Two ex-Bank of America Corp. traders were convicted by Wednesday of manipulating precious metals prices by using an aggressive tactic known as spoofing, the latest win for prosecutors in a yearslong effort to crack down on the practice.
John Pacilio and Edward Bases were found guilty of wire fraud and conspiracy after a two-week trial in Chicago. The proceeding was a test of prosecutors' attempts to punish spoofing activity that predated a law defining the tactic and making it illegal.
Prosecutors argued that trading by CME Group Inc. on short-term futures exchanges operated by Bases and Pacilio was fraud, allowing the government to accuse the conduct as fraudulent. Lawyers for the defendants argued that their trading style was allowed before the 2010 Dodd-Frank financial overhaul law prohibited spoofing.
Spoofing involves sending deceptive orders that can mislead traders into thinking that supply and demand have changed, according to regulators and prosecutors. The mirage, which some traders and attorneys argue is lawful bluffing, can move prices in a direction desired by the spoofer, while causing their counterparties to lose money.
Prosecutors argued Bases and Pacilio used illicit spoofing to gain an illegal advantage from 2008 to 2014. The law making spoofing illegal took effect in 2011 after most of the alleged activity had occurred, during which the actual action took place.
The government is trying to take old conduct that wasn't against the law at the time and turn it into a crime today, Pacilio said during opening arguments for the case.
After the jury delivered its verdict Wednesday, McGill said: We are disappointed in the outcome and we will continue to fight to clear John Pacilio's name.
An attorney for Bases said the former trader and his lawyers continue to believe that Ed is in error and that his trading was permise pursuant to the rules at the time and not fraudulent. Lawyers for both men are expected to file post-trial motions challenging the outcome.
A Justice Department spokesman and a Bank of America spokesman declined to comment. U.S. District Judge John Z. Lee, who presided over the trial, hasn't set a sentencing date for that trial.
Prosecutors countered that spoofing was always considered fraud because the law forbids deliberately deceptive conduct that aims to take money or property from others. The Justice Department called a former Bank of America trader to testify about the traders' spoofing and tell them he learned how to do it from them.
The spoof order was just smoke and mirrors, prosecutor Scott Armstrong told jurors in opening arguments. Spoof orders pretending to be real supply and demand in the market.
The Justice Department has developed an approach to prosecuting spoofing cases that involves a mix of data mining, cooperating chat messages and the testimony of incriminating witnesses.
Prosecutors use colorful trading charts that show spoofing patterns: a series of rapid-fire orders, all quickly filled, that nudge prices towards a bigger order the trader wants to be canceled at a different price. Cooperating witnesses, generally more junior traders who plead guilty and testify against the defendants, help prosecutors convince a jury that the misconduct was intentional.
The verdict follows another win by the Justice Department at trial last year when two former Deutsche Bank AG futures traders were convicted of manipulating gold and silver prices. Both were sentenced to prison for a year and one day.
Prosecutors have charged 20 traders with spoofing misconduct, with eight having pleaded guilty, and settled criminal cases over spoofing with JPMorgan Chase Co. Deutsche Bank and Tower Research Capital LLC. The Justice Department lost two previous spoofing trials, including one against a UBS Group AG trader in 2018.
Bank of America, which employed Bases until 2015 and Pacilio until 2011, agreed in 2019 to pay $25 million for civil investigations over its traders' conduct.