Prosecutors have not brought a case under the Racketeer Influenced and Corrupt Organizations Act, or RICO, against Wall Street traders since the investment firm Princeton Newport Partners was indicted in the mid-1980s. The RICO charges filed recently against three traders at JPMorgan Chase indicate that prosecutors may be resurrecting the law to target white-collar defendants.
Prosecutors accused Michael Nowak, who was the head of precious metals trading at the bank, along with Gregg Smith and Christopher Jordan, of organizing the precious metals desk as a RICO enterprise to engage in “spoofing,” as well as wire and bank fraud in which JPMorgan and its customers were the victims
“Spoofing,” which was made a crime by the Dodd-Frank Act, happens when traders are “bidding or offering with the intent to cancel the bid or offer before execution.” By building the case around RICO instead of just commodities manipulation charges, federal prosecutors are trying to avoid the problems they have had convincing juries in other cases that canceling orders is enough to prove a crime.
In 2018, a jury in Connecticut acquitted Andre Flotron, a precious metals trader at UBS, of spoofing charges. Prosecutors failed to prove that a trading strategy that involves canceling orders is enough to show an intent to spoof and not just the ordinary conduct of many traders. In many cases, the parties on the other side of the transactions were computers following trading algorithms rather than individuals who might be fooled by misleading orders.
The indictment of the three JPMorgan traders laid out a classic spoofing case, in which fake orders are intended to mislead the market. But rather than frame the case as just a commodities fraud, the prosecutors are using RICO to try to show that the defendants misled JPMorgan and defrauded customers of the bank by costing them money on their trading strategies.
The case is built around the traders’ goal of “maximizing trading profits and minimizing trading losses” for the precious metals desk and then concealing their “unlawful activities” from JPMorgan and the Commodity Futures Trading Commission. The indictment describes a scheme in which the defendants entered a “genuine” order, which was also called an “iceberg” order because the total amount sought was not obvious. The defendants then entered layers of “deceptive” orders that were much bigger than their genuine orders to “inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets,” it said.
Prosecutors have two cooperating witnesses, John Edmonds and Christian Trunz, to help explain how the reported spoofing was accomplished and how JPMorgan was misled. Their testimony could be helpful in framing the case for the jury as one involving deception and not just spoofing.
Proving a RICO conspiracy charge is never easy. The government must show that the precious metals desk constituted an “enterprise” used to engage in wrongdoing and that both JPMorgan and its customers were deceived by the orders.
The indictment notes that on some occasions the defendants were unable to cancel orders quickly enough, and some of the deceptive orders were filled. The defense may use that to argue that they were not trying to spoof the market but were just using different order strategies to earn profits.
Making this a case about wire and bank fraud rather than just spoofing may give it a greater appeal to a jury. Any misstatements the defendants made to JPMorgan, along with how they were able to generate greater profits through the deceptive orders, may be enough to convince a jury that they were engaged in systematic wrongdoing. But the RICO conspiracy will make this a much more complicated case than a simple spoofing charge.
While RICO hasn’t been used to prosecute Wall Street trading in decades, it was used against top executives at Insys, an opioid company, who were found guilty of racketeering in May 2019.
The case against the JPMorgan traders may become a template for future spoofing prosecutions. That may send a very chilling message to those who try to spoof the markets.