Ex-Merrill Trader Says Co-Workers in Spoof Trial Taught Him

(Bloomberg) -- A former trader at Bank of America Corp.’s Merrill Lynch unit told a federal jury in Chicago that he learned how to manipulate the price of precious metals from two more senior traders in the bank’s New York office, John Pacilio and Edward Bases.

Harnaik Lakhan said he used Merrill’s internal computer system to watch Pacilio and Bases, who are on trial for alleged spoofing, issue buy and sell orders they didn’t intend to be filled, pushing prices up or down to make it profitable for orders they wanted to execute. Lakhan, who agreed to cooperate with the government to avoid prosecution, said he began using the same techniques from his office in London.

“I wanted to push the market price to my true, intended trade,” Lakhan, who worked at Merrill’s London office from 2007 to 2013, testified on Thursday.

“I knew it was wrong to do, but it helped us make money and get trades done,” he said. “You’ve got to make money. If you don’t make money, you’re out of there.”

Bases and Pacilio face about 20 charges related to alleged spoofing trades in precious-metals markets from 2008 to 2014.

‘Frequently’ Saw Spoofing

Lakhan was a desk assistant for Pacilio and other traders before becoming a trader himself. When Bases joined Merrill in 2010, Lakhan traveled to New York to help set up his desk right next to Pacilio.

Lakhan said he “frequently” saw Bases and Pacilio spoofing because he was watching their trading activity “all the time.” While Pacilio typically used a single large order to push the market, Bases favored using many smaller orders, Lakhan said.

Prosecutor Scott Armstrong displayed for jurors on Thursday a copy of a portion of an exchange on an instant messaging group chat used by Merrill traders, including Lakhan. The chat log showed Pacilio messaged the group that he had in an order “to spoof the gold” in November 2009.

In testimony Friday, Lakhan described a conversation he had with Pacilio on Feb. 11, 2011, when Pacilio was spoofing to help Lakhan buy silver.

“that was me pushing it,” Pacilio wrote in a series of quick messages to Lakhan. “dont do it yourself. i will help you,” he wrote, “dont spoof it.”

Julie Porter, defense attorney for Bases, pushed Lakhan on his assertion that it was “common sense” that spoofing was wrong. She asked him if any supervisors, such as the desk head in multiple of the chat episodes referenced by prosecutors, had ever told him not to do it. Lakhan said they had not.

“Mr. Bases never once told you he thought it was wrong?” Porter asked.

“That’s correct,” Lakhan responded.

In opening arguments, Porter had pointed out that the Dodd Frank Act, which was enacted in mid-2011, criminalized spoofing, and she said that once Bases understood it was wrong, he stopped doing it.

Lakhan said that seeing more senior traders spoof and the desk head being in the group chat gave him “comfort” to do it himself.

“I felt, as a junior trader, I wouldn’t get in trouble,” Lakhan said.

Lakhan said he’s had a variety of jobs since he left as a metals trader at Morgan Stanley in 2015. He’s tutored students in math and English, been a support worker for adults with autism and now works at an Amazon fulfillment center packing boxes.

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