Lawsuits Claim JP Morgan and HSBC are Manipulating Silver Prices

There have been at least two lawsuits filed against both JP Morgan Chase and HSBC regarding the suppression and price manipulation of exchange-traded financial instruments (“SLV” and “SIVR”) and silver future contracts traded on the COMEX and GLOBEX. The cases are Beatty v. J.P. Morgan Chase & Company filed on October 27th, 2010 in the Southern District of New York and Kensik v. J.P. Morgan Chase & Company filed on December 7, 2010 in the Northern District of Illinois. Bart Chilton’s Announcement of Silver Price Manipulation A private investor has no way of discovering that other market participants are conspiring in secret or colluding to artificially manipulate and suppress prices until the information becomes public. As such, it was only on October 26, 2010 when the chairman of the Commodities Futures Trading Commission (“CFTC”), Bart Chilton, publically announced that “there have been fraudulent efforts to persuade and deviously control” prices in the silver market, did unsuspecting market participants become aware that they had possibly been defrauded. Opportunity to Collude on Silver Pricing Electronic trading was intended to allow for greater efficiency and freer markets, however, it also allows for unscrupulous entities to restrain trade and manipulate markets. In an open outcry system market participants could physically see each other and any signalling would be noticed and policed, whereas electronic trading allows for anonymity providing traders with the opportunity to signal one another or outright communicate regarding price manipulation. Throughout time JP Morgan became the custodian of the largest concentration of silver bars in the world, the Barclays iShares Silver (“SLV”) electronic traded fund (“ETF”) that holds 340 million troy ounces of silver, or 1/3rd of the worlds known supply. In exchange for pledging silver, investors receive shares of SLV that can be traded on the market where one share represents approximately one troy ounce of silver. The other major market participant, other tha Bear Stea s that JP Morgan acquired, is HSBC which is the custodian of the SIVR ETF, which holds in excess of 14 million troy ounces of silver. HSBC named JP Morgan as a sub-custodian for that fund and as such, JP Morgan and HSBC were in direct possession and control of a significant percentage of the world’s silver bars. JP Morgan and HSBC are also two of the eleven market makers in the London Bullion Market Association (“LBMA”). Whistleblower Andrew Maguire’s Disclosures The CFTC received a barrage of letters and complaints regarding silver price manipulation and suppression so they began investigating in 2008. In November of 2009, a whistleblower by the name of Andrew Maguire who is a former Goldman, Sachs & Co. employee sent e-mails to the CFTC informing them of the manipulative practices of JP Morgan and how they signalled the market about future price manipulation. Mr. Maguire sent e-mails to the CFTC explaining how the market would be manipulated during times such as when non-farm payroll numbers were reported, or when silver options were set to expire. This allowed JP Morgan to generate short term profits as they caused investors to take loses. Mr. Maguire also predicted the future price movement and explained that his information was based on signals that JP Morgan sent to the market. The whistleblower also noted that it would be impossible for him to know this advanced information about price movement absent unlawful and illegal manipulation. Silver Price Manipulation Bear Stea s held a large short position in silver, so when JP Morgan acquired Bear Stea s it also acquired their substantial short position. Rather than unwinding the position, JP Morgan increased the short position thereby sending the price of silver down even further. HSBC had an opportunity to force JP Morgan to deliver silver bars against their short position, but instead it accepted JP Morgan’s signals and themselves accumulated short positions. By August of 2008, JP Morgan and HSBC held a combined short position that equalled 85% of the commercial net short position in silver futures, or 25% of all short positions. In March of 2010 Andrew Maguire made his communication with the CFTC public, so JP Morgan and the other defendants began unwinding their positions causing the price of silver futures to increase dramatically. Through its Bank Participation Report, the CFTC confirmed that commercial banks reduced their short position by 30% during this time. This has caused a rapid increase in the price of silver as it gained over 40% in 2010 alone, reaching its highest level in over 30 years.