(Bloomberg) — The former head of the precious metals desk at JPMorgan Chase & Co. and its chief trader has been sentenced to prison for fraud, fraud and attempted market manipulation.
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Michael Novak, who ran the bank’s gold and silver trade, and trader Greg Smith were sentenced Tuesday in Chicago by US District Judge Edmund Chang. Novak was sentenced to one year and one day in prison, while Smith was sentenced to two years, the harshest sentence yet in the government’s latest crackdown on questionable business practices.
Both men were convicted in a trial last year. Smith, 59, has been described as “the most prolific crook the government has so far prosecuted”, while Nowak, 49, has been dubbed the “boss” behind the scheme.
In delivering the verdict, the judge said Smith and Novak clearly knew what they were doing was wrong.
“This is a serious crime that you committed,” Zhang told Novak. “What happened here was the act of throwing lies – and many lies – into the market. Market integrity is a critical component of financial markets. These lies moved the market. It’s not like they had zero impact.”
Read more: JPMorgan gold traders found guilty after lengthy plagiarism trial
The judge said the prison sentences were meant to “send a message” that market manipulation would be punished. “I try to deter all forms of financial fraud in the market,” he said.
Chang Nowak was ordered to begin his sentence on October 23 and Smith on January 15. Lawyers for the two men said they plan to appeal their convictions.
Acting Assistant US Attorney Nicole M. Argenteri, in a statement, said Smith and Novak “used their position as one of the most powerful traders in precious metals markets around the world to engage in an outrageous effort to manipulate prices in their favor.” The Department of Justice was committed to holding accountable “those who engage in fraud and manipulation that undermine the investing public’s confidence in the integrity of our commodity markets.”
Prosecutors had initially sought prison sentences of six years for Smith and five years for Novak, but said on Tuesday they had revised those sentences back to about two years. Lawyers for the two men argued that they should be spared imprisonment because neither of them gained personally from the plagiarism.
The JPMorgan case is part of a crackdown by federal prosecutors against illegal plagiarism, in which traders place fake orders to move prices up or down and then quickly cancel them before they can be executed. Smith and Novak used this technique to manipulate gold and silver prices from 2008 to 2016.
The convictions of Smith, Novak and the third trader convicted in November, Christopher Jordan, capped a string of victories by prosecutors in plagiarism cases targeting some of Wall Street’s biggest banks, including Bank of America Corp., Deutsche Bank AG and Morgan Stanley. . Two former Deutsche Bank traders and two former Bank of America traders were each sentenced to one year in prison.
JPMorgan, the largest US bank, agreed in 2020 to pay $920 million to settle Justice Department allegations against it — the largest fine imposed by any financial institution accused of market manipulation since the 2008 global financial crisis.
Read more: Plagiarism A silly name for serious market fraud: QuickTake
Prosecutors have charged several members of the team Nowak led at JPMorgan. Three of them pleaded guilty and testified against Nowak and Smith. Witnesses described how Novak and Smith routinely placed huge buy and sell orders that they never intended to execute—part of their strategy to push prices in a direction that would benefit the bank.
Christian Trones, a former student of Smith and one of the dealers who pleaded guilty and cooperated, told the jury that he learned the parody by watching Nowak and Smith for years. When Tronz came under scrutiny for his cynical trading, he said Nowak coached him to lie to compliance officials and later advised him not to plead guilty while prosecutors prepared criminal charges against the trading desk’s top executives.
Trones testified that Smith was so quick to place and cancel bogus orders that his colleagues would joke that he needed to put ice on his fingers to cool them down.
“This was an open-desk strategy,” said Trones, who sat next to Smith and watched as he quickly clicked his mouse to make and cancel trades. “It wasn’t hidden.”
Read more: A JPMorgan trader swindled so quickly he must have ice on his fingers
Spoofing was common in the commodity world, where traders would make an offer to buy or sell that they never intended to make to the CEO – hoping to manipulate prices in the direction they wanted to make a profit. This practice became illegal after the passage of the Dodd-Frank Act of 2010, which included several banking and market reforms in the wake of the financial crisis.
At trial, Smith’s lawyer argued that his client’s orders were legitimate and that there were other explanations for buying and selling precious metals contracts simultaneously on behalf of clients.
The case is United States v. Smith and Others, 19-cr-00669, US District Court, Northern District of Illinois (Chicago).
(Updates with comment from the judge, and a statement from a Justice Department official.)
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