A federal jury convicted two men for engaging in a multi-year fraud scheme to manipulate U.S. commodities markets for publicly traded precious metals futures contracts while the banks that employed them buy get-out-of-jail-free cards.
According to court documents and evidence presented at trial, Edward Bases, 59, of New Canaan, Connecticut, a former senior trader employed at Deutsche Bank and Bank of America in New York, and John Pacilio, 57, of New York, New York, a former senior trader employed at Bank of America and Morgan Stanley in New York, fraudulently pushed market prices up or down by routinely placing large “spoof” orders in the precious metals futures markets that they did not intend to fill.
Bases and Pacilio did so in order to manipulate prices for their own gain and the banks’ gain, and to defraud other traders on the Commodity Exchange Inc. (COMEX) and the New York Mercantile Exchange Inc. (NYMEX), both of which are exchanges run by the CME Group Inc. (CME).
“These defendants undermined public confidence in U.S. commodities markets by manipulating prices to create the false appearance of supply and demand,” said Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division. “This verdict shows that the Department of Justice is committed to holding accountable those who line their pockets by manipulating our financial markets through fraud.”
Court documents and witness testimony also showed that Bases and Pacilio taught other traders how to engage in the practice of spoofing, which involves placing orders on the exchange that, at the time they were placed, were not intended to be executed.
For example, electronic chat messages introduced as evidence during trial demonstrated that, while he was placing deceptive trades, Bases stated, “that does show you how easy it is to manipulate it sometimes . . . I know how to ‘game’ this stuff.”
Evidence introduced at trial also included electronic chat messages from Pacilio stating, “I just put in 500 lots to spoof the gold,” and “if you spoof this it really moves.”
“Illegally moving market prices in a direction that suits individual interests is a quick way to lose investor confidence and rack up federal criminal charges,” said Acting Assistant Director in Charge Jacqueline Maguire of the FBI’s New York Field Office. “The FBI will continue to pursue those who manipulate our financial markets.”
As a result of Bases’s and Pacilio’s scheme, other market participants, some of whom testified at trial, were induced to trade at prices, quantities, and times that they otherwise would not have traded.
Bases and Pacilio engaged in this conduct despite having received and been trained on bank policies prohibiting fraud and deceptive trading practices.
Bases was convicted of conspiracy to commit wire fraud affecting a financial institution and wire fraud affecting a financial institution.
Pacilio was convicted of conspiracy to commit wire fraud affecting a financial institution, wire fraud affecting a financial institution, and commodities fraud.
Conspiracy to commit wire fraud and wire fraud affecting a financial institution carry a maximum sentence of 30 years’ imprisonment per count. Commodities fraud carries a maximum sentence of 25 years’ imprisonment.
A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
In January, a federal judge dismissed litigation by traders and trading firms accusing Bank of America Corp and Morgan Stanley of manipulating the precious metals futures market by placing trades and then cancelling them before execution, or "spoofing" because the victims waited too long to file the lawsuit.
U.S. District Judge Lewis Liman in Manhattan said the June 2019 lawsuit over alleged spoofing in gold, silver, platinum and palladium futures from 2007 to 2014 was filed long after the two-year federal statute of limitations had run out.
The investors victimized by the scheme believed the clock started in January 2018 when Bases, Pacilio, and six other people were criminally charged with commodities fraud.
But in a 32-page decision, Judge Liman said the clock had begun ticking by December 2016, when a lawsuit alleging manipulation of silver futures contracts in the same period was filed by the same lawyers in the same Manhattan courthouse.
"They knew of the harm as early as 2016," Liman wrote. "They just did not know the identity of everyone who perpetrated it. The wrong itself was not concealed."
The banks essentially bought their way out of criminal liability for the illegal conduct of their employees.
In June 2019, Bank of America paid $25 million an entered a nonprosecution agreement to end a Department of Justice spoofing probe, and $11.5 million to end a related U.S. Commodity Futures Trading Commission civil case.
Morgan Stanley reached a $1.5 million civil settlement with the CFTC three months later.
The case is In re Merrill, BofA, and Morgan Stanley Spoofing Litigation, U.S. District Court, Southern District of New York, No. 19-06002.
The federal government, has in the past five years brought at least 10 spoofing cases against 14 defendants.
Commodities fraud and violations of the Dodd-Frank Act — which explicitly made spoofing a criminal offense — have a statute of limitations of six years and five years, respectively.
The financial industry has opposed efforts to clean up corruption in a similar prosecution by arguing that prosecutors were trying to shoehorn their case into the wire fraud statute, in a bid to bring spoofing-related charges beyond the five-year statute of limitations.
The Futures Industry Association, U.S. Chamber of Commerce, Bank Policy Institute and the Securities Industry and Financial Markets Association filed a brief supporting the defendants’ argument in a case involving two former Deutsche Bank precious metals traders, James Vorley and Cedric Chanu, who were indicted on charges of conspiracy and wire fraud.
The industry groups said in the filing that the "application of the wire fraud statute to open orders in the futures markets may adversely affect the proper and efficient functioning of those markets."