defraud investors. Obviously, if the traders are controlling the markets without tight supervision the activity is ripe for fraud. The traders quickly discovered that given the billions in their control, if they seized the opportunity to manipulate, their need to make money could exceed their wildest expectations.
How could they rationalize their behavior? We can look for all kinds of mysterious explanations. However, I believe they convinced themselves that as “the brightest guys in the trading room,” they deserved anything they could get by separate the naïve from their money. It was no different than Bernie Madoff and hundreds of crooks before him.
What none of these people suspected was that good people, with an ethical sense, still exist in this cynical, fraudulent world.
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