U.S. regulators on Wednesday closed a five-year investigation into alleged manipulation of the silver market, saying 7,000 staff hours of investigation produced no evidence of wrongdoing.
The decision by the Commodity Futures Trading Commission was a defeat for silver market commentators and investors who urged the probe, saying big banks were using futures and options to hold prices down. Big traders had dismissed the investigation as a waste of time and the charges as a conspiracy theory.
The CFTC formally closed the probe six months after a U.S. District Court dismissed a class action lawsuit making similar claims against JPMorgan Chase & Co..
“Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets,” the CFTC said.
The CFTC typically does not comment on ongoing inquiries, but made the silver case public in 2008 after receiving complaints alleging manipulation of the silver futures contracts traded on the Commodity Exchange Inc (COMEX). The agency launches dozens of such investigations each year, many of which do not result in formal charges or action.
The probe gathered urgency in 2011, as silver prices doubled to a record of nearly $50 an ounce, then collapsed nearly 30 percent in five days. That roller-coaster ride brought back memories of the Hunt Brothers silver short squeeze in 1980.
The CFTC said the allegations “asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase.”
The complainants, who were not named, also cited public regulatory data on futures traders to support claims that several large short positions were depressing prices, it said.
The decision may highlight the high hurdles that U.S. regulators face in proving a case of “market manipulation”, even after the CFTC was given greater powers to crack down on trading malfeasance after the 2010 Dodd-Frank financial reforms.
In the past, the CFTC has levied heavy fines for trading rule violations. Yet only once in its 36-year history has it successfully concluded a manipulation prosecution: a 1998 case concerning electricity futures prices.
Closing of the probe was a rare bright spot for Wall Street commodities players during a year in which the U.S. power market regulator has leveled record fines against two big banks, and the Federal Reserve is considering whether to rein in Wall Street’s ability to operate in physical markets.
But Democrat commissioner Bart Chilton, who had championed the silver inquiry, said he was disappointed.
“For me, there’s not been a more frustrating nor disappointing non-policy-related matter at the CFTC,” he said in a statement after the agency’s announcement.
The Gold Anti-Trust Action Committee, an advocacy group that believes the Federal Reserve and banks are colluding to keep gold and silver prices artificially low, said it was not surprised by the CFTC decision.
“We believe that the U.S. government is part of the trading operation. In essence, you are not going to have the CFTC turns against its own government,” GATA Chairman Bill Murphy said.
“We are not even slightly surprised and had expected this.”
A JPMorgan spokesperson declined to comment.
Commodities traders said it makes no sense for banks to distort precious metals prices, since they generally earn more from trading on behalf of clients in an orderly market.
“The fact that the CFTC couldn’t prove any illicit activities in the silver market is enough to let people feel more at east trading there,” said Miguel Perez-Santalla, a veteran precious metals trader for more than 20 years and now vice president of online precious metals market BullionVault.
“The silver market is much greater than the sum of the players,” he said.
Although silver is most visibly used in jewelry, it has wide industrial uses, including in electrical switches, circuit breakers and solar panels. The metal has also featured prominently in modern commodity market scandals.
In the most memorable case, the Hunt brothers of Texas hoarded the precious metal, aiming to corner the market and control global prices starting in the late 1970s.
But the silver market collapsed in 1980 and the Hunt brothers declared bankruptcy. Their losses grew and in 1989 they were convicted of conspiring to manipulate the market.
In 2004, the CFTC had published an open letter to silver investors telling them that the existence of a long-term manipulation was not plausible and that an analysis of activity in the silver futures market at that time did not support the conclusion that the market was being manipulated.
In October 2010, JPMorgan and HSBC, two of the world’s largest banks participating in precious metals derivative contracts, were hit with lawsuits accusing them of conspiring to drive down silver prices by amassing huge silver shorts, a trading position designed to profit from a fall in prices.
HSBC was later dropped from the complaints, which had alleged the firms reaped up to hundreds of millions of dollars of illegal profits, and a judge dismissed the consolidated lawsuit in March.
The District Court judge said that while the investors showed that JPMorgan had the ability to influence prices, a fact the bank did not dispute, they failed to show that the bank “intended to cause artificial prices to exist” and acted accordingly.
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