Silver Manipulation Case Against JPMorgan Dismissed

A US federal court has dismissed a class-action lawsuit that accuses JPMorgan Chase & Company (NYSE:JPM), its subsidiaries and 20 unnamed “John Doe” defendants of silver manipulation. Judge Robert P. Patterson Jr. found that the complaint contains many “conclusory allegations,” but fails to provide the specific factual allegations needed to substantiate a claim.

The 90-page class-action lawsuit names 44 plaintiffs who claim that they “lost money and were injured in their property” because the aforementioned defendants unlawfully combined, conspired and agreed to manipulate the prices of COMEX silver futures and options contracts.

The plaintiffs allege that these acts occurred on June 26, 2007 and between March 17, 2008 and October 27, 2010.

Despite the lengthy period under consideration and the seemingly detailed complaint, Judge Patterson found the case to be weak as it fails to link JPMorgan to a single manipulative act.

When “alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake,” he wrote in his Opinion & Order.

Market manipulation

The Commodity Exchange Act prohibits both manipulation and attempted manipulation, but the term “manipulate” is not defined. Therefore, to apply the rule of law, “the CFTC [Commodity Futures Trading Commission] and the courts have developed a four-factor test to determine whether a defendant has manipulated prices,” Patterson noted.

The accused must have the ability to manipulate the market in question and exhibit specific intent to do so. There must also be an artificial price and the accused must be the “proximate cause” of that price.

As is common in efforts to expose silver manipulation, the plaintiffs’ lawsuit points to JPMorgan’s short positions.

By August 15, 2008, the suit claims that JPMorgan “frequently held 24-32 percent of the open interest in COMEX silver futures short contracts then trading.”

JPMorgan did not challenge its ability to influence market prices, and the court found that the complaint provides sufficient factual allegations to satisfy this factor of the test.

However, after that, the case appears to fall apart as the none of the remaining three elements are addressed. As mentioned, the court found that the plaintiffs made only conclusory and speculative allegations.

“Plaintiffs’ claims concluding that JPMorgan, as large holder of COMEX silver futures contracts, short puts, and options, possessed the intent to hedge its holdings and manipulate market prices downward is not supported by sufficient factual allegations,” Patterson concluded.

He also noted that in its 2004 report on silver manipulation, the CFTC stated that “[t]he mere holding of speculative positions by either commercial or non-commercials is neither a violation of the CFTC or NYMEX rules, nor evidence of manipulation.”

Where the complaint claims that JPMorgan traders bragged about their large trades moving silver prices, Patterson again notes weakness.

This “generalized allegation does not state the date or the language of the remarks deemed to be ‘bragging;’ identify the traders who are alleged to have made these remarks; discuss which of the many trades that took place over the more than two-and-a-half year Class Period were the subject of the traders’ bragging; or indicate that the traders were acting at the instigation of JPMorgan to move silver prices on the market.”

With regards to the existence of an artificial price, the complaint points to silver’s performance compared to gold‘s performance.

“Plaintiffs raise these allegations without first explaining why COMEX silver futures prices should be compared solely to the ‘benchmark of gold prices,’” declared Patterson.

He said the CFTC compares prices of silver traded on the COMEX with those of silver traded in the London Bullion Market (LBMA). That is where the CFTC claims “the benchmark value of silver in the marketplace” is provided.

During the period under consideration, the average difference between NYMEX and LBMA prices was approximately 5 percent, and this fact undercuts the plaintiffs’ claims about artificial silver prices on COMEX during this time, Patterson said.

Furthermore, he added that when the CFTC compares silver to another metal it does not limit its view to a relationship with gold, but also considers platinum and palladium.

In its report for its second silver manipulation investigation in 2008, the CFTC found that all four metals have similar price movements. During the period under consideration in this case, Patterson said “these four metals have, in general, continued to exhibit similar price trends and, in particular, silver has continued to outperform platinum and palladium.”

Even if the complaint had successfully proved that an artificial price existed, Patterson found that the plaintiffs failed to connect silver prices to JPMorgan.

In an effort to show firm’s impact, the complaint points to March 25, 2010, when the CFTC held a public hearing on metal prices. After the exposure on the subject, JPMorgan allegedly reduced its short positions by a third. The plaintiffs argue that silver prices rose after this reduction.

One critical flaw in this argument is a failure to show a correlation between the hearing and rising prices “because prices did not actually increase until August 2010, more than five months after the hearing,” Patterson said.

The plaintiffs deem that certain price fluctuations “must have” been caused by JPMorgan because no other “information coming to the silver market” explained the price behavior at that time. Patterson found that this statement and others like it fail to allege specific conduct that might be reasonably attributed to the firm.

At one point, the plaintiffs’ suit argues that it is “difficult to imagine anyone else, working alone, who had the ability to cause such large price declines in prices which, clearly, benefited JPMorgan at least three times more than any other trader.”

Patterson said “the ‘imagination’ required to link these conditions, without corroborating factual allegations … is tantamount to impermissible speculation on the basis of sheer possibility.”

He pointed out that the CFTC has initiated investigations into alleged manipulation twice and has found that no manipulation occurred. Furthermore, the agency has an active investigation that has spanned more than three years and has not resulted in any charges being filed.

The complaint merely pleads facts that could be “consistent with” the defendants liability and “stops short of the line between possibility and plausibility of ‘entitlement to relief,’” the judge concluded.

The case was dismissed on December 21, 2012, and the plaintiffs were given 30 days from that time to show good cause as to why leave to file an amended complaint is necessary.

Securities Disclosure: I, Michelle Smith, own shares of JPMorgan.