JP Morgan Chase & HSBC Face Charges In Manipulating Silver Market (JPM, HBC)

JP Morgan Chase & Co.

and HSBC Securities Inc.

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 alleges violation of the Commodity Exchange Act and the RICO Act. It alleges that the two banks colluded to manipulate the 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. 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. 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 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. JPM is trading higher at $38.06 HBC is trading higher at $56.48