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.
Flaum said he left Bear Stearns in May 2008 to take a similar precious-metals trading job at Bank of Nova Scotia, where he worked until he was fired for spoofing in July 2016.
Flaum pleaded guilty to attempted price manipulation in 2019 and agreed to cooperate with prosecutors. He has yet to be sentenced.
He’s the second former gold trader to testify on behalf of the government in a trial that began with its first witness on July 8.
Last week, John Edmonds spent four days on the stand describing how Nowak, Smith and Ruffo were involved in spoofing precious-metals markets at the JPMorgan desk for almost a decade.
Edmonds has pleaded guilty to criminal charges and is cooperating with authorities. During cross examination, defense lawyers sought to undermine his credibility by citing several lies he told to authorities.
Attorneys for Smith and Nowak have argued that all their orders were legitimate and could have been executed by anyone in the market before they were cancelled. Ruffo’s lawyers emphasized that he never placed any orders because he was a salesman.
On Monday, jurors also heard testimony from Brian Wika of the CME Group Inc., which owns the futures exchanges where the US alleges thousands of spoof trades took place.
Wika lead an investigation into Smith’s trading activity following a 2012 complaint from Alex Gerko, founder of quantitative trading firm XTX Markets Ltd. The CME concluded in a report that Smith successfully placed gold spoof orders more than 3 000 times in July 2013 alone.
Wika denied they had cherry-picked examples of the defendant’s trading that were shown to the jury, saying there was “a large pattern of spoofing activity by Gregg Smith.”