Scotiabank Canada fined for commodities price manipulation

FOUR TRADERS at the Bank of Nova Scotia, working from New York, London and Hong Kong, were able to manipulate metals futures contracts for personal and professional gain for eight years.

Earlier this week, the Canadian bank, which trades as Scotiabank, entered into a multimillion-dollar settlement with two American agencies – the US Department of Justice and the Commodity Futures Trading Commission, CFTC – over the activities of the traders, while admitting to its role in the criminal manipulation of metals prices.

The bank was fined US$127.5 million and has committed to retaining an independent compliance monitor to guard against future criminal activity. The bank must also adhere to trading-related regulatory requirements and compliance policies.

The fine was split almost evenly between the Justice Department and the CFTC.

From January 2008 to July 2016, four precious metals traders located in New York, London and Hong Kong engaged in fraudulent and manipulative trading practices in the markets for gold, silver, platinum, and palladium futures contracts that traded on the New York Mercantile Exchange.

The traders tried to rig the market by placing thousands of phantom orders that were cancelled before the trades could be completed, creating uncertainty in the market for their benefit, according to the charges.

By placing these orders, the traders intended to artificially move the prices of precious metals futures contracts in a direction that was favourable to them, and to inject false and misleading information into the precious metals futures markets in order to deceive other market participants, the charges indicated.

Scotiabank has banking operations across much of the globe, with over 97,000 employees and assets of over CDN$1.2 trillion as at April 2020. It operates the second-largest banking network in Jamaica.

This week, the Department of Justice, charged the bank with one count of wire fraud and one count of attempted price manipulation. Scotiabank entered into a deferred prosecution agreement with the Justice Department in connection with criminal information filed August 19 in the District of New Jersey.

“For over eight years, Scotiabank traders placed thousands of orders for precious metals futures contracts in an attempt to manipulate prices for their own and the bank’s benefit and to deceive other market participants,” said Robert Zink, chief of the criminal fraud division at the Justice Department.

“For the markets to work fairly, everyone needs to be able to make trading decisions with consistent, accurate information,” said US Attorney Craig Carpenito for the District of New Jersey. “In the conduct described here, four Scotiabank traders attempted to rig precious metals futures prices in their favour by placing thousands of orders they knew they would cancel before the trades were executed,” he said.

The phantom orders sought to illegally manipulate the market to their own advantage, but not to the disadvantage of other traders, added Carpenito.

Scotiabank’s compliance function failed to detect or prevent the four traders’ unlawful trading practices. Moreover, three Scotiabank compliance officers knew of the illegal activity of one of the traders, between August 2013 and February 2016.

“Today, Scotiabank has admitted to their role in a massive price-manipulation scheme aimed at falsely manufacturing the prices of precious metals futures contracts to serve the bank’s best interests,” said Assistant Director in charge of the FBI’s New York Field Office, William F. Sweeney Jr.

“The consequences of the actions of these traders are far reaching, affecting not only the economy of the United States, but also the world’s financial markets,” added Inspector in Charge Delany De Leon-Colon of the US Postal Inspection Service’s Criminal Investigations Group.

Since the time of the underlying offence, Scotiabank has made significant investments to improve its compliance technology and trade-surveillance tools, nearly doubling its annual compliance operating budget, and has added more than 200 full-time equivalent compliance positions.

The bank is also in the process of winding down its precious metals business.