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NY Times notes CFTC's new interest in silver market manipulation
Once on Sleepy Beat, Regulator Is Suddenly Busy
By Julie Creswell and Graham Bowley
The New York Times
Friday, November 5, 2010
http://www.nytimes.com/2010/11/05/business/05commodity.html
Cotton, sugar, silver, wheat: in investment circles, commodities like these are hot.
Maybe too hot. At a time when prices of many commodities are soaring -- cotton has jumped 95 percent in the last 12 months, silver 43 percent -- alarms are going off inside the Commodity Futures Trading Commission in Washington.
Long dismissed as a lackadaisical regulator, the commission is suddenly on the move. Indeed, it is busier than ever: It opened a record 419 investigations over the last year, into things as diverse as small-time Ponzi schemes and claims of market manipulation.
It is a remarkable turnabout for the agency, which not long ago seemed on the brink of extinction. Its chairman, Gary Gensler, a former Goldman Sachs executive, has surprised some of his former Wall Street colleagues by flexing his agency's muscles. He is rushing to expand the CFTC's power now that the agency is poised to take on a new role in overseeing the vast market for derivatives that were traded off formal exchanges in the so-called over-the-counter market. He recently hired a former United States prosecutor as his new head of enforcement.
... Dispatch continues below ...
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Granted, the CFTC, like its bigger cousin, the Securities and Exchange Commission, often reels in relatively small fish. One recent case centers on what it calls the Aloha scam -- a $3 million suspected Ponzi scheme in Hawaii that the agency says was overseen by a man in prison. Bernie Madoff, this is not. What is more, agency outsiders question whether it has the means and experience to police new markets and take on the biggest players.
"They had the whole commodities market, and now they're getting an entire new market," said Therese M. Doherty, a partner at the law firm of Herrick Feinstein. "I don't think people have gotten their arms around just how big this market is."
The CFTC, for instance, has about 200 lawyers in its enforcement division, while the SEC has more than 1,200, Ms. Doherty said.
The agency is certainly talking tougher. Last week, one of its commissioners, Bart Chilton, urged the agency to strengthen its two-year investigation into suspected manipulation in silver trading.
"I believe that there have been repeated attempts to influence prices in the silver markets," Mr. Chilton said at a hearing last month in Washington. "There have been fraudulent efforts to persuade and deviously control that price."
A day after Mr. Chilton made his comments, two silver traders filed separate lawsuits in Manhattan federal court against two banking giants, JPMorgan Chase and HSBC Holdings. They accused the banks of conspiring to suppress prices of silver futures on the Commodity Exchange division of the New York Mercantile Exchange, beginning in the spring of 2008. A third suit, this one charging actions in violation of the Racketeer Influenced and Corrupt Organizations Act, was filed this week.
In the relatively thinly traded silver futures markets, a handful of large banks and financial firms dominate trading. In March 2008 when JPMorgan acquired the foundering Bear Stearns, Bear Stearns had made a significant bet that the price of silver would fall, one of the lawsuits says. A few months later, in August, JPMorgan and Bear Stearns' bet against the market totaled about 25 percent of the annual world mining production of silver, the lawsuit states.
The lawsuits say that JPMorgan and HSBC used their dominant positions in the market to manipulate silver prices.
Starting last spring as the two banks cut back on their activities in the silver market, the prices of silver futures increased about 50 percent "even though no fundamental changes in supply or demand for silver, including industrial demand, have occurred during this time period," one lawsuit states.
A spokeswoman for JPMorgan declined to comment on the lawsuits. HSBC officials did not return a telephone call for comment.
The investigation comes at a time when individual investors are increasingly interested in investing in commodities, following the lead of hedge fund giants like John A. Paulson and George Soros.
Given the uncertain outlook for the economy, many investors have sought safety in precious metals like gold. Silver, copper, wheat, and oil have also gained amid concern that new efforts to spur growth -- including the $600 billion in new Treasury bond purchases announced by the Federal Reserve on Wednesday -- could eventually ignite inflation.
Now, as many are making millions legitimately as gold and silver streak to record highs, others are falling foul of frauds in the darker underbelly of the commodities boom.
The CFTC filed 57 enforcement actions in the 12 months ended in September, 14 percent more than in the period a year earlier. And the pace shows no signs of slowing. On Wednesday the agency took enforcement actions against five different groups or individuals, including accusing three individuals of running a $28 million Ponzi scheme in Palm Beach Gardens, Fla.
A senior enforcement official said the commission was working more closely with other law enforcement agencies. Its success in securing convictions has shown that commodities fraud is a crime, encouraging other investors to come forward with their complaints, he said.
The increase in investigations also reflects a shakeout in Ponzi schemes during the financial crisis. Several of the successful cases over the last year came to light during the 2008 crisis.
The agency is also now looking harder for these schemes. It saw a big increase in enforcement actions in the early 2000s, but the number declined in the following years as commodities fell out of fashion and the agency cut back its staff.
Now the commission is expanding under Mr. Gensler. Its reach has recently grown to overseeing foreign exchange dealers, and it will share a large part of the burden of the new financial regulation, including new responsibilities for the swaps market. Specifically, the Dodd-Frank Act gives the agency new authority to fight manipulation in the swaps market, as well as new powers against disruptive practices in the swaps and futures markets.
Mr. Gensler, who was one of the strongest proponents for moving over-the-counter derivatives onto public exchanges, estimates that his agency will need an additional 400 employees, taking staff levels from 688 now to 1,100 over the next two years. "Markets work best when they are transparent and they have an effective cop on the beat," he said.
Another sign of the change in attitude at the agency is that it hired David Meister, a former securities fraud prosecutor in New York, to run the agency's enforcement division. Since 2008, the division has been overseen by acting directors.
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