Five months have lapsed without decision, since London
gold and silver benchmark-rigging class action lawsuits received a cool
response in a Manhattan court. Transcripts from April hearings show, in the
absence of direct evidence, the claims dissected by a “very skeptical” judge,
and criticized by defendants for lack of facts suggesting
collusion, among other things.
Judge Valerie E. Caproni, former white-collar defense
attorney, SEC Regional Director and controversial FBI General Counsel,
presided over oral arguments for motions-to-dismiss totaling 9 hours on April
18 and 20.
Its “based entirely on statistics with no other,” the
judge said, pouring cold water on plaintiff’s claims of bank collusion in
gold benchmark rigging. Defense attorney scoffed as much at the silver
hearing. “There is not a single fact… that shows an agreement between my
client and the other alleged conspirators to fix the fix.”
Seven banks are being sued in separate gold and silver
class action lawsuits currently before the US. District Court, Southern
District of New York. The plaintiffs: gold and silver bullion traders, and
traders of various associated financial instruments, allege banks conspired
in secret closed meetings, to rig the London PM Gold Fix, and Silver Fix
benchmarks during the period from 2001 to 2013.
If the motions to dismiss are allowed, the complaints
will be thrown out. Plaintiffs on the other hand, are hoping to crack open
the door to “discovery,” where they get to access confidential bank
communications and records. Turning the tables earlier in April Deutsche Bank
surprised by promising to provide such evidence ratting out its former fellow
defendants. “No. I cannot consider it at all,” the judge said, stonewalling
plaintiffs’ arguments mentioning the move. The German mega-bank settled
claims a week prior to the hearing but is yet to hand over records.
Evidence
Alleged proof of downward price manipulation is revealed
by averaged charts showing “Anomalous” price drops from 2001 to 2013 in the
London Silver Fix and PM Gold Fix. In sympathy, even as the gold price
quadrupled from around $300 to $1200 through the period, something
counter-intuitive happened. Plaintiffs’ claim during London hours between the
AM and PM fixes, the average price declined for each of the 13
years, bar one being flat in 2013. More pronounced effects were seen in
silver.
“Those were compelling charts,” the judge responded to a
presentation of evidence during the silver hearing. “I mean, seriously, they
truly show that something happened.”
Image
courtesy of Commodity Exchange, Inc., Gold Futures and Options Trading
Litigation, Dkt No. 14-MD-2548 (VEC)
Defendants argue rather than collusion, the price drops
show normal “parallel conduct.” Loads of precious metals producers all
needing to sell, and a bunch of savvy bankers hoping to buy low. Plaintiffs
say the banks have a near-perfect record betting on the fix outcome. Well of
course, they trade on “the best information in the world about supply and
demand,” the banks’ attorneys retorted.
Findings
Inclusion of a non-fixing bank UBS, in the lawsuit, is
described by defendants as “unfair,” and just to “suck in” a Swiss
regulator’s findings. If the Court is to be believed, the FINMA report may be
all the cases have going for them. Of its 19 pages, the dominating subject is
foreign exchange misconduct, with only a few lines about precious metals.
Tip-toeing around the topic of collusion, the report describes a process of
“cooperation” between UBS and others in precious metals trading. It says the
bank shared sensitive client trade information such as “client names”, “stop
loss orders,” and “flow information on large or imminent orders” with “third
parties.”
Sharing of client trade information by banks, including
UBS, in currency trading, the UK Financial Conduct Authority (FCA) reported in
2014, was for the purpose of collusion. Such communication enabled different
banks to plan trading strategies, and “attempt to manipulate fix rates and
trigger client “stop loss” orders (which are designed to limit the losses a
client could face if exposed to adverse currency rate movements).”
Strong similarities exist between the methods and tools
used by currency traders to rig benchmarks, and those used by precious metals
traders. Referring to the detailed description of UBS offences including
collusion in currency benchmarks, the FINMA report said, “the conduct and
techniques inadmissible from a regulatory perspective, were also applied at
least in part to PM spot trading.”
Thurgood Marshall United
States Courthouse, inset Judge Valerie E. Caproni
Hanging by a Thread
One “misconduct” the report emphasized in precious metals
trading was UBS’ manipulation of the silver benchmark in the banks
proprietary trading. “A substantial element of the conspicuous conduct in PM
trading was the repeated front running (especially in the back book) of
silver fix orders of one client.” According to the FCA, front running is a
kind of insider trading.
“transaction for a “person’s own benefit, on the basis of
and ahead of an order (including an order relating to a bid) which he is to
carry out with or for another (in respect of which information concerning the
order is inside information), which takes advantage of the anticipated impact
of the order on the market or auction clearing price.”
Commenting on the brevity of plaintiffs’ evidence in
silver, and the FINMA findings, Judge Caproni pointed out, “your hanging your
hat pretty heavily on one line in that report.”
Attorney for defendants found the report favorably vague:
“Your Honor, I apologize. I must say he has made a
misstatement three times. The FINMA settlement, Section 3.2.3 talks about UBS
conduct with respect to silver. There’s not a not a word or hint about
coordination with any other bank. It is between UBS and one of its customers
or maybe more than one but no collusion.”
The judge responded, “We have the FINMA report. I knew
that wasn’t exactly what it said.”
Confusion about the Swiss findings wasn’t helped by the
events of the day. The conference call in German, reported FINMA boss Mark
Branson alluding to perhaps more than the report dare, in, “clear attempts to
manipulate precious metals benchmarks.” FINMA declined a request to supply a
transcript or recording of the conference call, with a spokesperson
responding, “We do not publish a transcript, and besides we have nothing to
add to the report.”
A couple of things may help explain the regulators
haziness, and thus the challenges for sensitive cases as these. Switzerland
is a country long associated with gold and banking. In 1970 Zurich was home
to the worlds largest gold market. Most of the worlds’ gold is imported to
Switzerland for refining. Consider then this impressive feat: An official
inquiry is conducted of Switzerland’s largest bank caught up in a scandal
involving “precious metals.” Offenses were identified in its Zurich office.
The agency reports “serious misconduct” in precious metals trading including
sharing of secret client trade orders with “third parties.” The agency head
rallies against manipulation of “precious metals benchmarks.” Action against
11 bank personnel, including industry bans of between one and five years,
were brought against two managers and four traders for, “serious breaches of
regulation in foreign exchange and precious metals trading.” But yet, the
word “gold” is absent from the entire report and announcements.
Secondly, FINMA’s 2015 Annual Report describes the
sanctions against four now-former UBS traders. It may concern some, that
justice is left to financial market regulators when:
“Four further enhancement actions against UBS foreign
exchange traders were discontinued in August 2015. Since there were
indications that their behavior had contributed to serious breaches of
regulatory provisions, FINMA issued reprimands without taking further action
against these individuals.”
The Puzzle
If the cases proceed, US commodity futures markets may
also come under scrutiny. The Court spotted a not-so-obvious paradox
concerning allegations the banks suppress gold prices. “Why would they drive
the price down when they are sitting on I don’t know how much bullion? They
are driving down the price of their own asset,” Judge Caproni posed.
Plaintiffs claim the banks hold a majority of short gold
and silver futures on the US-based Chicago Mercantile Futures Exchange, paper
instruments tied to the value of London silver and gold, which increase in
value as the bullion prices fall. The banks argue that it’s impossible to
tell from mandatory government filings, which banks prosper during the
declines, and to what extent. The judge agrees, and defendants are pleased.
“I’m very skeptical they have a well-pleaded factual allegation of what the
banks’…COMEX position is,” the judge said.
“Mr Feldberg: Then your Honor has said that much better
than I ever could.”
Where direct evidence of collusion isn’t available,
antitrust law allows the pleading of additional circumstantial evidence that
lends plausibility to allegations. Other circumstantial evidence, or
“plus-factors,“ listed by gold plaintiffs, namely problematic antitrust facts
arising out of the very clubby arrangement of the fix meetings themselves,
failed to impress particularly.
“The Court: But weren’t all of your plus factors just the
natural – they are just a function of the fix?..I thought every plus factor
you pointed to was just that’s the nature of the fix.”
Last Stand
The unconvinced magistrate was likely close to a
decision, before four weeks back when the banks had one last throw at
dismissal. The court in the silver case was asked to apply a recent ruling
where warehouse aluminum price manipulation was deemed not to have impacted
end users of aluminum. Any decision on this in silver will likely impact the
gold case also.
The question of standing, or which plaintiff’s
are close enough to the alleged activity to have suffered injury, was well
discussed back in April. For example the Court put to defense: “I’m not
saying the two guys at a swap meet from Ohio would be a particularly
compelling class representative, but why wouldn’t they have
standing?” Plaintiffs seemed to have convinced that the issue could be
decided later, if it gets to that. Judge Caproni just wasn’t sure firstly if
all the statistics, and facts complained were plausible enough to
infer collusion, reminding frustrated gold plaintiffs where the balance lies.
“Unfortunately for you I’m the one who has to make the
decision here.
Mr Brocket: Again, with the greatest respect, I am trying
to resurrect this here but, look. Every fact alone doesn’t prove collusion.
The Court: I agree.”
A courtroom in the Thurgood Marshall Courthouse NYC
Decisions regarding motions to dismiss in the London gold
and silver benchmark-rigging class actions against banks, initially expected
around the end of August, could come any day sooner or later according to
someone familiar with the cases.
The above article was first published at
Allan Flynn’s website here.
Allan Flynn is a specialist researcher in
aspects of gold and silver. He is currently investigating for future
publication on the same topic and works in property and commercial
architecture when he needs to eat. He holds shares in precious metals
producers and banks.
Ronan Manly
E-mail Ronan Manly on:
Follow
@BullionStar
Follow
@ronanmanly
Written by Allan
Flynn, specialist researcher in
aspects of gold and silver.
