The world’s biggest investment bank JP Morgan Chase has found itself on the receiving end of a price-fixing allegation claimed to have forced the closure of the Dorosa silver mine owned by Florida-based Hidalgo Mining Corp.
A complaint filed last week against JP Morgan explained how Hidalgo raised US$10.35 million from investors to finance a silver mine in Mexico which began production around 2012 and stopped in 2014.
The metal’s price averaged around US$31 an ounce in 2012 and had dropped to US$19/oz two years later.
Hidalgo alleges that JP Morgan engaged in “spoofing” to alter market prices, using as its evidence information from an investigation by US regulators which found that JP Morgan staff sent fake buy and sell orders into metals and treasuries markets between 2008 and 2016 to move prices in its favour.
JP Morgan declined to comment on the allegations.
What is spoofing?
Spoofing is the act of flooding the market with buy or sell orders with no intention to actually execute the transactions.
It is designed to create the illusion of demand (or lack thereof), moving market prices in a way that financially benefits a trader’s pre-existing positions.
The practice was banned as part of the Dodd-Frank financial reform law targeting sectors of the US financial system which were believed to have caused the 2008 global financial crisis including banks, mortgage lenders and credit rating agencies.
Suspected cases of spoofing since then have been met with fines or criminal charges.
State of denial
JP Morgan has long been in a state of denial over its involvement in spoofing, despite evidence to the contrary.
In 2017, a former precious metals trader with the bank pleaded guilty to criminal charges of manipulating markets over nine years.
From July 2007 to August 2016, the former trader is believed to have placed “thousands of orders that he did not intent to execute for gold, silver, platinum and palladium futures contacts,” according to official documents.
The accused claimed he learned to spoof from more senior traders, and did so with the knowledge and consent of his supervisors.
A second former JP Morgan precious metals trader also subsequently admitted to spoofing, saying he worked with “unnamed co-conspirators” to manipulate the prices of gold, silver, platinum and palladium futures contracts between 2009 and 2015.
He also claims to have learned the tactics from senior traders at the bank and used them with the knowledge and consent of supervisors.
In both trials, some of the trades were made on JPMorgan’s own account while on occasion, traders manipulated the market to facilitate trades by hedge fund clients.
The court heard the bank failed to identify, investigate, and stop the spoofing behaviour, even after a new surveillance system flagged issues in 2014.
Largest ever settlement
In September last year, JP Morgan agreed to pay more than US$920 million (A$1.27 billion) to settle the lawsuits – believed to be the largest amount of monetary relief ever imposed by the US Commodity Futures Trading Commission.
The total included the highest restitution (US$311.7 million), disgorgement ($172 million), and civil monetary penalty ($436.4 million) amounts in any US spoofing case.
JP Morgan also admitted to wrongdoing to settle all market manipulation probes into its trading of metals futures and treasury securities.
At the time of the settlement, JP Morgan co-president Daniel Pinto conceded the charges, saying the “conduct of individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm”.
He added that the bank had invested “considerable resources” in boosting its internal compliance policies, surveillance systems and training programs.
In an unexpected plot twist, it turns out Hidalgo also had fraudulent dealings of its own over the US$10.35 million raised for Dorosa.
In exchange for an initial investment, Hidalgo gave investors the right to future silver production at a certain price per ounce, which they could opt to receive in cash instead.
In 2017, the US Securities and Exchange Commission charged the company and its owners with failure to disclose that 10% of the raising would be used to pay sales commissions.
The owners also did not disclose that they did not have the immediate financial ability to make good on about US$3.5 million of investor principal that was personally guaranteed, had they been called upon to honour all of those guarantees simultaneously.