NEW YORK, Nov. 3, 2010 /PRNewswire/ -- JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.
The suit – which alleges violation of the Commmodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate thhe market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.
The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm.
"The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."
According to the complaint, JP Morgan amassed a sizeable short position in silver futures and options in part through its March 2008 acquisition of investment bank Bear Stearns. By August 2008, JP Morgan and London-based HSBC controlled more than 85 percent of the commercial net short position in silver futures contracts.
The suit alleges that, starting in early 2008, the two banks began manipulating the silver futures market by accumulating unusually large "short" positions and then secretly coordinating enormous sales of silver futures contracts on the Commodity Exchange, which is known as "COMEX" and is part of the New York Mercantile Exchange.
According to the lawsuit, JP Morgan and HSBC used a variety of methods to coordinate their manipulation of the market for silver futures contracts, signaling when to flood the COMEX market with short positions, which caused the price of silver futures and options contracts to crash.
The suit describes two "crash" events that were set in motion by JP Morgan and HSBC, one in March 2008, and the other in February 2010, after defendants had amassed large short positions. In the wake of both events, the suit alleges, COMEX silver futures prices collapsed.
"We believe that JP Morgan and HSBC's scheme was carefully conceived and coordinated to maximize their profits at the expense of innocent investors who believed that they were trading in a market free from manipulation," Berman said.
The complaint also contains allegations that in September 2008, the U.S. Commodity Futures Trading Commission launched an investigation that would eventually consider allegations made by a London-based independent metals trader named Andrew Maguire that the silver futures market was being manipulated.
The complaint alleges that Maguire disclosed to the CFTC on Feb. 3, 2010 that he received a signal from the two banks of their intent to drive down the prices of silver futures two days later, on Feb. 5, 2010. Maguire's information was correct and the price of silver dropped dramatically between Feb. 3, 2010 and Feb. 5, 2010.
In addition, the lawsuit states that both JP Morgan and HSBC still maintain highly concentrated holdings in short positions in silver futures and options, giving both banks the ability to continue manipulating the price of silver.
Plaintiffs' attorneys have asked the court to certify the case as a class action and enjoin JP Morgan and HSBC from continuing their alleged conspiracy and manipulation of the silver futures and options contracts market.
Attorneys also ask the court to award damages and attorneys' fees to the class.