Merrill Lynch Pays $36.5 Million to Settle Spoofing Charges

Prosecutors filed complaints describing the plot, quoting conversations MLCI staff had via online chat with other traders.

Merrill Lynch Commodities, Inc. (MLCI) has just settled spoofing charges with the Commodity Futures Trading Commission (CFTC) by agreeing to pay a combined $36.5 million. The CFTC action centered on spoofing activity carried out by Bank of America’s global commodities trading business in a scheme that ran from 2008 through 2014 and involved dozens of fraudulent orders that were canceled before execution.

MLCI precious metals traders are accused of working with other traders to rig the purchase and sale of futures contracts on the Chicago Mercantile Exchange and the Chicago Board of Trade.

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The DOJ also obtained an indictment against two former MLCI traders, Edward Bases and John Pacilio, who are charged not only with wire fraud in connection with alleged spoofing but also with conspiracy to commit commodities fraud and criminal commodities fraud.

Prosecutors filed a complaint describing the alleged plot, quoting conversations they purportedly had via online chat with other traders.

“Guys the [algorithms] are really geared up in here, if you spoof this it really moves,” the indictment states.

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The charges against the registered swap dealer were part of a broad U.S. crackdown on spoofing, a tactic in which traders place orders without intending to execute them to try to move prices in their favor.

A yearlong plot to rip off metals traders

Earlier last year, Deutsche Bank, HSBC, and UBS were hit by penalties, the largest of which was a $30 million fine for Germany’s biggest bank. The Swiss bank UBS has also found itself facing similar accusations after some of its spot traders used phony trade orders to manipulate precious metals futures traded on the COMEX. The bank agreed to pay a penalty of $15 million to settle the ‘spoofing’ charges brought by the CFTC.

HSBC Securities, the bank’s US brokerage arm, was fined around $1.6 million on related charges, a relatively small penalty compared to other sanctions doled out in other banks’ rigging cases.

Regulators and exchanges have stepped up their policing of spoofing in recent years. However, the people and firms that they previously focused on were rather small-time.

James McDonald, CFTC’s director of enforcement, commented: “Today’s enforcement action shows that the Commission continues to aggressively pursue those who manipulate and spoof in our markets.  If left unchecked, this sort of misconduct can undermine the integrity of the price discovery process, harm law-abiding market participants, and diminish confidence in our markets more generally.  That’s why we will continue to keep our markets free from spoofing and manipulation.”

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