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Posted: July 20, 2018

“Fixing” with the Fix? Market Manipulation Litigation for Precious Metals and their Spot and Derivatives

There is indeed gold “in them hills” if you are willing to lie to get it, at least according to the allegations in a number of precious metals litigations that have sprung up since 2013. Currently there are no less than two multi-district litigations relating to gold and silver, and a separate action with respect to platinum and palladium. These actions are respectively: In re: Commodity Exchange, Inc., Gold Futures and Options Trading Litigation, 1:14-md-02548-VEC (SDNY) (“In re Gold Derivatives Litigation”); In re: London Silver Fixing, Ltd., Antitrust Litigation, No. 1:14-md-02573 (SDNY) (“In re Silver Derivatives Litigation”); and In re: Platinum and Palladium Antitrust Litigation, 1:14-cv-09391 (SDNY) (“In re Platinum and Palladium Antitrust Litigation,” collectively “the Precious Metals Fixing Litigation”). Each of these actions allege similar manipulation of the fixing process for the “fix,” the daily benchmarks for precious metals which influences the value of physical precious metals, spot, the commodity price, and associated derivatives, including futures and options (“Precious Metals Investments”). While these litigations contain a veritable gold mine of litigation content to explore, in this post, we will focus on the allegations in the Precious Metals MDLs. We will leave digging into what has been going on in these litigations till a later date.

Overview of the Alleged Collusion

To sift these allegations down to a single nugget: Plaintiffs, a number of individuals, businesses and funds, allege that Defendants, several large broker dealer banks including UBS, Barclays, Deutsche Bank, Bank of America, and HSBC, among others (the “Fixing Banks”), manipulated the fix through The London Gold Market Fixing Limited, The London Market Fixing, Ltd. and The London Platinum and Palladium Fixing Company, (the “Fixing Companies”), the companies responsible for the promotion, administration and conduct of the fixing process.

What is the Fixing Process?

The fixing process is a method developed long ago to set a benchmark, the “fix,” for the price of precious metal. Each day during the “fixing,” at least in theory, a Walrasian auction is supposed to occur, where that day’s spot price is announced in the afternoon, at the same time each day, commencing a simultaneous blind auction. That auction includes numerous individuals, including the Fixing Banks themselves, who submit orders to buy and sell to the Fixing Banks. This information is supposed to be held, shared, and used simply to calculate the benchmark fix which is announced later in the afternoon of that same date.

The “Fixing” of and with the Fix

According to the Plaintiffs, the fix would then influence the prices of physical precious metals along with their spot, and derivatives, which are all correlated and influenced by this benchmark rate. However, given that that information was being shared amongst the Fixing Banks, and with no oversight from any organization or government entity, the Fixing Banks are alleged to have used their shared material nonpublic information to take bets and otherwise influence the market for various Precious Metal Investments. They would have daily collaborative calls wherein they would discuss how they would use their vast combined resources to influence the position of the fix and the Precious Metal Investments, and otherwise take bets on the various precious metal instruments. They would also have discussions in chat rooms, on phone calls, and through instant messages to continue to share information and to make sure that every member of their cartel was acting in unison. They would also spoof, or engage in wash sales, that is to say create fake orders or sales during the Fixing Process window to give the illusion that there was more demand or supply to influence price in their desired direction with reference to various Precious Metal Investments, especially precious metal futures, like those traded on COMEX.

In general, Plaintiffs allege that they were on the other side of these trades and were damaged thereby. In the case of In re Gold Derivatives Litigation, for instance, Plaintiffs allege that Defendants’ conduct decreased competition, and artificially lowered prices of gold, thereby injuring the plaintiffs as a class, which caused a loss, or a net loss, when they sold their physical gold, spot, and gold derivatives. Similarly there are allegations in the Precious Metals Fixing Litigation in general that Defendants used their ability to control the price of Precious Metals Instruments to take advantage of their clients’ instruments and orders, such as stop-loss orders, to force their clients to enter into transactions that were favorable to the Defendants, and allowed these Defendants to make artificial margin calls, demands from the broker Fixing Banks to their client to deposit additional funds or securities so that the investor’s margin collateral account would be raised to a certain contractually agreed upon level. These are just some of the ways in which the Fixing Banks used their total control of the fix to manipulate the precious metals market.

Damages

Plaintiffs seek damages, restitution, injunctions and declaratory relief under Section 1 of the Sherman Act, 15 U.S.C. § 1, the Commodity Exchange Act under 7 U.S.C. §§ 1 et seq., and claims for unjust enrichment.

This post was written by Lee J. Rubin.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at jlundin@schlamstone.com or Lee J. Rubin at lrubin@schlamstone.com or call John or Lee at (212) 344-5400.

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