JPMorgan Chase & Co. (NYSE: JPM) and HSBC Holdings Plc (NYSE ADR: HBC) were hit with two lawsuits Wednesday by investors alleging the companies conspired to drive down silver prices and gain hundreds of millions of dollars on short positions.
Two traders, Brian Beatty and Peter Laskaris, are accusing the big banks of attempting to manipulate the market for silver futures and options contracts since 2008. The complaints allege the defendants gained millions "if not billions of dollars in profits" by suppressing silver futures and making their short positions on the metal more lucrative.
The plaintiffs said they traded COMEX silver futures and options contracts and lost money due to the manipulation. Laskaris alleges that the banks informed each other of large trades and flooded the market with a disproportionate number of orders, according to Forbes.
The suit says that together JPMorgan and HSBC in August 2008 held 85% of the net short position in silver. Beatty claims that he was hurt by price manipulation when he bought and sold silver contracts on Aug. 14 and Aug. 15 that year, when the silver price plunged 18% from $14.86 to $12.23.
Laskaris' suit also claims that when public complaints grew and the government started investigating silver prices in March, silver went from underperforming to outperforming gold's price climb.
The Wall Street Journal reported Wednesday that the U.S. Commodity Futures Trading Commission has interviewed employees of JPMorgan's metals trading business, as well as industry traders, commodity experts and employees of other firms to look into the matter.
The CFTC proposed regulations one day before the lawsuits were filed that would give the commission more power to monitor manipulative practices. Commissioner Bart Chilton said the tightened control was needed due to "fraudulent efforts to persuade and deviously control" the silver market.
Both banks are major players in the silver market. A CFTC report for Oct. 19 shows that both JPMorgan and HSBC are among the few participants holding 24.3% of all net bearish bets on the silver market, according to The Journal, but both have significantly reduced their holdings in recent months.
In November 2009 two banks held 68% of the commercial net short position in silver, according to a letter to the CFTC from chairman of the Gold Anti-Trust Action Committee William Murphy, citing the commission's own reports.
"It has been possible to extrapolate that the two banks that hold these large manipulative short positions on the COMEX are JPMorgan Chase and HSBC because of their huge positions in the OTC derivatives market, whose regulator, the U.S. Office of the Comptroller of the Currency, does not provide anonymity when it publishes market data," wrote Murphy.
Both banks declined to comment on the issue.
Speculation of market manipulation has swirled around the silver industry for years. The CFTC started investigating silver market manipulation in September 2008. It also looked into allegations earlier this year by a London trader that JPMorgan was manipulating silver trading.
"Going back to the early 1980s, silver has been an extremely volatile market," Bill O'Neill, managing partner at investment firm Logic Advisors that specializes in commodities, told Reuters. "I often describe it as a speculative playground. You have to be a big boy to play."
More individual investors are turning to silver to protect against a falling U.S. dollar and inflationary concerns. Silver has soared 41.6% this year, recently hitting a 30-year high. Some industry experts think it should be trading even higher, suspecting market manipulation is keeping prices down.
The CFTC has settled more than three dozen manipulation cases in its history, but only concluded one from trial through appeal. New structuring due to financial reform has lowered the CFTC's burden of proof.
One of the most high-profile commodities cases involved the silver market, when in 1985 the CFTC accused the Hunt brothers of Texas with trying to corner the silver market in 1979 and 1980. The Hunts made large silver purchases that the CFTC said artificially drove up prices, which then plunged.
While accusations of silver price manipulation are common, lawsuits are not, according to Michael Purves, chief equity strategist at BGC Financial.
"What you're seeing is a developing pattern," Purves told MarketWatch. "Chilton on the top, traders from the trenches, this is part of an interesting string of developments. If the allegations are true, this is a big deal and it becomes a giant PR issue that the central bank will eventually have to deal with."
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