Wall Street Banks, In Drag as Trade Associations, Fight Indictments for Manipulating Precious Metals Markets

By Pam Martens and Russ Martens: June 27, 2019 ~

On July 18 of last year, the U.S. Department of Justice indicted two Merrill Lynch precious metals traders, Edward Bases and John Pacilio, charging them each with one count of conspiracy to commit wire fraud affecting a financial institution and one count of commodities fraud each.  Pacilio was further charged with five counts of spoofing. (Spoofing is where a trader uses a high-speed computer to issue a rapid barrage of buy or sell orders, with no intention of executing the trades, in order to mislead the market and gain an advantage for his own position in the market.)

On Tuesday of this week, a unit of Merrill Lynch was given a deferred prosecution agreement in the same matter by the Justice Department in exchange for an agreement to cooperate. Merrill also agreed to pay a measly $25 million in fines and disgorgement. (The amount of the fine and disgorgement is like a fly on the backside of an elephant. The parent of Merrill Lynch, Bank of America, had profits of $7.3 billion in just the first quarter of this year.)

Merrill’s promise to “cooperate” is also looking quite specious.

The Justice Department said it had obtained an agreement from Merrill and its parent, Bank of America, to “cooperate with the government’s ongoing investigation of individuals and to report to the Department evidence or allegations of violations of the wire fraud statute, securities and commodities fraud statute, and anti-spoofing provision of the Commodity Exchange Act in BAC’s Global Markets’ Commodities Business…”

The General Counsel of Global Banking, Global Markets and International at Bank of America Merrill Lynch is William C. Caccamise, who is also the Chairman Elect at the Wall Street trade association known as SIFMA. The Board of SIFMA includes representation from pretty much every mega bank on Wall Street – including the ones that are serially charged with market manipulations like Citigroup, Goldman Sachs and Deutsche Bank.

While Merrill is promising to “cooperate” with the Justice Department, SIFMA, along with the Bank Policy Institute and the Chamber of Commerce of the United States, has filed an Amicus (Friend of the Court brief) asking the Federal District Court in Illinois that is hearing the cases against the two indicted Merrill traders, Bases and Pacilio, to throw out the wire fraud charges.

The Futures Industry Association (FIA) has also filed a similar Amicus. The Chairman of the Board of FIA is Jerome Kemp of Citigroup. The Vice Chairman of FIA is Nicholas Rustad of JPMorgan Securities. Citigroup admitted to one criminal felony count lodged by the Justice Department in 2015 for rigging foreign exchange trading. JPMorgan Chase admitted to two criminal felony counts in 2014 for its role in the Bernie Madoff Ponzi scheme and one felony count in 2015 for participating in the rigging of the foreign exchange market.

Bank of America Merrill Lynch also has an executive on the Board of FIA, Dean Tonkin.

The gist of the Amicus briefs seems to be that Wall Street doesn’t want its predatory traders to become little lambs worrying about being indicted. The FIA brief, for example, argues this:

“The government’s approach will create undeterminable legal risk that will chill legitimate, non-fraudulent trading that does not violate any of the prohibitions charged in this case or in the CEA or CFTC regulations generally—trading that is essential for vibrant, liquid markets. For these reasons the wire fraud charges in the indictment should be dismissed.”

SIFMA seems to be worried about other predatory schemes on Wall Street being swept in to wire fraud charges. It writes in the joint Amicus:

“The government’s theory could criminalize legitimate commercial conduct. The government’s expansive theory of wire fraud liability in this case poses significant risk to amici’s members. If the government’s theory that the defendants’ unexpressed hopes or intentions constitute an implied misrepresentation to the market were accepted, a wide array of legitimate commercial activity would be at risk of being labeled criminal fraud. It is common, not rare, for a business in dealing with counterparties in the market, or with the public, not to disclose all of the facts motivating its conduct. So long as the business does not misrepresent any facts, this is of course not fraud.”

That is quite a leap. We’re thinking of when Goldman Sachs sold the Abacus deal as a sound investment to some of its customers without telling them it knew it had been designed to fail by the hedge fund, John Paulson & Co., so that the hedge fund could short the deal and end up making $1 billion while Goldman’s customers lost $1 billion. Goldman paid $550 million to settle the charges with the SEC. One of the charges was for “omitting” material facts.

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