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Do the Crime, Do the Time

By Theodore Butler


(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Some people might think it was too extreme, but I think it was on the money. A couple of weeks ago, the Federal Energy Regulatory Commission (FERC) banned the Enron Corporation from dealing in electricity and natural gas, due to their involvement in the California energy manipulation a few years back. CNBC ran a ticker headline, “Enron Receives Death Penalty”. Of course, considering Enron’s current status, there wasn’t much to kill, but given this is Enron’s basic business, it could prove to be the final blow. Still, it is a legitimate question – did the punishment fit the crime?

The answer depends upon how one views the crime of market manipulation. To some, it is an unavoidable ingredient in every market, and should be ignored. However, according to the law, manipulation is the most serious violation possible when it comes to the markets. Nothing threatens the workings of markets more than manipulation. The framers of US law knew this well, and that is why they designated market manipulation as the equivalent of Murder One in the criminal code, or treason in the military code. Our whole body of commercial law is structured to ward off any attempt to compromise the unfettered functioning of the free markets and to punishing violators. For good reason – free markets are the cornerstone of the US economic system.

All US Government departments and agencies involved in the world of commerce share the number one priority to maintain free, fair markets, encourage competition and to prevent and eliminate manipulation. That includes the FERC, the Justice Dept. (Antitrust Division), the Commerce Dept., the Federal Trade Commission, the Federal Communications Commission, the Securities and Exchange Commission, and yes, even the Commodity Futures Trading Commission (CFTC). Despite strong comprehensive laws and rigorous enforcement, major market manipulations do occur, as Enron proved. I believe another market manipulation has also slipped through the intent of law and the enforcement infrastructure – silver.

To me, Enron was to energy markets, what the Silver Managers are to silver. I will expand on that, but first I would like to fast/forward to my conclusion – those found guilty of manipulating the silver market should be given a permanent ban from dealing in silver.

One major problem with bringing the Silver Managers to justice and ending their stranglehold on silver prices is that the ultimate regulator, the CFTC, doesn’t appear capable or willing to end the manipulation. This same regulator also oversaw Enron and the CFTC proved to be asleep on that watch, just as they are with the Silver Managers. In fact, a reader sent me a copy of a story on the FERC’s punishment of Enron, which included the following quote from FERC Commissioner Massey, “Profit maximization is not an excuse for market manipulation.” I can’t imagine the CFTC understanding those words.

The companies who I believe are the Silver Managers, because of their dominant role in silver paper and physical trading, and their critical role in their own self-regulation, fit the same dominant profile that Enron enjoyed in the paper and physical energy markets. In fact, the comparison between the Silver Managers and Enron is hardly loosely-connected. All the Silver Managers are major clearing member firms on the NYMEX/COMEX. Before its implosion, Enron was the largest clearing member on the NYMEX/COMEX. (In fact, Enron is still listed as a clearing member on the Nymex web site, although it is hard to imagine them clearing trades at this point.) A clearing member, on any exchange, basically guarantees not only its own trades, but also the trades of other non-clearing members. That means, in addition to dominating the paper and physical markets, on a self-regulated basis, the Silver Managers are the guarantors for the entire paper futures market. What don’t these guys control?

For all the similarities between Enron and the Silver Managers, there is one glaring difference – the market had no public warning as to what Enron was up to, until after the damage was done. In silver, we have the unprecedented situation where the regulators have not only been warned repeatedly of a manipulation, but they have also been offered public proof of the manipulation. I know this to be true because I have been the one doing the warning. And the proof is their inability to answer the simple question – how can a market possibly be considered free, when it is in a long term deficit without rising prices?

I’d like to be really clear about one thing – although I have publicly identified who I think is behind the silver manipulation, I am not for one instant suggesting that any of these companies are involved as a result of intentional high level, senior management (CEO or Board of Director) direction or knowledge. These are major world-class financial organizations, collectively employing many tens of thousands of dedicated employees and providing a myriad of important financial services. Any involvement in the silver manipulation is coming as a result of a few employees in their metal department operations. A few rotten apples, ruining the whole barrel.

But the law is clear, and even if some poorly-supervised employees have acted illegally and without senior management approval, the entire corporation is potentially liable. And the stakes are enormous. Aside from the potential financial losses of billions of dollars that would accrue to a major silver short in a surging market, there could be a regulatory and reparations nightmare. Since market manipulation is the number one crime in financial law, the Silver Managers could, and should, have the book thrown at them. It is not inconceivable that the largest financial institution could be brought to its knees by a rogue trader, as has happened before.

I am sending a copy of this article, along with the article, “The Silver Managers”, to the CEO and General Counsel of each of the financial institutions I have named. I will ask them to investigate my allegations. I will also tell them that if they can demonstrate that their company is not a Silver Manager, I will refrain from referring to them as such and retract past statements. The time is long overdue for this silver manipulation to end.

The Sound of Silence

It has been six weeks since I asked (and I asked you to ask) the CFTC and the COMEX about the 8 million ounce transfer into the COMEX and how is it possible that a market in a long term deficit, without rising prices, could even be considered free. No reply has been forthcoming, save for the COMEX’s Mr Wolkoff writing that all was well and that he had previously answered my question. I know many of you had written in also, but no one has forwarded any reply received to me yet. I assume we will hear from the CFTC.

I’ve never experienced the lack of an answer to my question. No friend, foe, critic, analyst, reader or anonymous poster on the Internet has offered an answer. That’s never happened before. Perhaps all interested parties should ask again.

For over 15 years, I have made allegations of manipulation in the silver market. I have tried to back up those allegations with cold, hard facts. Leasing, unprecedented and concentrated naked short selling on the COMEX, artificial movement and maintenance of COMEX warehouse inventories, and the price-setting game between the tech funds and the Silver Managers are a few of the concepts I have introduced and explained over that time. Everything has been done in the open, including publishing the responses from the regulators. But it was always me making the allegations and then trying to prove it and prodding the regulators into doing their job. I think a new question may have changed that process.

Instead of me always trying to prove a manipulation and prodding the regulators with specific and constructive solutions (like enforcing legitimate speculative position limits), the manipulation in silver has become so obvious that, just by asking a simple question, we are left scratching our heads. There is no simple, legitimate answer to the question – how given documented deficits and verified inventory declines measured over a decade, without a sharp increase in price, can silver even be considered a free market? There are only illegitimate possibilities – dumping or other uneconomic economic disposals of inventories with no regard to the price. Like leasing. Or some kind of tampering with the price. Like unlimited naked short selling.

The law of supply and demand dictates that significant inventory liquidation must be accompanied by higher prices. You can’t get a more significant inventory liquidation than we’ve seen in silver. Without higher prices, inventory owners can’t be induced to part with their property. This is basic economics. It is the cornerstone of the free market. Non-free market devices like leasing and massive short selling are distortions to the free market’s regulator of supply and demand – the price. Anything that distorts the free functioning of the price is manipulative. This is my central complaint – the Silver Managers, through their use of leasing to dump supply on the market and unlimited short selling whenever necessary, have controlled the silver price to such an extent that they have visibly altered the law of supply and demand. Inventories disappearing and prices not rising is preposterous. Every economics text book in existence must be discarded.

It’s no longer me having to prove silver is manipulated, it is up to the regulators and market officials to show how the silver market can possibly be free, considering the known facts and the law of supply and demand. This is a very simple question. The silence it has generated, instead of a simple answer, is deafening.

Of course, there is only one answer to this question, namely, that only a manipulation could explain no increase in price in a verified commodity deficit. Certainly, there is no other market that has ever experienced such a situation.

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