Merrill Lynch to pay $25M to settle metals ‘spoofing’ claims

According to MLCI’s admissions, from 2008 through 2014, precious metals traders employed by MLCI schemed to deceive other market participants with materially false and misleading information. They did so by placing fraudulent orders for precious metals futures contracts that, at the time the traders placed the orders, they intended to cancel before execution.

In doing so, the traders aimed to “spoof,” or manipulate the market, by creating the false impression of increased supply or demand, the Justice Department said. Over the relevant period, the traders placed thousands of fraudulent orders.

In addition to the $25 million in fines, MLCI entered into a non-prosecution agreement, the terms of which require MLCI and its parent company, Bank of America, to cooperate with the government’s ongoing investigation of individuals and to report to the Justice 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 Bank of America’s Global Markets’ Commodities Business.

MLCI and Bank of America also agreed to enhance their existing compliance program and internal controls to ensure they are designed to detect and deter, among other things, manipulative conduct in Bank of America’s Global Markets Commodities Business, the Justice Department said.

The Justice Department said it reached this resolution based on several factors, including MLCI’s “ongoing cooperation with the United States,” and MLCI and Bank of America’s remedial efforts of conducting training concerning appropriate market conduct and implementing improved transaction monitoring and communication surveillance systems and processes.

As part of the investigation, the Justice Department in July 2018 obtained an indictment against Edward Bases and John Pacilio, two former MLCI precious metals traders. Those charges remain pending in the U.S. District Court for the Northern District of Illinois.

CFTC action

The Commodity Futures Trading Commission (CFTC) announced a separate settlement with MLCI in connection with related, parallel proceedings. Under the terms of that resolution, MLCI agreed to pay approximately $25 million, which includes a civil monetary penalty of $11.5 million, over $2.3 million in restitution, and disgorgement of $11.1 million, with restitution and disgorgement credited for any such payments made to the Justice Department. In addition, the CFTC order imposes upon MLCI other remedial and cooperation obligations in connection with any CFTC investigation pertaining to the underlying conduct.

“The order also requires MLCI to cooperate with the CFTC in matters related to this action and the underlying conduct, and to comply with certain obligations in connection with its corporate compliance program and reporting requirements,” the CFTC said.

In a statement, CFTC Director of Enforcement James McDonald said the enforcement action “shows that the Commission continues to aggressively pursue those who manipulate and spoof in our markets.”