Traders Beware: U.S. taps new tools to find fraud in volatile commodities market

Traders Beware: U.S. taps new tools to find fraud in volatile commodities market
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WASHINGTON (Reuters) – When the U.S. Department of Justice charged a handful of JP Morgan Chase & Co (JPM.N) traders in 2018 and 2019 with alleged commodities futures manipulation, it wasn’t the first time the government had probed the bank’s metals trading activities.

The Commodity Futures Trading Commission (CFTC) investigated the same business as part of a similar probe of the silver market years earlier, but it was not able to build a case with the data it had at the time, according to U.S. court filings and a person with knowledge of the aborted probe.

Since then, leaps in the agencies’ data analysis capabilities have enabled them to detect and prosecute increasingly sophisticated forms of manipulation in the commodities futures markets which for decades have gone under-surveilled, according to ten officials and industry experts.

The Justice Department fraud division is beefing up with the creation of a sub-unit specializing in combating commodities fraud overseen by Avi Perry, a trial attorney who has prosecuted high-profile cases involving trading powerhouse Tower Research Capital, Merrill Lynch Commodities Inc, and the ongoing JPMorgan probe, according to two sources.

The unit is also hiring a handful of additional trial attorneys, according to the sources and online job postings. A Justice Department spokesman said the agency intends to fill the positions “promptly”.

The unit is part of a broader Justice Department initiative to dramatically expand the scope of market manipulation the agency targets for criminal prosecutions, beyond traditional insider trading and futures manipulation into a range of asset classes, sources told Reuters.

The effort, if successful, raises the stakes for traders with potential jail-time, while banks, brokers and prop trading firms could face chunky fines and business curbs as the agency gets better at detecting potential misconduct across institutions.

The new-found expertise may also give the agencies an edge as they scrutinize extreme market volatility sparked by the novel coronavirus disruption, including last month’s historic oil price crash. The CFTC is reviewing how the U.S. crude oil benchmark fell below $0 a barrel for the first time ever.

“There is just a wealth of information there, which is going to give us years and years of cases to come, I would expect,” Robert Zink, chief of the Justice Department’s fraud section, a unit of the agency’s criminal division, said of the data in an interview.

Source: Reuters

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