By Brad Rosen, J.D.
The Department of Justice and the CFTC are urging a federal court to issue a complete stay in a related CFTC civil enforcement action against former J.P. Morgan precious metal traders Michael Nowak and Gregg Smith which charges the defendants with engaging in illegal spoofing activities. The DOJ argued that a complete stay is needed to preclude Nowak and Smith from impermissibly taking advantage of the civil discovery process to circumvent the limitations on criminal discovery that protect the integrity of criminal prosecutions. Echoing these concerns, the CFTC rejected the defendants’ proposed alternative to a complete stay, asserting that it would unfairly allow them to obtain discovery from the Commission and third parties far beyond what they would be entitled in the related criminal case. At the same time, the defendants would be shielded from any discovery if they believed those actions might touch upon their Fifth Amendments rights (CFTC v. Nowak, December 13, 2019).
Law enforcement pools resources as part of major anti-spoofing campaign. In September 2019, the CFTC and federal prosecutors announced civil and criminal charges against five individuals who, from as early as 2007 to as late as 2016, engaged in spoofing and other manipulative practices in precious metals futures markets. All the defendants had been worked at the precious metals desk of J.P. Morgan. The defendants were charged with placing thousands of orders with the intent to cancel them in order to send false signals of interest to the market. They also allegedly engaged in spoofing with the intent to manipulate market prices and create artificial prices, enabling their orders to be filled at better terms than they otherwise would.
Three individuals were charged by both the CFTC and DOJ: Michael Nowak, Gregg Smith and Christian Trunz. Trunz entered into a formal cooperation agreement with the CFTC and settled the charges with the agency. He also pleaded guilty in the criminal proceeding.
Defendants contend granting a complete stay will result in prejudice. In his response to the DOJ’s brief supporting a complete stay, defendant Nowak argued that courts have uniformly held that a stay is appropriate only in unique circumstances and where necessary to avoid significant prejudice. Moreover, he asserted that the defendants’ use of civil discovery rules to obtain the discovery to which they are entitled—solely as a result of the CFTC and DOJ’s concerted decision to charge them both civilly and criminally—does not pose a risk of cognizable prejudice or harm to the government. Moreover, it does not justify the extensive stay the DOJ seeks. Nowak concluded that a complete stay would prejudice the defendants by substantially delaying the time-consuming process of discovery in the CFTC case and would prolong and delay a resolution of that action.
As an alternative to a complete stay, the defendants have suggested that the court should stay the action but allow for document discovery, including third party discovery, to proceed. In support of this approach, the defendants pointed to CFTC v. Vorley, a recent case in the Northern District of Illinois where the court considered a similar situation to the matter at hand. In that case, the court ruled to stay the action but allowed document discovery to proceed.
Defendant Smith, for his part, desires to clear his name without further undue delay. Smith noted that he has lived under a cloud of suspicion related to his trading for the past six years as a result of CME, CFTC, and DOJ investigations and now the current charges. Smith asserted that all along the way, he has maintained his innocence and now stands ready and eager to defend himself. He argued that the DOJ’s motion, if granted, would substantially delay his ability to do so. Furthermore, he asserted, the government seeks a blanket stay of all discovery in this action pending resolution of a complex, multi-defendant criminal case against him and others for which no trial date, or even pre-trial motion schedule, has been set. Accordingly, he joined with co-defendant Nowak, arguing that the DOJ’s motion should be denied.
DOJ assets prevailing law supports a complete stay. In its reply memorandum to the defendants, the DOJ asserted that a complete stay of the case is supported by the prevailing case law and is warranted given the circumstances. Moreover, it contended that the defendants’ arguments in opposition to a stay have no merit. Additionally, their 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. Accordingly, they argued that the court should reject the defendants’ proposals as transparent attempts to obtain one-sided discovery without having to actually assert their Fifth Amendment rights against self-incrimination and incur the resulting adverse effects in this civil case.
As for the CFTC, it did not oppose the DOJ’s motion for a complete stay of the civil enforcement action while the criminal proceeding is pending. However, the CFTC squarely opposes the defendants’ suggestions to partially stay the action on asymmetrical terms that, it asserts, are contrary to applicable rules, unfair to the Commission and to nonparties, and inconsistent with the defendants’ purported desire to avoid unnecessary delay.
The defendants are entitled to file replies to the CFTC’s brief supporting the DOJ’s motion for complete stay of discovery by December 20, 2019. The court indicated that it will issue a ruling and set a further status hearing at that time.
The case is No. 1:18-cv-0663.