On June 25, 2019, the Department of Justice (DOJ) announced a non-prosecution agreement with Merrill Lynch Commodities, Inc. in connection with a criminal investigation of the company. The complaint for this class action takes up its findings and brings suit against Merrill Lynch, its parent company Bank of American Corporation, and individuals on behalf of investors who suffered from the companies’ behavior. The issue is the manipulation of prices for precious metals futures contracts via a scheme called “spoofing.”
The class for this action is all persons who traded precious metals futures contracts on the COMEX from at least January 1, 2008 through December 31, 2014.
Spoofing occurs when traders enter large fake buy or sell orders that they have no intention of fulfilling and then cancel the orders. These provide false or misleading information to the market about supply, demand, and price. The intended result is to manipulate pricing to make investors trade under conditions more favorable to the traders.
For example, if a trader wants to buy gold at a lower price, it may enter a number of large fake sell orders for gold at a lower price, then enter its real buy orders for gold at the lower price. The fake orders are then canceled, but they have already helped give a false picture of the market and lower the price of gold.
The two individuals named as defendants in this suit are Edward Bases and John Pacilio, precious metal traders at Merrill Lynch, who undertook the spoofing scheme. This was unlawful conduct that was meant to move the price of precious metal futures contracts in a direction that favored Merrill Lynch and disadvantaged others.
Bases and Pacilio have been indicted for conspiracy to commit wire fraud and for commodities fraud for their actions in theDOJ investigation and were awaiting trial when this action was filed.
The scheme manipulated prices for gold, silver, platinum, and palladium futures contracts that were traded in the Commodity Exchanged, Inc. (COMEX) marketplace. One person would place the fake orders and then cancel them within seconds; another would place the real orders. The complaint details several of these alleged orders.
The fake orders would provide a false picture of the market for the futures contracts and thus manipulated the actual prices, as other traders reacted to the level of demand and price shifts.
The spoofing incidents were violations of the Commodity Exchange Act, the complaint says, in the areas of manipulation and using manipulating and deceptive devices, and under principles principal-agent liability. The complaint also accues the parties of unjust enrichment.