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Wall Street Journal discovers silver-rigging controversy

Section: Daily Dispatches

Silver Market Probe: Act Now, CFTC Is Urged

By Susan Pulliam and Carolyn Cui
The Wall Street Journal
Wednesday, October 27, 2010

A Commodity Futures Trading Commission regulator is putting pressure on the agency to take action in a high-profile, 2-year-old investigation of the silver market.

At a CFTC hearing Tuesday to consider new rules to strengthen its commodity-enforcement powers, commissioner Bart Chilton said market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices. Mr. Chilton said he believed there have been violations of CFTC rules that should be prosecuted, though he couldn't publicly disclose trader names.

CFTC Chairman Gary Gensler declined to comment on the silver investigation or Mr. Chilton's comments.

Mike Reid comments on a new investigation by the CFTC into possible manipulation of the silver market.

... Dispatch continues below ...


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The call to action on the silver investigation comes as the CFTC faces increasing pressure because of its expanded role overseeing derivatives trading under the new financial-overhaul law. For years, lawmakers have criticized the agency for failing to aggressively police the commodities markets.

In its 36-year history, the CFTC has reached settlements in more than three dozen manipulation-related cases, though it has successfully concluded just one manipulation case from trial through appeal. To win manipulation cases in the past, the CFTC had to prove that a trader intended to manipulate prices. Under the financial overhaul's new fraud-based manipulation powers, the CFTC's burden of proof would be lower.

The CFTC's investigation of silver has heated up in recent weeks. The agency's enforcement staff has circulated a packet of information to CFTC lawyers and commissioners, outlining some of its findings in the silver probe, including documents that could suggest there have been attempts to manipulate prices. In recent days, the commissioners have been discussing how to proceed in the investigation, but they haven't made a decision.

The investigation comes as more individual investors enter the red-hot area of commodities trading, rushing to buy exchange-traded funds. The broad ETF market has ballooned to more than $900 billion in recent years, including iShares Silver Trust, a silver ETF with a market value of $7.8 billion. Meanwhile, the price of silver, gold and other precious metals are soaring. On Tuesday, silver traded at $23.824 an ounce, up 1.2%.

The silver market is no stranger to controversy. Theories that the price of silver is being manipulated have long been held by a vocal segment of traders. Many big banks, traders and longtime players in the silver market dismiss that notion.

The silver market was at the center of one of the most high-profile cases in the commodities world. In 1985, the CFTC accused the Hunt brothers of Texas and others with illegally manipulating silver prices in 1979 and 1980. Large purchases of silver by the Hunts "artificially" drove up prices, the CFTC said, leading to a plunge.

The Hunts at the time denied wrongdoing. In 1989 Nelson Bunker Hunt agreed to pay penalties of up to $10 million and consented to a ban from commodities trading. William Hunt, who now works for an energy-exploration company owned by the Hunt family, said: "We didn't manipulate the market or corner the market" and added that he no longer is involved in the silver market.

The continuing CFTC investigation of the silver market began two years ago, after Mr. Chilton and others at the CFTC were besieged with emails from hundreds of investors, who complained that they believed silver prices were being manipulated. A number of the emails allege that the CFTC is dragging its feet and ignoring evidence of manipulation in the silver market.

It isn't the first time in recent years that the CFTC has examined similar allegations in the silver market. The agency's market-oversight division conducted a 2008 study and found no evidence of manipulation.

After complaints continued, the agency's enforcement division made an unusual announcement in September 2008 that it had launched an investigation into the matter.

Over the past two years, silver prices have bounced around, rising to around $20 just before the May 2008 CFTC report, then dropping to around $9. In 2009, silver prices climbed back to just under $20. This year, silver prices have soared 41.6% amid a lower U.S. dollar and rising concerns over inflation, at one point hitting their highest level in 30 years.

Despite silver's lofty price, some analysts and others suspecting manipulation believe the metal should be trading at far higher levels.

Earlier this year, the investigation took a new twist when the CFTC began looking into allegations by a trader in London who contended that J.P. Morgan Chase & Co., one of the largest silver traders, was involved in manipulative silver trading, a person close to the situation says.

In recent months, CFTC lawyers have interviewed employees of J.P. Morgan in its metals-trading business as well as industry traders, commodity executives, experts, and employees of other metals-trading firms, a person familiar with the situation says.

J.P. Morgan and HSBC Holdings PLC traditionally have been big players in the silver market. A CFTC weekly report for Oct. 19, the most recent period, shows that less than four market players hold 24.3% of all net bearish bets in the silver market. J.P. Morgan and HSBC are among those market participants, according to silver traders and a person close to the investigation. In recent months, however, the banks with large futures positions have sharply reduced the size of their holdings.

Both J.P. Morgan and HSBC declined to comment on any aspect of the investigation.

The CFTC has been in the process of setting limits on the size of trading positions for more than a year and was due to come out with proposals at the beginning of next year. Last week, Mr. Gensler, the CFTC chairman, said he believes the process will take longer than expected.

In the hearing Tuesday, Mr. Chilton said limits on the size of trading positions could also help prevent fraud and manipulation.

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