Silver Price Manipulation Case against JP Morgan
Every now and then we receive questions about JP Morgan and the allegations that the company suppresses the price of silver. In our Q&A section we answered some of those concerns by replying to a question about JP Morgan and silver manipulation. In that answer we wrote the following:
Despite a (…) lawsuit accusing JPMorgan and HBSC of jointly controlling " over 85 percent of commercial net short positions ", a position inherited mainly from the liquidated Bear Stearns business, the CFTC seems inclined to drop any case it has against JPMorgan , making this the third case in a row that has not found proof of wrongdoing.
This actually happened last year and the CFTC didn't find any substantial evidence of foul play on the part of JP Morgan after leaving out HSBC from the case.
Additionally, a group of 44 plaintiffs submitted to the U.S. District Court for the Southern District of New York a class-action complaint accusing JP Morgan of the manipulation of the silver market. This lawsuit was turned down by Judge Robert P. Patterson Jr. on December 21, 2012.
The complaint itself claimed JP Morgan had "combined, conspired and agreed to restrain trade in, fix and manipulate prices of silver futures and options contracts" and that it had "intentionally acted to manipulate prices of COMEX silver futures and options contracts." (http://www.scribd.com/doc/65207178/11-09-12-FINAL-Consolidated-Class-Action-Complaint) This would have been done primarily through an enormous short position inherited from Bear Sterns. Supposedly, "JP Morgan frequently held 24-32% of the open interest in all COMEX silver futures short contracts (…) trading."
The plaintiffs mentioned numerous cases when, in their opinion, JP Morgan had intentionally influenced the price of silver, particularly had caused substantial sell offs. The supposed manipulation would have caused significant losses on the part of the plaintiffs, particularly because of the depreciation in silver and because of margin calls which forced investors to close off their long positions.
The overall period during which the alleged manipulation would have taken place was on "June 26, 2007 and between March 17, 2008 and October 27, 2010." The suit mentions dates of sudden price drops, such as June 19, 2008, June 24-25, 2008, May 17-18, 2009, June 9-10, 2009 and many more.
In spite of the level of detail presented in the listing of supposed manipulative actions, the case was rejected by Judge Patterson as one providing only "conclusory allegations." This basically means that the plaintiffs presented possible situations of manipulation in the silver market but did not provide substantial evidence that the manipulation in fact had taken place.
As there is no precise definition for price manipulation within the U.S. legal system, the courts usually refer to a 4-step test in order to determine whether any manipulation has in fact taken place. In these 4 steps the court checks if:
- The Defendant has the ability to influence prices.
- They display intent to do so.
- There is an "artificial" price other than the price that would have been set without manipulation.
- The Defendant is the cause or one of the causes of that "artificial" price.
In our specific case, for Judge Patterson to consider JP Morgan a manipulator in the silver market, it would take several undisputable facts. The first point about the ability to drive prices one way or another is a relatively easy one to prove. With the abovementioned 24-32% of the silver futures short contracts under their control, it seems like there is a good possibility that JP Morgan is able to put pressure on silver prices whenever it wants to. Actually, this point was not disputed by the representatives of the bank - they didn't contend the fact that JP Morgan has a position large enough to shake the market.
What they did contend, however, was the intent to suppress prices. And the plaintiffs' complaint didn't provide any facts which would prove otherwise. The intent part can be actually quite hard to prove. The lawsuit cited JP Morgan traders bragging about their possibility to control the market and success in doing so. The main problem here is that the suit was formulated in a general way and didn't supply any concrete situations in which it could be established that person X from JP Morgan phoned person Y from JP Morgan and said "Hi, X, I just rigged the market." This is exaggerated a little bit, but without such a "smoking gun", or at least a loaded one, the claims that the traders were boasting about their ability to suppress the market boil down to one magic word. Hearsay. Which is not admissible in court.
Now, let us break it down for you into two pictures: the one seen by the plaintiffs and the one examined by court. The plaintiffs identified situations in which silver prices behaved "strangely," mostly situations in which silver dropped significantly without any apparent reason. Then they looked at the market players and found out that JP Morgan is the biggest on the short side of the market. Up to that moment, the analysis is correct but the next point is flawed from the legal point of view. Namely, the plaintiffs came to the conclusion that JP Morgan had to be involved in those "strange" depreciations, mainly based on rumors circulating among precious metals investors.
The court saw the "strange" price patterns, but they didn't provide any proof of market manipulation - markets can both appreciate and depreciate strongly without manipulative activities. Judge Patterson acknowledged that JP Morgan had the ability to influence the market but the most important part, the intent, was clearly unsubstantiated.
So, it would take an important witness to change the outcome of such a case. Someone who actually saw the manipulation taking place (if any manipulation was taking place), not just a person who overheard some bits and pieces from a different department within the bank.
Then, if any manipulation is taking place in the silver market, it would probably take an insider from one of the institutions involved in such alleged manipulative activities to speak. What is very important here is the fact that accounts of people connected to the silver market but not directly able to witness any supposed wrongdoing wouldn't count. So, complaints of whistleblowers who, based on their market knowledge and experience, believe that the market is manipulated, just as Andrew Maguire did, don't amount to much in court.
Since both the CFTC and the court have dropped their cases against JP Morgan, the company has been legally freed of any accusations. There is no conclusive proof linking any actions of JP Morgan to price behavior in the market, no matter how regular price patterns resulting in silver depreciation might seem.
Is silver price manipulated? It might be, but given that it would be so difficult to prove it, that is not the right question to ask in our view. The correction question would be if anything can be done to make sure that you make money on your silver investments whether silver is manipulated or not. The answer to this important question is yes, it can be achieved thanks to diversification of strategies (you will find details in our gold portfolio report) and keeping at least part of one's silver holdings in the physical form.
In such a situation when there are lots of rumors circling around but no conclusive evidence, it might be best to analyze the data for yourself. We actually did that during the development phase of one of our soon-to-be-released investment tools, True Seasonals. Our results suggest that there are depreciation patterns around the expiration dates of derivatives. Because of that, regardless of the fact if any manipulation is taking place in the market or not, it's best to remain particularly cautious about your trading activities on the expiration of gold and silver futures and options.
Liked this commentary? You'll be able to find more essays on both gold's fundamentals and the current technical situation in our gold articles. If you're wondering why we consider both fundamental and technical factors, our report on gold portfolio might be of interest to you.
Thank you for reading.
Przemyslaw Radomski, CFA
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