NEW YORK -- JPMorgan Chase admitted Tuesday to manipulating the markets for precious metals and U.S. Treasuries, agreeing to pay $920 million in fines and penalties for the illegal behavior.
U.S. financial regulators and the Department of Justice said traders at JPMorgan used a tactic known as "spoofing" over an eight-year period. Spoofing is when traders send trading signals into a market, with no intention of buying or selling at those prices, in order to move a market in one direction or another.
From at least 2008 to 2016, 15 traders at the biggest U.S. bank caused losses of more than $300 million to other participants in precious metals and Treasury markets, according to court filings Tuesday.
The traders initiated orders to buy or sell precious metals, Treasury notes and Treasury futures only to quickly cancel the trades before they were executed. The illegal practice sends a false signal to other market players, prompting price changes that the spoofers can then exploit.
JPMorgan admitted responsibility for the traders' actions. The Justice Department filed two counts of wire fraud against the bank's parent company but agreed to defer prosecution related to the charges, under a three-year deal that requires the bank to report its remediation and compliance efforts to the government. It will also pay fines and penalties to the Securities and Exchange Commission, as well as the Commodity Futures Trading Commission.
"The conduct of the individuals referenced in today's resolutions is unacceptable, and they are no longer with the firm," said Daniel Pinto, co-president of JPMorgan Chase and chief executive of its Corporate & Investment Bank. "We appreciate that the considerable resources we've dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs."
TREASURY MARKET SCAM
In the case of the U.S. Treasury market, the SEC said JPMorgan traders submitted trades they intended to act upon as well as spoof trades. Five traders on the Treasuries desk manipulated prices of U.S. Treasury contracts, as well as trading in notes and bonds in the secondary market, over eight years, according to the settlement, causing $106 million in losses.
The settlement didn't identify the five Treasuries traders, and it's unclear whether the government will pursue any legal action against any of the traders referred to in the settlement.
Members of that group openly discussed their illegal strategies via chats, with one trader writing on six occasions that he was "spoofing" the market, according to the government's statement of facts. Another Treasuries trader, in a November 2012 chat, described his success in moving the market by tricking high-frequency traders: "a little razzle dazzle to juke the algos."
"J.P. Morgan Securities undermined the integrity of our markets with this scheme," said Stephanie Avakian, director of the SEC's Division of Enforcement, in a prepared statement. "Their manipulative trading of Treasury cash securities created a false appearance of activity in the market and induced other market participants to trade at more favorable prices than J.P. Morgan Securities would have otherwise been able to obtain."
METALS FUTURES
The accord also ends a criminal investigation that led to a half dozen of the bank's employees being charged with rigging the price of gold and silver futures from 2008-16. Two have entered guilty pleas, and three traders and a former JPMorgan salesman are awaiting trial. In all, according to the settlement deal, 10 JPMorgan traders caused losses of $206 million to other parties in the market.
While other suspected market cheats have been charged with specific spoofing and manipulation offenses, the Justice Department accused JPMorgan metals traders under the 1970 Racketeer Influenced and Corrupt Organizations Act -- a criminal law more commonly applied to Mafia cases than global bank probes.
While the individuals remain charged under the RICO law, Tuesday's resolution didn't accuse the bank of racketeering conspiracy.
The settlement with the Commodity Futures Trading Commission found that JPMorgan's illegal trading "significantly benefited" the company while harming other market participants.
RECORD PENALTY
The New York-based lender will pay the biggest monetary penalty ever imposed by the commission, including a $436.4 million fine, $311.7 million in restitution and more than $172 million in disgorgement, according to a commission statement.
The commission said its order will recognize and offset restitution and disgorgement payments made to the Department of Justice and the SEC. The Justice Department resolution requires that more than $300 million of the penalty be set aside to cover potential victims who could apply for relief through the government.
"For nearly a decade, a significant number of JPMorgan traders and sales personnel openly disregarded U.S. laws that serve to protect against illegal activity in the marketplace," said Assistant Director in Charge William F. Sweeney Jr. of the FBI's New York field office.
JPMorgan, in a statement, said it doesn't expect any disruption of service to clients as a result of the resolutions.
JPMorgan has faced charges before. In 2015, the bank pleaded guilty to felony antitrust charges along with several other global banks that paid penalties and admitted to conspiring to rig the price of U.S. dollars and euros. The bank agreed to pay $550 million, but it and other global lenders in the accord felt little lasting hit from markets or customers, undercutting investor fears that a guilty plea would devastate their business. The Justice Department said it took the previous plea into account in determining penalties.
JPMorgan is scheduled to announce quarterly earnings on Oct. 13. Shares dropped by less than 1% during afternoon trading, when all three major indexes gave up ground Tuesday. The company's decrease for the day was roughly in line with declines in the financial sector overall.
Spoofing has become a focus for prosecutors and regulators in recent years after lawmakers specifically prohibited it in 2010. While submitting and canceling orders isn't illegal, it is unlawful as part of a strategy intended to dupe other traders.
Information for this article was contributed by Ken Sweet of The Associated Press; by Tom Schoenberg and Matt Robinson of Bloomberg News; and by Hamza Shaban of The Washington Post.