It is vitally important for the compliance professional to understand the methods and tactics used by various government agencies, both agencies with criminal prosecutorial powers as well as agencies with accountabilities to enforce regulations. As the United States government continues its relentless pursuit of criminalizing commerce it would behoove compliance practioners to familiarize themselves with tactics employed during investigations.
As we all know certain regulatory violations now carry potential criminal charges, as in the case of the JPMorgan Chase (JPM) spoofing/market manipulation case. The vexing fact that the same conduct can lead to multiple regulatory investigations as well as administrative proceedings only adds to the complex topic of corporate investigations. In addition, as in the matter here, will be the inevitable follow on of civil actions.
Compliance professionals are increasingly finding themselves in a high stakes and now multi-billion dollar dilemmas under which your actions to “prevent and detect” compliance breaches will be part of the investigation. Look into the method and tactics (which will be familiar to anyone with exposure to police investigative techniques) used in this case.
The low man on the totem pole squeeze.
The blogosphere has been raging for years with complaints about market manipulation in the precious metal’s markets. In my view, most market professionals knew there was some validity to the claims. What set off the authorities to start investigating is any one’s guess. But as expected they went at the lower level players in the scheme and worked their way up. The chart below outlines some of the actors in the scheme, the instruments used during the investigation as well as the associated charges.
According to the records it appears that one of the first public indications of a serious attempt to investigate the matter was a criminal information filed on October 9, 2018, against John Edmonds (see here). This was nearly two years before the signing of the Deferred Prosecution Agreement and associated Administrative Orders against JPM.
An Information is a formal criminal charge which begins the criminal proceeding to court. An Information is a particular type of charging document that sends a message in and of itself. Point being if an employee is the subject of an Information not only is the employee at great risk of losing his freedom the firm is at great risk as well.
Notably in that Information it is stated that the alleged offenses occurred from 2009 up and until 2015. This time period was within the timeframe when JPM was under a separate DPA related to their breaches of conflicts of interest.
Mr. Edmonds was alleged to have engaged in Conspiracy, Wire fraud, Commodities fraud, Commodities price manipulation and Spoofing. Prior to his departure Mr. Edmonds was a managing director at J.P. Morgan
Ultimately Mr. Edmonds plead guilty under seal on Oct. 9, 2018 in the District of Connecticut to one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities price manipulation and spoofing.
Approximately 10 months later a second Information was filed against Christian Trunz, an Executive Director at the time of his departure from JPM (see here). The two counts in Mr. Trunz’s information allege conspiracy and spoofing.
Mr. Trunz plead guilty to one count of conspiracy to engage in spoofing and one count of spoofing.
Two days after the filing of the Information against Mr. Trunz, Gregg Smith, 55, of Scarsdale, New York, Michael Nowak, 45, of Montclair, New Jersey and Christopher Jordan, 47, of Mountainside, New Jersey were charged in a 45-page indictment alleging racketeering conspiracy along with several other federal crimes (see here).
That indictment was then followed up three months later with a superseding indictment. Along with the racketeering conspiracy charges other allegations included; Attempted Price Manipulation (Nowak and Smith), Bank Fraud (single count for each), Wire Fraud Effecting a Financial Institution (single count for each), Commodities Fraud (Smith, Nowak) and Spoofing (Smith, Nowak).
Class Action lawsuit
And here comes the inevitable. On June 29, 2020, 92 days before the DPA was released, the Illinois law firm of Freed Kanner London & Millen LLC filed a class action lawsuit in a Manhattan federal court (see here). The lawsuit states in part:
“Beginning in 2018, DOJ criminally charged several of Defendants’ employees, including Michael Nowak, head of the precious metals trading desk, for their roles in manipulating the prices of precious metals futures contracts. Two employees, John Edmonds and Christian Trunz, have since pled guilty and are cooperating with the ongoing federal criminal investigation. Similarly, CFTC has imposed civil penalties and sanctions against several of those same individuals.”
Interestingly, the CFTC’s Administrative Order did not come out until September 29, 2020.
The lead plaintiff in this class action is Thomas Gramatis, President /TJG Commodities LTD a proprietary trading firm located in Chicago Illinois.
Deferred Prosecution Agreement
On September 29, 2020 the Department of Justice issues a public statement announcing the Deferred Prosecution Agreement (see here). Per the DPA:
“The Company and the Related Entities agree that, effective as of the date they sign this Agreement, in any prosecution that is deferred by this Agreement, they will not dispute the Statement of Facts set forth in this Agreement, and, in any such prosecution, the Statement of Facts shall be admissible as: (a) substantive evidence offered by the government in its case-in-chief and rebuttal case; (b) impeachment evidence offered by the government on cross-examination; and (c) evidence at any sentencing hearing or other hearing. (Emphasis added)
The term of the DPA is for three years without the imposition of a corporate monitor. “Based on the Company’s and the Related Entities’ remediation, the state of their compliance program, and the Company’s and the Related Entities’ agreement to report to the Fraud Section and the Office as set forth in Attachment D to this Agreement (Corporate Compliance Reporting), the Fraud Section and the Office determined that an independent compliance monitor was unnecessary.”
That was a save of a couple $100 million dollars.
Order Instituting Proceedings
On September 29, 2020 the Commodity Futures Trading Commission (CFTC) submits its Administrative Order noting that the Respondents (JPM) have entered into an Offer of Settlement with the Commission (see here). Some of the more interesting disclosures from the CFTC:
“In accepting the Offer, the Commission notes that JPM’s cooperation with the Division of Enforcement (“Division”) during the early stages of its investigation was not satisfactory. The Commission, however, does recognize that JPM’s cooperation with the Division in the later stages of the investigation, which cooperation is described in more detail below, was substantial. Accordingly, the Commission has taken into account the level of cooperation provided by JPM in all stages of the investigation in determining the civil monetary penalty JPM is ordered to pay.”
“During the Relevant Period, JPMS failed to identify, investigate, and stop the violative conduct described above.”
“The order notes that during the early stages of the Division of Enforcement’s investigation, JPM responded to certain information requests in a manner that resulted in the Division being misled.”
“Prior to 2014, JPM’s surveillance system lacked the ability to effectively identify spoofing conduct. Despite using a newer surveillance tool beginning in 2014, and despite numerous red flags, including internal surveillance alerts, inquiries from CME and the Commission, and internal allegations of misconduct from a JPM trader, JPMS still failed to provide supervision to its employees sufficient to enable JPMS to identify, adequately investigate, and put a stop to JPM’s Precious Metals Desk and Treasuries Desk’s misconduct. Accordingly, JPMS failed to perform its supervisory duties diligently.”
“Later in the investigation, however, JPM expended significant time and resources to provide the Division with timely updates and factual presentations on its internal investigation, expeditiously responded to Division requests for information, identified to the Division relevant evidence and information from the voluminous documents JPM collected and produced, and analyzed trading data.”
Cease and Desist Order
Also, on September 29, 2020 the Securities and Exchange Commission issues a cease and desist order (see here). The gist of the SEC Cease and Desist is as follows:
Between April 2015 and January 2016 (the “Relevant Period”), certain traders (“Traders”) on the U.S. Treasuries trading desk at JPMS (the “JPMS Treasuries Desk”) engaged in manipulative trading of U.S. Treasury (“Treasury”) cash securities in the secondary market.
In the largest spoofing/manipulation case to date the payable fines and monetary penalties approximate $920 million dollars, aside from the still pending civil litigation(s). This case is important from several different aspects. If you follow the investigative trail of the government authorities, you can see that the methods and tactics used and gage potential impact to the firm and the firm’s most important asset – its people.
Reading these documents is important for the compliance professional because the documents lay out in detail the matters the authorities found substantive. In addition, this case layouts expectations for firms and their respective compliance functions on a go forward basis.
Of significant importance is the claim in the DPA that JPM now analyzes 100% of their 100 million electronic communications. In a companion piece on our friends at Honcho blog I more fully address a few communications monitoring concerns.
|Name||# of pages||Date||Charges/Violations|
|John Edmonds (information)||5||10/9/2018||Conspiracy|
|Commodities price manipulation,|
|CHRISTIAN TRUNZ (information)||4||8/20/2019||Conspiracy|
|Smith, Nowak, Jordan indictment||45||8/22/2019||Conspiracy to commit in Enterprise w pattern of RICO|
|Conspiracy to Commit Price Manipulation, Bank Fraud, Wire Fraud Affecting a Financial Institution, Commodities Fraud, and Spoofing|
|– Attempted Price Manipulation|
|– Bank Fraud|
|– Wire Fraud Effecting a Financial Institution|
|– Commodities Fraud|
|Smith, Nowak, Jordan superseding indictment||48||11/14/2019||See above|
|DEFERRED PROSECUTION AGREEMENT||34 (87)||9/25/2020||Wire Fraud (2 counts)*|
|JPM CFTC Order||19||9/29/2020||Section 9(a)(2) of the Commodity Exchange Act|
|7 U.S.C. § 13(a)(2) (2018)|
|Section 4c(a)(5)(C) of the Act|
|7 U.S.C. § 6c(a)(5)(C) (2018)|
|Section 6(c)(l) and 6(c)(3) of the Act, 7 U.S.C. § 9(1), (3) (2018)|
|Regulations 180.l(a)(l) and (3)|
|17 C.F.R. §§ 180.l(a)(l), (3)|
|Regulation 166.3, 17 C.F.R. § 166.3 (2019)|
|SEC ADMINISTRATIVE AND CEASE-AND-DESIST||5||9/29/2020||Section 17(a)(3)|
|* As per the Information|