28 December 2010

A New Lawsuit Against JPM and HSBC for Silver Manipulation With An Interesting ETF Twist

This lawsuit specifically cites JPM and HSBC as custodians of the largest silver ETFs, SLV and SIVR, and how they used that market positioning to manipulate their knowledge and market positioning as custodians of these funds to manipulate the silver price to their benefit.

The goal of this lawsuit is to move to the discovery process, and to attach itself to the ongoing CFTC and DOJ investigations into the silver market. It will be very interesting to watch this drama unfold over the coming months.

It is always worrisome when the 'house' sits down at the same table as the players and bets against them. It ought to never be permitted except in the course of making a market in limited circumstances, because as the lawsuit also illustrates, the opportunity for private collusion is beyond the scope of the regulators, especially given the ability for the house to deal in dark pools.

And of course the root of the problem is that the Wall Street banks, which had been engaged in massive frauds in subprime debt instruments, were never reformed, and in fact became even larger and more hungry, now devouring whole markets and even small nations in their search for fees and illicit profits.

Paul Volcker's vision of a return to 'narrow banking' may very well prove to have been wisdom as compared to the current financial system of unproductive mammoths still unfolding.

Plaintiffs vs. JPM and HSBC

8. In this case, the vast majority of trading on CME/COMEX and NYSEArca was electronic. While electronic trading was intended to allow for greater efficiency and “freer” markets, it has actually provided greater opportunities to restrain trade in the markets and manipulate prices. Rather than being visible in an “open outcry” pit and subject to the scrutiny of fellow market participants, the vast majority of trading is electronic, involving traders who sit at computer-trading terminals and place orders anonymously. Thus, unlike where pit or open-outcry trading is the dominant form of placing offers and bids, nothing prevents potential manipulators in this market from signaling or outright communicating with each other to drive the market in any direction they deem fit, or from posting sham orders that are intended to drive prices in an artificial way. In other words, because of electronic trading, market participants are generally unable to police one another. Thus, defendants JP Morgan and HSBC, had an opportunity to communicate and signal to each other their market moves (i.e., conspire and
manipulate) without detection by other market participants.

11. Before the Class Period began, JPMorgan had become the custodian and an authorized participant of the largest known concentration of silver bars, the iShares Silver ETF, which holds in excess of 340 million troy ounces of silver, a sum that equals an estimated 1/3 of the total present global supply of silver bullion. As a result, it had actual knowledge of the precise whereabouts of much of the world’s known silver bar supply.

12. In approximately March 2008, JP Morgan acquired Bear Stearns, which held a very large short position in silver. With more of the total short position in silver concentrated in the hands of JP Morgan, it had a further motive to suppress prices.

13. Upon information and belief, JP Morgan works together with HSBC, the other dominant player in the silver and precious metals markets. In July 2009, HSBC became the custodian of the SIVR ETF, which meant that it had physical access to and knowledge of the silver held by that trust. Notably, it named JP Morgan as one of the sub-custodians of the SIVR ETF.

14. As a result of their participation in the silver ETFs, JP Morgan and HSBC had a direct opportunity to confer and discuss with each other the prices of silver held by each of them.

15. In addition, Defendants had a strong incentive to suppress downward the price silver as measured by the NYSE-Arca and CME/COMEX instruments. For example, Defendants could pledge their silver to the ETFs in exchange for ETF shares, sell their shares to other market participants, drive down the prices of silver through trades on NYSE-Arca and CME/COMEX, buy back their ETF shares from investors at lower prices, and return their (now lower priced) silver ETF shares in exchange for the silver bars initially pledged against those shares, the real value of which remained the same, and only notionally appears lower because of Defendants’ suppression.

There are other ETFs which have similar setups and opportunities for market manipulation by the 'custodians' and insiders. There are a few that on the surface appear to be so stacked against the buyer as to approach the level of fraud. Professional traders snigger that those who are not specifically informed enough to find this out for themselves deserve to be 'taken.' I wonder how these smart fellows would feel if the medical profession in which they and their children are customers was managed in the same way. A bull market in infant mortality and thalidomide babies?

This is not some efficient free market but a kind of hell in which no one or nothing can be trusted, a society that dissolves into mere anarchy and madness.

But in fact the common protection of the many against the more powerful, the average person against the insider, with the creation and maintenance of a public infrastructure, are the primary functions of popular government. And if you look to the governments of the developed nations against this benchmark, too many recently appear to be miserable failures.

The source of this failure and its remedy is a familiar tale to those well read in history, and is the great story of the beginning of this century.

"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law.

But when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government. There are no necessary evils in government. Its evils exist only in its abuses."

Andrew Jackson

The problem is not that government is inherently bad. The triumph of evil is always when good men and women do nothing, or even worse, allow themselves to be co-opted by their selfish interests into a system of injustice. No one can control the madness, the will to power, the insatiable hunger to possess. In the end it will always come for them and what they hold most dear, and consume it.