Ned Naylor-Leyland

Cheviot Asset Management Limited Tel: +44(0)20 7438 5683 Email: ned.naylor-leyland@cheviot.co.uk www.cheviot.co.uk Cheviot Asset Management, 90 Long Acre, London, WC2E 9RA

Silver, Gorillas, Madoff and Financial Regulators Will they ever learn?
One of the most uncomfortable facts surrounding the Bernie Madoff case was that he was allowed to continue operating for years despite all the evidence about this fraud being gift-wrapped and delivered (on more than one occasion) by Harry Markopolous to the SEC. Despite the clear evidence handed to them, the SEC looked the other way. Interestingly, and coincidentally, JPMorgan was a key player in the Madoff case, and this summer the Trustee in charge of liquidating Madoffs firm sought $19bn in damages from JPMorgan, accusing the bank of being an active enabler fo the Madoff Ponzi scheme. It is also widely known that JPMorgan has repeatedly been accused of manipulating Silver (and Gold) prices, and in light of the recent downdraft in Silver, I felt it would be pertinent to revisit the timeline and details of this manipulation and the investigation into it. There is an uncomfortable echo here with the Madoff case and it is also worth reiterating as background to this story that there is an ONGOING investigation at the CFTC into Silver manipulation. For many years market observer Ted Butler had flagged up an anticompetitive degree of concentrated short interest within the structure of the Silver futures market and whole books of commentary and analysis have been dedicated to the subject. At that point, even though Mr Butler had presented data to the CFTC (Commodities Futures Trading Commission), showing 1 or more commercial banks operating outside of speculative position limits, the claims of Silver manipulation were swiftly rebutted by the regulator with minimal explanation. In 2008, before Lehman Brothers went the way of the Dodo, Bear Stearns was acquired by JPMorgan for $10 a share, $2 a share having been refused by Bear Stearns shareholders a mere 24 hours earlier. As per the September 2011 class-action lawsuit (detail below) Bear Stearns massive Silver short position needed to be taken under the wing of another institution, because had Bear gone into Chapter 11 the unhedged Silver short position would have been unwound. The price effect of that unwinding would have been a dramatic move higher for Silver. Instead, JPMorgan took over this position and it has grown ever since into the 1000lb Silverback(!) in a room of scary financial Gorillas that both the market and Regulator choose to ignore. JPMorgan also have (according to the most recent OCC derivatives report from the USTreasury) 80% of all registered Gold Derivatives on its books. No wonder the Dodd-Frank financial reform Bill demands tighter speculative limit enforcement, so far, however, the CFTC have failed to put this important legislation into practice in either Silver or Gold. In March of 2010 the CFTC held a public hearing into Silver Manipulation on the back of thousands of detailed complaints from industry professionals and individual investors. At that hearing a whistleblower with 30 years experience in Gold and Silver trading spoke out on the public record, using the Gold Anti-Trust Action Committee as a loudspeaker (the whistleblower was pointedly NOT invited to the hearing). He laid out the hows and whys of Silver manipulation and indeed gave multiple examples of previous engineered sell-offs that were clearly telegraphed to the market using trading signals. The whistleblower had repeatedly shown the CFTC where the market would trade (and when) with an uncomfortable degree of accuracy. Since the Date of the hearing, May 20 2010, the CFTC investigation has apparently been ongoing and yet they have not made a single move to enforce or even attempt to deal with the evidence gift-wrapped and delivered to them. Fast forward a year from the original CFTC public hearing and the Dodd-Frank Financial Reform Act came into play. Within this act new (lower) speculative position limits were proposed and the CFTC were given expanded powers to enforce these new limits, in order to restict the sway of big financial institutions in commodities markets. Despite this, no new limits have yet been imposed, indeed the timetable for the CFTC to vote on new limits keeps being pushed back, as you will see as this timeline evolves. Post the Dodd-Frank Bill passing, the Silver market took a rapid 25% nosedive, displaying all the tell-tale signs of a manipulated sell-off as the price fell fastest in the thinnest trading hours (NOT the way to effect best execution) and was abetted by repeated margin hikes. Silver recovered well across the summer until we hit September, when the music from The Twilight Zone started to be heard once more by Gold and Silver investors. Inspite of a dreadful global currency and debt crisis (ostensibly bullish for Precious Metals) Silver proceeded to fall another 25%, bottoming out at $26/oz. This time the evidence of what really happened is as clear a case of regulatory malfeasance as that of the SEC in the Madoff case.

On September 12th 2011, JPMorgan were served an explosive amended Class-Action lawsuit, detailing the individuals accused of effecting the Silver manipulation and also the methodology used in doing so. The evidence within this document is exactly what the CFTC have sat on since the hearing of May 2010. With this incriminating evidence now in the public domain some very strange things took place. Firstly, the CFTC again decided to delay their vote on Speculative Position Limits, from October 4th 2011 to October 18th. Then, on September 16th 4 days after this lawsuit was served on JPMorgan - the CFTC released the following on their website: September 16, 2011 CFTCs Division of Market Oversight Provides Temporary Relief from Large Swaps Trader Reporting for Physical Commodities Washington, DC The Commodity Futures Trading Commissions (Commissions) Division of Market Oversight (Division) today issued a letter providing temporary relief from the requirements of the Commissions regulations regarding large trader reporting of physical commodity swaps (20.3 and 20.4). Because this is the first time that swaps data is being collected, this temporary relief is intended to provide sufficient time to enable both the industry and the Commission to develop and refine systems and processes that will be able to report these complex transactions. On July 22, 2011, the Commission published large trader reporting rules for physical commodity swaps and swaptions. The rules require daily reports from clearing organizations, clearing members and swap dealers, and become effective on September 20, 2011. The letter issued today provides temporary relief from reporting, as long as parties are making a good faith attempt to comply with the reporting requirements, until November 21, 2011, for cleared swaps, and January 20, 2012, for uncleared swaps. Upon the conclusion of applicable relief periods, such reporting parties must become fully compliant.

This extraordinary and inexplicable free-pass from reporting by the CFTC allowed major players (such as JPMorgan) to go beyond speculative position limits so long as they make a good faith attempt to comply with reporting requirements. What this means in real terms is that the CFTC loosened reporting requirements where previously any position beyond the concentration limit must be proven to be hedged elsewhere, no longer would this be the case. Just 1 day after this relief was granted, the Silver (and Gold) price went into a tailspin. How the CFTC think it is appropriate to continually delay the vote imposing the will of Congress with respect to position limits is anyones guess, but to provide temporary relief from reporting while the Silver manipulation is still under investigation is malfeasance under any definition of the word. I look forward to seeing how higher Regulatory and Judicial authorities in the US deal with this behaviour by the CFTC, presumably the CFTC itself can look forward to being dragged infront of Congress to account for itself. Ned Naylor-Leyland September 2011

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