- An investigation into fraudulent trades in the precious metals market has expanded to other markets as well as to more firms.
- The Justice Department may be expanding its staff as the probe into spoofing trades broadens.
- So far, federal prosecutors have brought 13 spoofing cases against 19 defendants in the past five years.
Federal prosecutors and regulators are expanding their already aggressive investigations of allegedly fraudulent precious metals trades at J.P. Morgan Chase to other U.S. markets and financial firms, CNBC has learned.
The broader inquiry into market manipulation of all kinds comes amid a spike in criminal prosecutions and civil actions in the past year involving so-called "spoofing" in the precious metals markets.
Prosecutors have broadened their investigation in part due to information received from traders questioned for spoofing-related charges.
Information from those traders has led to criminal charges against other individuals, according to people familiar with the probes who spoke with CNBC on the condition of anonymity due to the nature of the ongoing investigations.
The widening inquiry is being led by the Justice Department and the U.S. Commodity Futures Trading Commission as they continue their pursuit of individuals and firms for manipulating U.S. markets.
The scope of the investigations has grown to the point where the criminal fraud division of the Justice Department expects to add personnel to the existing team to assist with the investigations and prosecutions of cases.
Spoofing is the practice of a trader placing a buy or sell order for a commodity or stock with the intent to cancel the order before it can be executed. The goal of the tactic is to affect the price of the futures contract or share to benefit a preexisting trading position.
People familiar with those methods say prosecutors now have an easier time identifying suspected spoofing due to advancements in the way the Department collects and analyzes trade data internally.
Sources who spoke with CNBC said prosecutors are using information about suspected spoofing to collect additional evidence against a trader and, if warranted, question that trader about their own conduct and that of others.
So far, the increased focus on spoofing has resulted in federal prosecutors bringing a total of 13 spoofing cases against 19 defendants in the past five years. Of those, eight have pleaded guilty, while seven are fighting the charges and awaiting trial.
Following the indictment of three J.P. Morgan precious metals traders on Monday, Assistant Attorney General Brian Benczkowski said that the Justice Department is not finished with its probes.
"Our investigation is ongoing, and we're going to follow the facts wherever they lead whether it is across desks here or at any other bank or upwards into the financial institution," Benczkowski said.
The CFTC, the independent agency that polices the futures and options markets, has also been enhancing its own data analytic capabilities to detect spoofing and other suspicious activity in the markets.
"Our goal is to build a really comprehensive data analytical capability — a complete set of data with the expertise to analyze all of it in each specific market so that we have a comprehensive ability to identify suspicious activity in any form it takes in any market it occurs in," said the Director of the CFTC's Enforcement Division James McDonald in an interview with CNBC.
McDonald is a former federal prosecutor, having served as an assistant U.S. Attorney in the Southern District of New York, where he was well acquainted with the practice of using cooperating witnesses to build big cases against individuals and corporations.
McDonald used that knowledge when he moved to revamp the CFTC's cooperation program. That effort has worked in tandem with the agency's investment and development in data analytics.
"You can identify the person who executed the trade, but is there a supervisor or someone higher up the chain who may also have culpability?" McDonald said, explaining how to leverage data analysis with personal interviews of traders.
"It can be hard to go up the chain without having someone to tell you what is happening on the inside," McDonald said.