A Need for Internal Transparency: JPMorgan Sued for Spoofing Precious Metals

Investors have sued JPMorgan Chase & Co., and a group of precious metals traders employed there, in New York federal court, claiming they manipulated futures contracts through a rogue broker practice known as “spoofing.”

JPMorgan Sued for Spoofing Precious Metals 

“Spoofing” is a practice in which traders attempt to give an artificial impression of market conditions by entering and quickly canceling large buy or sell orders onto an exchange, in an attempt to manipulate prices.

The complaint was filed just days after John Edmonds, 36, an ex-J.P. Morgan Chase trader, pled guilty to manipulating the precious metals market over a seven-year period. He has implicated his supervisors at the bank during the separate proceedings, which seems to have added fuel to the lawsuit by investors.

Accusations of Market Manipulation and the “Spoofing” Lawsuit

Private investor Dominick Cognata has filed a lawsuit that accuses JPMorgan and its employees of manipulating the prices of precious metals futures contracts on the New York Mercantile Exchange and Commodity Exchange.

The lawsuit alleges that, between January 1, 2009, and December 31, 2015, a price-distorting scheme was conducted by JP Morgan Chase & Co., in which traders under the company’s supervision would place orders for futures contracts, intending to cancel those orders before execution, which resulted in investors being “spoofed” into buying and selling futures at artificially and unethically inflated prices.

In a Department of Justice press release regarding the charges against Mr. Edmonds, U.S. Attorney John H. Durham, said:

 “This defendant was involved in manipulating the precious metals commodity markets for several years, and I thank the FBI for its diligent investigation of this matter and its commitment to hold accountable those who use technology to their advantage to cheat these markets. The investigation of deceptive trading practices by others involved in this scheme is ongoing.”

The U.S. Attorney’s use of the term “ongoing” would seem to indicate the charges recently filed against JPMorgan Chase & Company, which implicate supervisors or superiors within the firm who had knowledge of, or approved of, the unethical practices.

Read the full press release here.

A Lack of Systematic Accountability Increases Risk

While spoofing itself is a rogue broker practice, this case still has relevance to RIAs (registered investment advisors) and investment firms, serving as a definite reminder of the positive influence that transparency and accountability bring to their organizations.

It seems unlikely that questionable practices conducted by a group of conspirators, including brokers and their superiors, at JP Morgan Chase could have continued long if a robust system of internal checks and balances had been in place.

Without an effective system, it seems illegal activity was continued for a duration sufficient to draw the ire of regulatory bodies and investors alike.

Simply put, individuals, teams, or departments who are aware their activities are being systematically monitored within their organizations are less likely to engage in practices that carry potential consequences for themselves or the firm as a whole.

We recommend that each organization develop an internal system of monitoring and accountability that could deter questionable trading practices. Such policies and procedures could include the following:

  • Consistent cross-departmental reviews
  • Frequent spot checks by other department heads
  • Revolving leadership among departments

Such procedures could effectively discourage any questionable or unethical trading methods and reduce unnecessary risk, thus greatly reducing the odds of a firm finding itself on the wrong side of the SEC or other regulatory body for spoofing or other illegal activities conducted by those operating under the organization’s umbrella.

Preventative Accountability Measures — We Can Help

Should you need guidance in developing an internal system of checks and balances that effectively monitor trading practices and provide a clear sense of accountability and transparency within your firm, the experienced attorneys at Core Compliance & Legal Services, Inc., can help.

Contact us here for assistance.