United States v. Smith

555 F.Supp.3d 563

UNITED STATES of America

v.Gregg SMITH, Michael Nowak, Jeffrey Ruffo, and Christopher Jordan, Defendants.

No. 1:19-CR-00669

United States District Court, N.D. Illinois, Eastern Division.

Signed August 17, 2021

Matthew Francis Sullivan, Avi Perry, Elise Bernanke, Assistants US Attorney, Scott Armstrong, John Francis Scanlon, U.S. Department of Justice, Criminal Division, Washington, DC, AUSA, Assistant US Attorney, United States Attorney's Office, Leslie Salba Garthwaite, Criminal Division-Fraud Section, Chicago, IL, Pretrial Services, Probation Department, for United States of America.

Melissa Chiang, Melissa C. Chiang, Pro Hac Vice, Robert A. Schwartz, U.S. Commodity Futures Trading Commission, Washington, DC, Jon J. Kramer, U.S. Commodity Futures Trading Commission, Chicago, IL, for CFTC.

Jonathan David Cogan, Matthew Ivan Menchel, Sean Stephen Buckley, Alexa Rae Perlman, Pro Hac Vice, Christopher Stone Cogburn, Pro Hac Vice, Jean Nicole Ripley, Pro Hac Vice, Kobre & Kim LLP, New York, NY, Leanne A. Bortner, Pro Hac Vice, Kobre & Kim LLP, Washington, DC, for Defendant Gregg Smith.

Chad Eric Silverman, Pro Hac Vice, David Meister, Pro Hac Vice, Jocelyn Emily Strauber, Pro Hac Vice, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, William Elliott Ridgway, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Defendant Michael Nowak.

Anne M. Evans, Pro Hac Vice, Daniella Roseman, Pro Hac Vice, James J. Benjamin, Jr., Pro Hac Vice, Parvin Moyne, Pro Hac Vice, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Megan Cunniff Church, MoloLamken LLP, Chicago, IL, for Defendant Christopher Jordan.

Guy Petrillo, Pro Hac Vice, Davis, Polk & Wardwell, Daniel Zachary Goldman, Pro Hac Vice, Petrillo Klein & Boxer LLP, New York, NY, Bethany Kaye Biesenthal, Jones Day, Chicago, IL, for Defendant Jeffrey Ruffo.

MEMORANDUM OPINION AND ORDER

Edmond E. Chang, United States District Judge This prosecution arises out of an alleged commodities-spoofing conspiracy perpetrated by precious-metals traders. The superseding indictment charges a conspiracy to commit racketeering activity, as well as substantive counts of fraud, spoofing, and attempted price manipulation. R. 52¹ (for convenience's sake, the superseding indictment will be referred to as the indictment from now on). The Defendants have moved to dismiss much of the indictment.² R. 113. For the reasons set forth in this Opinion, the motion is denied for the most part, and granted as to the bank fraud counts.

I. Background

In analyzing a pretrial motion to dismiss, the government's factual allegations are accepted as true. United States v. Moore , 563 F.3d 583, 586 (7th Cir. 2009). The indictment alleges that, between March 2008 and August 2016, the Defendants participated in a racketeering conspiracy to manipulate the market for precious-metals futures. R. 52, Sup. Indict. ¶¶ 22, 26. At various points during that stretch of time, each of the Defendants was employed by (or associated with) the Precious Metals Desk at Bank A. Id. ¶ 18. They served in the following job positions:

• Gregg Smith was a "precious-metals trader at Bank B from May 2007 until its acquisition by Bank A in May 2008." Id. ¶ 18(a). For the rest of the relevant time, Smith was "an Executive Director and trader at the Precious Metals Desk at Bank A." Id.

• During the relevant time, Michael Nowak was a "Managing Director and trader on the Precious Metals Desk at Bank A." Id. ¶ 18(b).

• Jeffrey Ruffo was "a salesperson at Bank B from May 2007 until its acquisition by Bank A in May 2008." Id. ¶ 18(c). For the rest of the time, Ruffo was "an Executive Director and salesperson on the Precious Metals Desk at Bank A." Id. Ruffo specialized in hedge fund sales and his clients included Hedge Funds E and F. Id. Ruffo left Bank A in August 2017. Id.

• Christopher Jordan worked at Bank A from March 2006 until December 2009. Id. ¶ 18(d). At the time of his departure, Jordan was an Executive Director. Id. After leaving Bank A, Jordan joined Bank C as a precious-metals trader and worked there from March 2010 to August 2010. Id. Then, from June 2011 to October 2011, "Jordan traded precious-metals futures contracts as an employee of Company D." Id.

The alleged purposes of the conspiracy were to illegally maximize profits and minimize losses (for themselves and Bank A), as well as to conceal the crimes. Id. ¶ 24. The alleged scheme involved two kinds of financial derivatives: futures and barrier-options. A brief background on these financial instruments is helpful here.

A. Futures

A futures contract is an agreement to buy or to sell a commodity at a fixed price on a future date. Futures are traded on markets designated and regulated by the Commodity Futures Trading Commission (CFTC). CME Group Inc. is a commodities marketplace comprising several exchanges, including the Commodity Exchange, Inc. (better known as COMEX) and the New York Mercantile Exchange, Inc. (NYMEX). Sup. Indict. ¶ 11. COMEX and NYMEX use the "Globex" electronic trading system, which allows market participants to trade in futures contracts from anywhere in the world. Id. ¶ 12. Commodities traders can place an order on Globex to either buy or sell futures contracts at a particular price. Id. ¶ 13. An order is "filled" or "executed" when the offer is accepted by a buyer or seller in the marketplace. Id.

B. Barrier Options

The holder of an options contract, on the other hand, has the right (but not the obligation) to buy or sell an underlying asset at an agreed-on price at any time before an agreed-on expiration date. Sup. Indict. ¶ 15. The rights under an option contract can be bought and sold at a price (known as the premium) set by the market. A barrier option is a type of options contract whose value depends on whether the underlying asset reaches or exceeds a predetermined price before its expiration. Sup. Indict. ¶ 16. Barrier-running refers to market manipulation of the underlying asset so that it deliberately reaches the trigger price. Id. Barrier-defending, on the other hand, manipulates the market price of the underlying asset so that it avoids the trigger price. Id.

C. The Alleged Conspiracy

At bottom, the gist of the alleged conspiracy was that the Defendants placed orders to buy and to sell precious-metals futures contracts, but did so with the intent to cancel those orders before execution.³ Id. ¶ 26. The government labels these the "Deceptive Orders." These orders were placed solely to move the metals’ market price in a desired direction by manipulating the commodity's perceived supply and demand. Id. ¶¶ 26(h)–(j). The "layering" of Deceptive Orders in rapid succession made detection and execution more difficult. Id. ¶ 26(e). In contrast, on the opposite side of the Deceptive Orders, the Defendants would place one or more "Genuine Orders" that they intended to be filled. Id. ¶ 26(a). Sometimes, these Genuine Orders were "iceberg" orders, meaning that the true order size was unknown to other market participants. Id. ¶¶ 14, 26(a). In those instances, Deceptive Orders would be much larger than the visible portion of the opposite-side Genuine Order. Id. ¶ 26(d). By manipulating the price movement for a given commodity, the Defendants increased the likelihood that the market would fill Genuine Orders, which in turn allowed the Defendants to generate profits and avoid losses. Id. ¶ 26(j). After the Genuine Orders were filled, either in full or in part, the Defendants would quickly cancel the Deceptive Orders to avoid execution of them. Id. ¶ 26(k). But Deceptive Orders occasionally did end up being executed before the Defendants could cancel them. Id.

The barrier-option part of the alleged scheme also relied on the market manipulation of precious metals futures. Sup. Indict. ¶ 27. The Defendants would trade in a manner that would move the price of the underlying asset (the futures contract) either towards the trigger-price to earn money (barrier-running), or away from the trigger-price to avoid losing money (barrier-defending), on barrier options held by Bank A. Id.

The Defendants also allegedly kept the conspiracy going by concealing the illegal trading practices. Sup. Indict. ¶ 28. Throughout the relevant time, the Defendants completed annual compliance certifications with their employer (Bank A), certifying that the Defendants had complied with all applicable policies and that they had reported any known or suspected violations of Bank A's policies, as well as violations of laws and regulations. Id. ¶¶ 28(a)–(d), 43. Jordan and Nowak also made allegedly false statements to the CFTC during a separate inquiry into the manipulation of silver prices. Id. ¶¶ 40–42. Specifically, Jordan represented to the CFTC that, during his employment with Bank A, he never engaged in trading "for the purpose of influencing the price on COMEX" and did not "show a bid or offer on Globex that he didn't intend to execute" unless he changed his mind or made it in error. Id. ¶ 41. Similarly, Nowak represented that he had no knowledge of any precious-metal traders at Bank A placing orders that they did not intend to execute. Id. ¶ 40. And during a CME Group inquiry in October 2013, Smith represented to the CME Group that certain allegedly Deceptive Orders were placed with the intent that they be filled. Id. ¶¶ 42, 30(o).

Altogether, the indictment charges a RICO conspiracy, 18 U.S.C. § 1962(d) (Count 1), Sup. Indict. ¶¶ 17–42; substantive counts of attempted price manipulation, 7 U.S.C. § 13(a)(2) (Counts 3–4), id. ¶¶ 52–57; bank fraud, 18 U.S.C. § 1344(1) (Counts 5–7), id. ¶¶ 58–63; wire fraud, 18 U.S.C. § 1343 (Counts 8–10), id. ¶¶ 64–69; commodities fraud, 18 U.S.C. § 1348(1) (Counts 11–12), id. ¶¶ 70–73; spoofing, 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2) (Counts 13–14), id. ¶¶ 74–77; and conspiracy to commit all of the substantive charges, 18 U.S.C. § 371 (Count 2), id. ¶¶ 45–51. In the dismissal motion, the Defendants target most of the charges.

II. Standard of...