Money makes the world go round: A blog about the business and culture of all things entertaining in the world of theater, television, film, music, art, gadgets, gizmos and other life necessities (and probably other things, knowing myself)

Tuesday, November 16, 2010

Yet another Wall Street lawsuit

I know, I know...this doesn't have anything to do with entertainment unless you view it as entertaining to watch...another lawsuit has been filed against JP Morgan with co-defendant HSBC on their side:

JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face allegations of manipulating the silver futures and options market and violating the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act, according to a lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.

Filed on behalf of Carl Loeb, an independent investor, by litigation firm Hagens Berman Sobol Shapiro, the lawsuit accuses JP Morgan and London-based HSBC of manipulating the silver futures market by naked short selling a considerable amount of silver futures contracts, but not intending on delivering the futures by its “expiration” date. 

According to the complaint, JP Morgan accumulated substantial short positions, or contracts to sell an asset, in silver futures when they acquired rival investment bank Bear Stearns in 2008. In the following months, JP Morgan and HSBC owned more than 85 percent of the short positions in the market of silver futures contracts.   

In the short period of time, these companies have made $100 million off the activity,” said Sean Matt, co-counsel and partner at Seattle-based Hagens Berman, in a conference call with New York University students. “It’s a very large damage case the farther you go out…like you throw a pebble in a lake and you actually see energy from that pebble and the waves span out from where that pebble is dropped.”
The lawsuit alleges that the two giant investment and security firms colluded to flood the Commodity Exchange, or "COMEX," with a substantial amount of futures contracts in a given time to force prices to rapidly decline. 

“The top four largest traders in silver futures own about 20-45 percent of the annual silver market so I highly doubt [JP Morgan and HSBC] own anywhere near the positions they hold,” Matt said. “If they don’t own enough, they cover it and close out the contracts by doing the opposite.”
In the late 1970s, Nelson and William Hunt lost their billionaire fortune after the Commodity Futures Trading Commission (CFTC) found the brothers guilty of conspiring to manipulate and monopolize the silver market, committing fraud and racketeering and violating antitrust laws. To date, there have been twenty-two similar lawsuits filed in New York’s Southern District Court, but issues still arise as to the question of manipulation: when is it legally manipulation?

“If people believe there is no collusion between market participants, their view of the market participants is skewed,” said Itamar Dreschler, assistant professor of finance at New York University’s Leonard N. Stern School of Business. 

To determine manipulation, the CFTC use a four-part test: First, does the defendant have the ability to influence market prices? Second, Did the defendant specifically intend to do so? Third, does artificial prices exist? Lastly, Has the defendant caused an artificial price to occur?
“In most commodity markets, there are position limits such that this cannot happen…there are limits on the amount of short positions you can amass…not so for silver, gold and copper,” Matt said. “I have read that people believe to reform the market, part of what they need to do is put in position limits.”

“We hope on behalf of our clients that it [the impact of case] will lead to a market free of manipulation…that will likely involve the price of silver going up, I suspect.”

To be honest, I am still pretty confused about the process of naked short selling of futures and options. If "manipulating" the silver market push the price down, it will eventually bring the price up again. So where is the big payoff in the end for the accused? But I guess it doesn't take an investment banker to understand that eventually, a bubble WILL burst if you continue to short items you can't deliver.  I mean, there was a case where a trader was prosecuted after cornering merely 5 percent of the market. I guess all we can do is wait and see what will come out of yet ANOTHER Wall street case.

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