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National Post mocks gold manipulation without ever questioning a central bank

Section: Daily Dispatches

All any journalist has to do is ask them about gold swaps and leases, but no one dares to do it:

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Shine Fades on Scotiabank's Gold Business as Banks Land in Court over Alleged Price Manipulation

Barbara Shecter and Peter Koven
National Post, Toronto
Friday, May 27, 2016

In 2004, Rick Waugh, then Bank of Nova Scotia's chief executive, proudly posed with a gold bar for a photo to tout the Canadian bank’s new leadership position among the world’s top bullion dealers. In May that year, Scotiabank became the first non-British bank to chair the London Gold Fixing, a twice-daily setting of a key benchmark price for gold. It felt like a landmark moment for the bank.

But a little more than a decade later, Waugh's successor Brian Porter found himself in a less pleasant sort of spotlight, as lawsuits began to roll in against Scotia and the other banks involved in setting benchmark prices for precious metals (known as the "fix"): Deutsche Bank Societe Generale, Barclays, and HSBC.

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The allegations at the heart of the proposed class action lawsuits, filed in New York and Ontario, are unproven, but they are serious.

The five banks are accused of manipulating the gold market, which is worth trillions of dollars in trading value per year. A smaller subset, including Scotiabank, is accused of manipulating the silver market by rigging the daily Silver Fix. UBS AG, meanwhile, is accused of conspiring to exploit metals prices.

In a wrinkle that became public this year, one of the defendants -- Deutsche Bank -- is close to settling and co-operating with the plaintiffs in order to extract itself from the U.S. lawsuit. That puts the remaining defendants in a highly uncomfortable position, even if they have done nothing wrong.

A statement of claim in one of the Canadian lawsuits, filed in February, alleges the five banks "conspired" to rig precious metals pricing for their own benefit for nearly 10 years.

"Beginning at least as early as 2004 and continuing through to June 30, 2013, the defendants conspired with each other to fix, raise, decrease, maintain, stabilize, control, or enhance unreasonably prices in the gold market," the claim states.

"This was accomplished through daily conspiratorial communications under the guise of the arcane fixing process," which, the lawsuit alleges, "provided a veneer of false legitimacy for collusion."

The fixing process produced a benchmark price for gold that the lawsuit claims affected the broader market for gold instruments including coins, futures, options, exchange-traded funds and mutual funds.

Canadian plaintiffs also filed a silver manipulation suit with similar allegations.

Scotiabank declined to comment because the matter is before the courts.

Canada's third-largest bank became a big player in bullion dealing in 1997, when it acquired Mocatta Bullion, which had 180 employees in 10 offices around the world. The bank recently closed a small office in Dubai, but said in a statement that "ScotiaMocatta remains an important part" of its global banking and markets business.

The controversy over precious metals fixing didn't come out of nowhere. Since the 2008 financial crisis, accusations that global banks have manipulated various benchmark rates have been at the heart of several ongoing legal and regulatory wrangles. Most famously, several of the world's largest banks in 2015 were fined nearly US$6 billion over alleged rigging of the London Interbank Offered Rate (LIBOR).

Precious metals price fixing is an archaic process that dates back to the late 19th and early 20th centuries (1897 for silver and 1919 for gold).

Somehow, the process didn't undergo a significant change until 2014. Until then, a group of bankers from bullion banks got together daily in London and set a daily benchmark price for the commodity based around their buy and sell orders. (They eventually stopped meeting in person and just did it over the phone).

"In effect, they were setting the prices of their own financial instruments," said Daniel Brockett, a lawyer at Quinn Emanuel Urquhart & Sullivan LLP, who is spearheading the U.S. lawsuit.

The fix price may seem irrelevant to investors, who trade on the open market, but it is an important benchmarks for companies that buy and sell physical metal on a daily basis, including mining firms, jewelers and refiners.

The fixing model created obvious opportunities for abuse, given that competing banks worked together to set the price without any outside oversight.

But after the LIBOR scandal rattled Europe's financial sector, regulators and investors began looking at precious metals fixing with greater scrutiny.

"The way it worked was completely, in my view, unacceptable," said Rosa Abrantes-Metz, managing director at Global Economics Group, who has identified some questionable trades around the gold fix.

"Under any antitrust view, I don't think this kind of direct, private communications among competitors would have been allowed. And as soon as antitrust regulators realized how the fixing worked, they changed it."

The very nature of the self-regulated fixing process has over the years outraged gold and silver bugs, who see it as proof of a grand conspiracy to drive down the price. And while that theory has never come close to panning out, the fix has produced some genuine controversy.

In 2014, Barclays was fined US$44 million over allegations that a trader tried to manipulate the "fix" price of gold. And earlier this year, silver bulls were livid when the price was repeatedly fixed at levels lower than the spot price the same day.

The fixing process has been reformed over the past couple of years. In 2014, Thomson Reuters Corp. and CME Group Inc. assumed independent oversight of the silver fix, eventually installing an electronic, auction-based system.

The Intercontinental Exchange (ICE) became the gold fix's administrator the same year, and also adopted an electronic platform. Transparency is now much higher, although regulators are expected to push for more changes.

Abrantes-Metz said there are still lingering problems with the system. Most notably, she said, the price continues to be determined at a specific moment in time, when it should be established over several minutes of trading.

"In my view, it is still easier than it should be to manipulate prices during the fixing," she said.

According to the proposed Canadian gold fixing lawsuit, first filed last December, regulatory probes around precious metals fixing continue in the United States, Switzerland, and the United Kingdom.

All but one of the banks embroiled in the U.S. lawsuit went to court in April to try to have the case tossed out. Representatives for Scotiabank, HSBC, Société Générale and Barclays argued that there are simply no facts to back up the claims.

But Brockett said he is prepared to build the case and will push ahead with discovery if the presiding judge rejects the motion to dismiss. A decision on the dismissal motion is expected in the next 30 to 90 days.

"I think our complaint is very strong," he said. "When you have a circumstance where competitors are getting on the phone, even if they're ostensibly doing it to set a legitimate benchmark, there's a lot of temptation there to be able to coordinate information."

Notably absent from the dismissal motion argued in court was Deutsche Bank. According to Brockett, the large German bank is close to reaching a US$60-million settlement. As part of that deal, it will help the plaintiffs with their remaining claims against the other banks.

Some media reports have suggested this would mean providing instant messages, emails and other communications. Brockett said he could not disclose the specifics at this point, as the settlement requires the judge's approval, which is still pending.

It is unclear how Deutsche Bank's co-operation with U.S. plaintiffs would impact the lawsuits on either side of the border. Experts noted that it doesn't necessarily reflect the strength of the case or the value of potential settlements involving other players.

The German bank has good reason to exit this lawsuit, and the move did not come as a big surprise to onlookers. Deutsche Bank has been under greater financial pressure than most of its peers, and has been cutting costs and shedding most of its commodity business -- indeed, Deutsche gave up its seats on the gold and silver fix in 2014 without finding any buyers.

Jeffrey Christian, managing partner of CPM Group and a close follower of the gold market, said he doubts the plaintiffs will get anything of value out of Deutsche Bank's co-operation. Although gold bugs hope the bank will lift the veil on some sort of grand conspiracy to suppress gold prices, he said concerns about the fix process involve minor manipulations at best.

Christian noted Deutsche has spent more than US$13 billion settling lawsuits in recent years, meaning it clearly wants to eliminate any overhang from legal actions, even if they are just nuisance suits.

He also noted that if precious metals fixing was such a good business and there was a lot of money to be made from being an insider, Deutsche wouldn't be so keen to give up on it, even with the heightened regulatory scrutiny of the past couple of years.

"If you're in the fix, you have to trade spot physical metal, which is probably one of the least profitable bullion transactions you can make," he said. "And it's very cumbersome and expensive to execute."

Peter Griffin, one of Canada's top litigators and a specialist in business and securities law, said it is not unusual to see divergence in cases with multiple defendants, particularly as they work their way through the regulatory process or the courts.

"You often have different interests at play amongst the defendants," said Griffin, a partner at Lenczner Slaght in Toronto, who is not involved in the precious metals fixing cases. "So as time goes on, some of the commonality of the defence starts to erode just as people start to look at their own interests."

Griffin said there can also be a "first settler advantage," where plaintiffs are willing to accept less money than they'll demand later, partly because a chunk of the initial settlement funds the ongoing lawsuit.

"Really, the issue amongst the defendants is who has what stomach for the fight. Often you're going to find that you end up with one or two defendants in these multi-defendant claims who go the distance," he said. "In certain circumstances, you might actually outlast the plaintiff and get a better deal if you're the last person standing."

Still, the risks must be balanced. Although there are mechanisms that allow the remaining defendants to limit their liability while others settle, the outcome of a trial cannot be guaranteed. And if damages must be paid -- particularly punitive ones popular in the U.S. -- Griffin said it can be "daunting" for a defendant standing alone.

"Trials are an unruly business because it's human beings trying to convince other human beings about a set of facts and a position, and people react differently," he said. "That's just the way trials are. So it's a risk you take if you're the last person."

The precious metals price-fixing lawsuits come on the heels of numerous other lawsuits that have accused banks of manipulating interest rates and foreign exchange rates.

Brockett was involved in a number of class-action suits that accuse banks of price fixing and manipulation, including one in which a collection of global banks agreed to pay US$1.87 billion to settle claims they limited competition in the credit default swap market.

As with a handful of other post-financial crisis cases, the credit default swap issues were resolved through financial settlements in court after regulators either found insufficient proof of wrongdoing by the banks, or declined to take action.

Brockett said the financial bar set by Deutsche Bank's proposed settlement in the precious metals class action should not be taken as the price at which other banks could settle.

"If we litigate against the other banks," he said, "We're going to be looking for more."

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