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Catch of the Week: Bank of Nova Scotia Fined for Commodities Fraud and False Statements to Investigators

Posted  August 21, 2020

Self-disclosure offers wrong-doing corporations a path to leniency: Fess up, the government says, and we’ll go easier on you.  But as the Bank of Nova Scotia learned, you had better reveal the full extent of the problem, or you are just making your problem worse.

The Bank had made a self-disclosure that secured it’s leniency and an $800,000 deal for charges of commodities fraud.  When the CFTC later determined that the disclosure was critically flawed, however, the Bank lost its deal.  Instead of leniency, it got a deferred prosecution agreement that requires it to pay $77.4 million.

Their object lesson is our Catch of the Week.

The Commodities Fraud

From 2008 to 2016, four traders at the Bank’s precious metals desk engaged in a fraudulent scheme to manipulate the futures markets for financial gain.  Specifically, as the Bank admitted to the DPA, the traders would place massive orders for commodities like gold, silver, platinum, and palladium that they knew at the time they would cancel.  These fictional orders were large enough to materially move the commodity markets, affecting other traders’ behavior and permitting the Bank’s traders to make huge profits.  After cashing in the markets’ response to their orders, they would cancel them before execution.

As the Bank admits, these actions were designed to deliberately and falsely influence the actions of the futures markets.  Because they never intended to execute the orders, they were creating false market conditions that they could exploit, to the detriment of other, honest traders.  This activity, known as spoofing, is specifically prohibited by commodities and securities laws.

Incomplete Self-Disclosure

In 2016, after 8 years of this conduct, one of the Bank’s futures merchants flagged potentially suspicious activity by one of the four traders.  The Bank elected to self-report this problem to the CFTC.  That got it the leniency it presumably was seeking.  After an investigation relying on the Bank’s disclosure, the government gave the Bank cooperation credit and settled for a fine of only $800,000.

The Truth Comes Out

Unfortunately for the Bank, over the two years since that settlement, the CFTC determined that statements made by the Bank during the course of the investigation were false.  Specifically, the Bank did not disclose all the identifiers used by traders to effectuate the illegal spoofing, which misled the CFTC about the scope of the conduct.

Once the CFTC understood the full measure of the fraud, the Bank’s brief moment of leniency turned into an additional penalty.  Not only did it have to pay $60.4 million for the illegal conduct, but it faced a separate $17 million fine for making false and/or misleading statements during the CFTC’s earlier investigation.  An unrelated deal with the CFTC on the same day resulted in another $50 million in penalties.  All in all, an expensive lesson in how to come clean.

There is no mention of a whistleblower in the CFTC’s or DOJ’s announcements, but there is a real possibility that the government was assisted behind the scenes by someone with insider information that helped investigators find the full extent of the market violations.  If so, that whistleblower could stand to receive a hefty reward of 10-30% of the government’s recovery under the CFTC’s highly successful whistleblower program.

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Tagged in: Catch of the Week, Fraud in CFTC-Regulated Markets, Market Manipulation and Trading Violations,