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Once on Sleepy Beat, Regulator Is Suddenly Busy

By JULIE CRESWELL and GRAHAM BOWLEY

Published: November 4, 2010

Cotton, sugar, silver, wheat: in investment circles, commodities like these are hot.

Maybe too hot. At a time when prices of many commodities are soaring — cotton has jumped 95 percent in the last 12 months, silver 43 percent — alarms are going off inside the Commodity Futures Trading Commission in Washington.

Long dismissed as a lackadaisical regulator, the commission is suddenly on the move. Indeed, it is busier than ever: It opened a record 419 investigations over the last year, into things as diverse as small-time Ponzi schemes and claims of market manipulation.

It is a remarkable turnabout for the agency, which not long ago seemed on the brink of extinction. Its chairman, Gary Gensler, a former Goldman Sachs executive, has surprised some of his former Wall Street colleagues by flexing his agency’s muscles. He is rushing to expand the C.F.T.C.’s power now that the agency is poised to take on a new role in overseeing the vast market for derivatives that were traded off formal exchanges in the so-called over-the-counter market. He recently hired a former United States prosecutor as his new head of enforcement.

Granted, the C.F.T.C., like its bigger cousin, the Securities and Exchange Commission, often reels in relatively small fish. One recent case centers on what it calls the Aloha scam — a $3 million suspected Ponzi scheme in Hawaii that the agency says was overseen by a man in prison. Bernie Madoff, this is not. What is more, agency outsiders question whether it has the means and experience to police new markets and take on the biggest players.

“They had the whole commodities market, and now they’re getting an entire new market,” said Therese M. Doherty, a partner at the law firm of Herrick Feinstein. “I don’t think people have gotten their arms around just how big this market is.”

The C.F.T.C., for instance, has about 200 lawyers in its enforcement division, while the S.E.C. has more than 1,200, Ms. Doherty said.

The agency is certainly talking tougher. Last week, one of its commissioners, Bart Chilton, urged the agency to strengthen its two-year investigation into suspected manipulation in silver trading.

“I believe that there have been repeated attempts to influence prices in the silver markets,” Mr. Chilton said at a hearing last month in Washington. “There have been fraudulent efforts to persuade and deviously control that price.”

A day after Mr. Chilton made his comments, two silver traders filed separate lawsuits in Manhattan federal court against two banking giants, JPMorgan Chase and HSBC Holdings. They accused the banks of conspiring to suppress prices of silver futures on the Commodity Exchange division of the New York Mercantile Exchange, beginning in the spring of 2008. A third suit, this one charging actions in violation of the Racketeer Influenced and Corrupt Organizations Act, was filed this week.

In the relatively thinly traded silver futures markets, a handful of large banks and financial firms dominate trading. In March 2008 when JPMorgan acquired the foundering Bear Stearns, Bear Stearns had made a significant bet that the price of silver would fall, one of the lawsuits says. A few months later, in August, JPMorgan and Bear Stearns’s bet against the market totaled about 25 percent of the annual world mining production of silver, the lawsuit states.

The lawsuits say that JPMorgan and HSBC used their dominant positions in the market to manipulate silver prices.

Starting last spring as the two banks cut back on their activities in the silver market, the prices of silver futures increased about 50 percent “even though no fundamental changes in supply or demand for silver, including industrial demand, have occurred during this time period,” one lawsuit states.

A spokeswoman for JPMorgan declined to comment on the lawsuits. HSBC officials did not return a telephone call for comment.

The investigation comes at a time when individual investors are increasingly interested in investing in commodities, following the lead of hedge fund giants like John A. Paulson and George Soros.

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Glad to see this. Hope to see a lot more of the underbelly of commodities trading and derivatives trading exposed.  Consumers need more protection especially from false assets created by derivatives.

-- Edited by Sanders on Friday 5th of November 2010 03:42:02 PM