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At Bear Stearns, before the bank was acquired by JPMorgan Chase & Co in 2008, manipulating the gold futures market with bogus spoof orders was “common practice,” especially for its top trader, Gregg Smith, a former colleague told jurors in Chicago.
“It was pretty widespread” on the precious-metals trading desk, said Corey Flaum, a gold and silver trader who was later fired for spoofing and reached a criminal plea agreement to cooperate with prosecutors. “It was done out in the open,” Flaum said Monday. “Nobody ever said boo about doing it. No one ever said it was legal or illegal. It was common practice.”
Smith, who became JPMorgan’s top gold trader after the merger, is on trial with two others on the desk: Jeffrey Ruffo, a salesman who handled orders by the bank’s biggest hedge fund clients, and Michael Nowak, the longtime head of the JPMorgan precious-metals business. They are accused of operating a criminal enterprise by manipulating prices from 2008 to 2016.
Flaum described how Smith used “spoof” trades – huge orders that are quickly cancelled before they can be executed – several times a week to push precious metals up or down so he could make trades for the bank and its clients more profitable.
Flaum, who joined Bear Stearns in 2006 and sat next to Smith in their New York office, said he learned to spoof on the bank’s precious-metals desk and wasn’t aware that the practice was wrong or illegal until 2011.
“It was something I observed,” Flaum said. “Nobody from the managing director on the desk to their superior to people in compliance ever came out and said anything about it.”
The former trader said the precious-metals desk routinely spoofed because the technique usually worked, which was profitable for the bank and kept clients happy by ensuring better pricing on their orders.
Flaum said he could tell when Smith was spoofing the market because he’d hear Smith’s “excessive clicking” as he rapidly cancelled orders within seconds of placing them.
That contrasted with normal trading that was “more slow and methodical,” Flaum told the jury. – fin24
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