The Bank of Nova Scotia will pay US$127.5-million to settle criminal and civil charges after investigators in the United States found Scotiabank traders illegally manipulated the price of futures contracts for precious metals over a period of eight years and the bank subsequently misled regulators about it.
Scotiabank has also agreed to oversight by an independent monitor for three years to ensure it addresses major failures the Commodity Futures Trading Commission uncovered in its compliance system. The CFTC said it had grounds to “suspend or revoke” Scotiabank’s registration, and would do so if improvements are not made.
The settlement involves the largest civil penalty for “market spoofing” in U.S. history. Both civil and criminal fines are at the top end of the U.S. penalty scale owing to Scotiabank’s failure to disclose the wrongdoing and its attempts to mislead investigators, the CFTC and the U.S. Department of Justice (DOJ) said in statements on Wednesday.
Charges included compliance failure, making false or misleading statements to regulators, and market manipulation.
“Entities seeking to co-operate with the CFTC, like all others that interact with the commission, must tell the truth,” James McDonald, director of the CFTC’s division of enforcement, said in a statement.
Between 2008 and 2016, four Scotiabank traders manipulated the price of gold, silver, platinum and palladium futures contracts on the New York Mercantile Exchange and Commodity Exchange using an illegal trading strategy known as “spoofing.”
The traders, located in New York, London and Hong Kong, placed orders they knew they would not fill and then cancelled them. This sent artificial price signals to the market, the DOJ said in a statement, with the intention of tricking “other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling futures contracts at quantities, prices, and times that they otherwise likely would not have traded.” The DOJ said this allowed the traders to make favourable transactions.
“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,” Delany De Leon-Colon of the U.S. Postal Inspection Service’s criminal investigations group, said in a statement.
At least two senior members of Scotiabank’s compliance team knew about the illegal activity but “failed to act to stop the misconduct when they became aware of it,” the CFTC said in a statement.
The CFTC caught wind of the illegal trading in 2016, after Scotiabank made a voluntary disclosure about suspicious activity by one of the traders, Corey Flaum. Acting on this information, the CFTC fined Scotiabank $800,000 in 2018.
Further investigation determined that Scotiabank’s 2016 disclosure was “materially incomplete” and inaccurate because of record-keeping failures. Moreover, the CFTC found that during the earlier investigation, Scotiabank employees made “multiple false and misleading statements of material fact to CFTC staff, and omitted material facts.”
Scotiabank acknowledged wrongdoing in a statement on Wednesday: “We understand that in order to maintain the trust of our stakeholders, we must adhere to trading-related regulatory requirements and compliance policies. We are committed to adhering to these standards.”
As part of a deferred prosecution agreement, Scotiabank agreed to assist in other investigations and prosecutions. Mr. Flaum, the trader, pleaded guilty to attempted price manipulation in 2019 and is scheduled to be sentenced next year.
The DOJ acknowledged that Scotiabank has improved its compliance systems since 2016, nearly doubling its annual compliance budget and adding more than 200 new full-time compliance positions. But the DOJ determined that an independent monitor was needed because the improvements had “not been fully implemented and tested.”
Earlier this year, the bank announced plans to shut its metals trading business by the beginning of 2021. The division, once one of the largest players in the global metals trading industry, had only 15 team members left by April, down from 140 five years ago, Reuters reported.
This is not the first Canadian bank hit with penalties for U.S. market manipulation. In 2014, Royal Bank of Canada paid $35-million to resolve a CFTC lawsuit that alleged “wash trading,” a strategy to create the perception of market activity.
On Wednesday, the CFTC and DOJ used the Scotiabank settlement as an explicit warning to other market participants, and an advertisement for their own increased capacity to catch offenders.
“These record-setting penalties reflect not only our commitment to being tough on those who break the rules, but also the tremendous strides the agency has made in data analytics,” CFTC chairman Heath Tarbert said in a statement.
“Our ability to go through the electronic order book and look across markets has enabled the CFTC to not only spot misconduct, but also to uncover false and misleading statements,” he said.
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