DOJ and CFTC push for complete stay of civil action against precious metals traders

Maria Nikolova

The civil case against Michael Nowak and Gregg Smith should be completely stayed while the criminal proceedings are ongoing, the US authorities argue.

The efforts by the United States Government to stay the civil action brought by the Commodity Futures Trading Commission (CFTC) against Michael Thomas Nowak and Gregg Francis Smith, precious metals traders accused of spoofing, continue.

On December 13, 2019, the CFTC and the DOJ once again made clear their stance that the civil case should be stayed pending the outcome of the criminal proceedings. The CFTC and the DOJ replied to arguments by Nowak and Smith opposing the United States’ motion for a complete stay of this action.

In its memorandum, the CFTC argues that of defendants’ alternative proposals are defective and should be rejected. The CFTC opposes the defendants’ suggestions to partially stay the action on asymmetrical terms that are, according to the regulator, contrary to applicable rules, unfair to the CFTC and to nonparties, and inconsistent with the defendants’ purported desire to avoid unnecessary delay.

The Department of Justice (DOJ) argues that the defendants’ arguments in opposition to a stay have no merit. DOJ notes that the defendants’ proposed alternatives to a complete stay would unfairly allow them to obtain discovery from the CFTC and third parties far beyond what they would be entitled to in the related criminal case, while at the same time shielding them from having to produce any discovery, respond to pleadings, answer interrogatories, or sit for depositions if they believed those actions would touch on their Fifth Amendment rights.

According to the DOJ, in their opposition briefs, the defendants seek a lop-sided stay of discovery permitting them to deploy the full array of civil discovery tools, while also avoiding any obligation on their part to produce documents, respond to pleadings, answer interrogatories, or be deposed. Let’s recall that the defendants take different positions on the DOJ’s requested stay, with Smith opposing the stay completely with a “slight modification” and Nowak agreeing there should be a stay except for document discovery.

The DOJ argues that the Court should reject both defendants’ proposals because, under either, the defendants could obtain civil discovery from others while being afforded protections broader even than those provided by the Fifth Amendment insofar as the defendants would not be required to provide discovery or submit to questioning.

“Their rationale is plain: they could enjoy the benefits of discovery without having to assert their Fifth Amendment rights and suffer the attendant adverse consequences in this civil action”, the Department of Justice says.

The Court is advised to “reject that self-serving, one-sided approach and instead stay this case completely pending the outcome of the parallel criminal prosecution”.

The CFTC charges the defendants with spoofing, engaging in a manipulative and deceptive scheme, and attempting to manipulate prices in the precious metals futures markets while employed at a major US bank.

According to the CFTC complaint, from at least 2008 and continuing through at least 2015, Nowak and Smith repeatedly engaged in manipulative or deceptive acts and practices by spoofing (bidding or offering with the intent to cancel the bid or offer before execution) while placing orders for and trading precious metals futures contracts on CME Group Inc.’s exchanges. The defendants are alleged to have placed thousands of orders with the intention to cancel them in order to send false signals of increased buying or selling interest designed to trick market participants into executing the orders the defendants wanted filled. The complaint also alleges that Nowak and Smith engaged in spoofing with the intent to manipulate market prices and create artificial prices, and thereby enable their orders to be filled sooner, at a better price, or in larger quantities than they otherwise would.

The US regulator seeks, inter alia, civil monetary penalties, disgorgement, restitution, trading bans, and a permanent injunction against future violations of the federal commodities laws.

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