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by Free Market Duck

New silver class action invokes RICO against JP Morgan, HSBC

By C. Powell, annotated/edited by FM Duck

Wed Nov 03, 2010

Banks Alleged to Have Used Naked Short Selling to Rig Market

NEW YORK, NY – As we at FM Duck have been telling you for years, 4 to 8 major bullion banks on Wall Street have been monopolizing and manipulating the precious metals market for many years, controlling up to 85% of the gold and silver futures markets by a method called “naked short selling.”

   What is “naked short selling?”

   First, selling short is the opposite of buying long.  That is, Ma and Pa Kettle standard investors usually buy stocks at what they think are low prices, hoping that the stock prices will go up in the future.  In this manner, they hope to earn more profits in dividends and when they sell their stock for higher than they purchased.  This is called going long.  Easy peezy, lemon squeezy, unless you guess wrong.

   As Ma and Pa Kettle get more sophisticated – or perhaps more dumb – they may decide to place orders to sell stock first, and then buy it back later, hoping said stock values go down.  Technically, they are trying to sell high first, and then buy low later, sort of the reverse of going long.  This is referred to as “shorting a stock,” or “short selling.”

   So far, so good.

   But then, in steps the crooks who have changed the mechanics of selling short so they can game the system.  Here’s how it works.

   In the old days, when somebody shorted a stock, a piece of signed paper was physically delivered to a central clearinghouse to ensure that said shorted stock did, indeed, exist on the buy side.  That is, the shorted stock had to already have a buyer who was going long.  The shorts and buys had to really exist and balance.

   Then, the big banks on Wall Street and the SEC and the CFTC decided that trades could execute faster if the shorts could just verbally or electronically state that they were shorting without actually sending a piece of paper to a clearinghouse to verify that an equal amount of longs existed.  And so they did.  They short-circuited the old paper trail process for a new electronic trust-me process.  This new process has been termed “naked short selling” because all too often the short is standing there butt naked without any clothes on, i.e. no offsetting longs.

   In this clever manner, those big short sellers who want to cheat the system can short more stocks than what really exists, and then buy later to make huge profits from those non-existent stocks.  In short, no pun intended, the major bullion banks have been shorting more stocks than exist in the entire market through “naked short selling.”

   The second problem with “naked short selling” is that when you buy a stock, the company typically sends you a notice of the number of stocks you own, and you get to vote your shares for which corporate officers you want running the company.  In “naked short selling,” big investors are receiving and voting according to non-existent shares that they really do not own, and thus can control, even bankrupt a company.  This, too, is fraud, of course, and must be dealt with by the SEC.

As reported at GATA by C. Powell:

“JP Morgan Chase & Co. and HSBC Securities Inc. face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.

The suit -- which alleges violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act -- alleges that the two banks colluded to manipulate the market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.

The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm.

‘The practice of naked short selling has long been a serious issue on Wall Street,’ said Steve Berman, co-counsel and managing partner at Hagens Berman. ‘What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market.’

According to the complaint, JP Morgan amassed a sizeable short position in silver futures and options in part through its March 2008 acquisition of investment bank Bear Stearns. By August 2008 JP Morgan and London-based HSBC controlled more than 85 percent of the commercial net short position in silver futures contracts.

The suit alleges that, starting in early 2008, the two banks began manipulating the silver futures market by accumulating unusually large ‘short’ positions and then secretly coordinating enormous sales of silver futures contracts on the Commodity Exchange, which is known as COMEX and is part of the New York Mercantile Exchange.

According to the lawsuit, JP Morgan and HSBC used a variety of methods to coordinate their manipulation of the market for silver futures contracts, signaling when to flood the COMEX market with short positions, which caused the price of silver futures and options contracts to crash.

The suit describes two ‘crash’ events that were set in motion by JP Morgan and HSBC, one in March 2008 and the other in February 2010, after defendants had amassed large short positions. In the wake of both events, the suit alleges, COMEX silver futures prices collapsed.

‘We believe that JP Morgan and HSBC's scheme was carefully conceived and coordinated to maximize their profits at the expense of innocent investors who believed that they were trading in a market free from manipulation,’ Berman said.

The complaint also contains allegations that in September 2008 the U.S. Commodity Futures Trading Commission launched an investigation that would eventually consider allegations made by a London-based, independent metals trader named Andrew Maguire that the silver futures market was being manipulated.

The complaint alleges that Maguire disclosed to the CFTC on Feb. 3, 2010, that he received a signal from the two banks of their intent to drive down the prices of silver futures two days later, on Feb. 5, 2010. Maguire's information was correct and the price of silver dropped dramatically between Feb. 3, 2010 and Feb. 5, 2010.

In addition, the lawsuit states that both JP Morgan and HSBC still maintain highly concentrated holdings in short positions in silver futures and options, giving both banks the ability to continue manipulating the price of silver.

Plaintiffs' attorneys have asked the court to certify the case as a class action and enjoin JP Morgan and HSBC from continuing their alleged conspiracy and manipulation of the silver futures and options contracts market.

Attorneys also ask the court to award damages and attorneys' fees to the class.

Seattle-based Hagens Berman Sobol Shapiro LLP represents whistleblowers, investors, and consumers in complex litigation. The firm has offices in Boston, Chicago, Colorado Springs, Los Angeles, Phoenix, San Francisco and Washington, D.C. Founded in 1993, HBSS continues to successfully fight for investor rights in large, complex litigation. More about the firm and its successes can be found at www.hbsslaw.com.”

   So what does all this mean to you, the small to medium investor in gold and silver?  Remember that the 4-8 major bullion banks on Wall Street are members of the Federal Reserve central banks, some sitting on the Board making America’s monetary decisions.  So just when you try to protect yourself from the hyper-inflation of the Federal Reserve printing up trillions of dollars in paper money out of thin air, by your purchasing of gold and silver, you discover that the very same inflators of our currency are controlling and manipulating the precious metals market to screw you over again as you try to protect yourself from their initial monetary Ponzi Schemes.

   In short, the central bankers screw you coming and going.

   And not only that, their hyper-inflation shoves you into a much higher income tax bracket to taxflate even more of your earnings.

   As we have stated over and over in these columns, the KEY TASK for the new Congress is to (1) audit the Fed, and then (2) abolish the Fed.  We do not need a central bank.  What America needs is to return to a 100%, non-fractional reserve, gold and silver standard.  Until that happens, we will wallow around in a global Depression for many years.  Freedom to choose one’s choice of a medium of economic exchange is the equivalent of freedom of speech, economic speech.  And this is already protected in the First Amendment of our Bill of Rights. – FM Duck

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