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Banks Accused of Rigging Silver Market

MANHATTAN (CN) - JP Morgan Chase and HSBC have rigged the silver market by periodically driving down prices since March 2008, reaping huge profits while causing average commodities traders to lose millions, according to a federal class action.

Lead plaintiff Paul Kaplan says he bought 30 silver futures contracts on the Commodity Exchange (COMEX) in May 2008 for $1,875 each and sold them about five months later for $952 apiece - an artificially suppressed price that the big banks created to drive their own profits. Kaplan says the conspiracy cost him more than $1.3 million.

"A silver futures contract is an agreement to buy or sell a fixed amount of silver at a date in the future," the complaint explains. "The futures price is the market's consensus of the expected spot price for the underlying physical commodity at a specified future date."

Kaplan claims that Bart Chilton, commissioner of the Commodity Futures Trading Commission, reported on Oct. 26 this year that the silver market has been and is being manipulated.

The class claims the banks took short positions in silver options contracts, expecting prices to drop - and manipulated the market to ensure that outcome.

Chilton's office launched an investigation when a whistleblower reported that JP Morgan traders "bragged ... about their large trades which successfully moved silver prices," the class claims.

Andrew Maguire, a former trader for Goldman Sachs, accurately predicted market movements after realizing that the banks tended to manipulate trading when the Department of Labor released reports on employment statistics, according to the complaint.

Maguire found that whether the news was bad or good, JP Morgan and HSBC would try to drive the market down, illegally, and reap large profits, according to the complaint.

"During certain times of the day (typically when trading volume on the COMEX is light), defendants rapidly dumped large numbers of COMEX silver futures contracts at or around the same suppressed price," the complaint states. "It was understood among defendants and their co-conspirators that the price of these contracts would set the direction of silver futures contracts prices for that day."

The class claims there are about 10 times as many light sweet crude oil contracts as there are silver futures contracts, and the market is highly concentrated among a handful of very large banks.

"The relatively sparse number of silver futures contracts regularly traded on COMEX enabled large banks, such as defendants, to manipulate the price of silver futures contracts during the class period by flooding the market with a disproportionate number of contracts," according to the complaint.

The class claims that JP Morgan and HSBC controlled more than 85 percent of the commercial net short position in COMEX silver futures in August 2008, and they owned 96 percent - $7.9 billion worth - of all precious metal derivatives held by U.S. banks, excluding gold, in the first quarter of 2009.

"Because the COMEX silver market was thin, large banks such as defendants were able to manipulate the price of COMEX silver futures and options contracts during the class period by controlling the market with manipulative dominant positions and manipulative trading strategies," according to the complaint.

After Maguire went public, the banks began to "unwind their massive short positions," and the net short position of silver futures held by commercial banks dropped by 30 percent from the March 2010 levels.

"As defendants' short position in Comex silver futures contracts have decreased, the price of silver has risen dramatically," the complaint states.

Silver is at its highest level in 30 years, up 40 percent this year, and JP Morgan recently announced it would close its metals trading operation.

The class seeks restitution and creation of constructive trust, alleging violations of the Commodity Exchange Act, antitrust violations and manipulation. It is represented Vincent Briganti with Lowey Dannenberg.

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