Former JPMorgan traders Michael Novak and Greg Smith have filed to stay a lawsuit brought by the Commodity Futures Trading Commission (CFTC) against them.
The documents were filed in the Northern District Court of Illinois on November 22, 2023.
The traders note that the case should be stayed pending the resolution of the appeal and any subsequent retrial in the parallel criminal case against them.
Recall that the CFTC filed an enforcement action in the US District Court for the Northern District of Illinois against Michael Nowak and Gregg Smith in September 2019. The regulator accused the defendants of counterfeiting, engaging in a scheme to manipulate and deceive, and attempting to manipulate prices in precious metals futures markets while working at JPMorgan.
The CFTC complaint alleges that beginning in at least 2008 and continuing through at least 2015, while placing orders and trading precious metal futures contracts on CME Group Inc.’s exchanges, Nowak and Smith repeatedly engaged in manipulative or deceptive acts and falsifying practices (offer or offer to cancel the offer or offer before execution). The defendants allegedly submitted thousands of orders with the intention of canceling them in order to send false signals of increased buying or selling interest in order to deceive market participants into executing the orders that the defendants wanted filled.
The complaint also alleges that the defendants engaged in spoofing with the intent to manipulate market prices and create artificial prices, and thereby allow their orders to be filled earlier, at a better price, or in larger quantities than they otherwise would have .
According to the complaint, the defendants knew other traders at the bank were also counterfeiting, and Smith taught other traders at the bank how to counterfeit.
In August 2022, after a lengthy jury trial and nearly eight days of deliberations, Mr. Smith and Mr. Nowak were convicted of some counts (and acquitted of others), and in August 2023, they were sentenced to 24 months (Mr. Smith ) and a year and a day (Mr. Nowak). The defendants, who surrendered to the Bureau of Prisons to begin their prison terms in October, are in the process of appealing their convictions. The Seventh Circuit has consolidated their appeals and their briefs will be issued in about six weeks (January 5, 2024).
CFTC action has been suspended since June 2020 at the suggestion of the US Department of Justice (DOJ). At the time, the merchants agreed that some stay was appropriate to preserve their Fifth Amendment right against self-incrimination, but pushed for substantive discovery to proceed in the interim. The CFTC did not take a position on the DOJ’s motion, but opposed the defendants’ discovery requests, making it clear that it had no interest in moving quickly.
Now, traders say, despite previously being content with the years-long stay of that action and having opposed defense efforts to push it forward at all, the CFTC is suddenly claiming it will be harmed by any further delay. He wants not only to depose the defendants in jail pending their appeals—thus forcing them to choose between preserving their Fifth Amendment privileges or risking adverse inferences—but also to move for timely summary judgment based on the purported estoppel effect of convictions which may eventually be overturned.
In other words, according to Nowak and Smith, the CFTC wants to rush decisions before the defendants’ appeals are heard—decisions that will be time-consuming and expensive to overturn if the defendants’ appeals are successful—while at the same time boxing the defendants into an unfavorable conclusions if this matter proceeds to trial.
Defendants argue that such tactics do not serve the interests of justice, and the factors courts consider in deciding whether to impose a stay weigh in favor of avoiding the waste of judicial resources and extending the stay through resolution of the appeal and any subsequent retrial in the Criminal Action.