NEW YORK – Frustrated traders and offbeat activists have complained for years in whispers and in online screeds that the price of gold has been subject to collusion. On Monday, these accusations of manipulation found a more august arena for expression: the federal courts.
At a 40-minute hearing, lawyers for more than 20 plaintiffs gathered in U.S. District Court in Manhattan to coordinate their linked lawsuits against the five banks that make up what is known as the London gold fix. The suits, filed by hedge funds, private citizens and public investors like the Alaska Electrical Pension Fund, contend that the banks have used their privileged positions as market makers to rig the price of gold to their benefit.
The lawsuits – the first of which was filed in March – question the integrity of the gold fix, which dates to 1919, when a handful of bankers began to meet in the wood-paneled offices of N.M. Rothschild & Sons in London. The purpose of the fix is to set a benchmark price for gold, which is subsequently used by dealers, central banks and mining firms to buy and sell the precious metal and its various derivatives.
These days, the fix takes place by phone twice a day – at 10:30 a.m. London time and at 3 p.m. – and generally lasts 10 minutes to an hour.
According to one of the suits, “The ‘great flaw’ of the gold fixing process is that the member banks trade on the information exchanged during the call to manipulate the price of gold and gold derivatives before publication of the gold fix to the wider market.”
Each of the banks – Barclays, Scotiabank, Deutsche Bank, HSBC and Société Générale – denied, or declined to comment, on the accusations of collusion, which – at least traditionally – have been dismissed as a conspiracy theory. Nonetheless, concerns that the gold fix may be rigged have escalated of late in part because of investigations into the setting of the London interbank offered rate, or Libor, and suspicions about manipulation of global foreign exchange rates.
“A lot of conspiracy theories have turned out to be conspiracy fact,” said Kevin Maher, a former gold trader from New York who filed the first suit against the banks. (The case is Maher v. Bank of Nova Scotia, 14-cv-01459.) “We now know that Libor was manipulated and that a bad odor is coming out of the Forex market. So why not gold?”
Maher, who started trading gold in 1993, said he filed his suit reluctantly and only after he became convinced that official regulators were unwilling or unable to investigate the fix. “I didn’t feel like there was any oversight, either from the government or from self-regulating entities,” he said in an interview last month. “A lawsuit seemed to be the only means to rectify the problem.”
Over the last few weeks, so many plaintiffs have joined Maher with copycat complaints that a hearing was held to consolidate the cases and to appoint a lead lawyer. The fourth-floor courtroom was so full of lawyers that it took nearly 15 minutes for all of them to introduce themselves. “I want to do this in an organized way to figure out who’s who,” said Valerie E. Caproni, the presiding judge. “Not,” she added, “that I’ll remember.”
The lawsuits – and there are still more being filed – center on two main aspects of the gold fix: the fact that it is unregulated and that member banks can trade gold, and gold derivatives, during the call.
“The gold fix is by its very nature not transparent and therefore vulnerable to conspiratorial and manipulative behavior,” one of the suits maintains. The suit claims: “The lack of prohibition against trading during the calls allows defendants to gain an unfair trading advantage because pricing information exchanged during the calls provides them with insight into the immediate future direction of gold and gold derivative prices.”
As proof that collusion exists, the suits point to a handful of academic studies – some of them unpublished – that describe what one of the studies calls “significant spikes in trading volume during, but not after, the fixing period, when defendants are free to share information with each other and their clients.” Because the fix is private and not monitored, it enables its participants “to coordinate with their respective trading desks,” one suit said, and “to disseminate information” about the price of gold “while the process is occurring.”
The price-setting of gold has drawn some regulatory scrutiny, particularly in Britain and Germany.
The Financial Conduct Authority of Britain began looking at other benchmark rates, including for gold and silver, as part of its investigation into the rigging of Libor, a person briefed on the matter said.
The Federal Financial Supervisory Authority of Germany, or BaFin, has acknowledged that it is looking at the trading of precious metals as part of its inquiry into potential manipulation of the currency markets.
More than 20 traders have been suspended or fired as part of internal investigations into potential manipulation of currency markets. But no suspensions have emerged related to precious metals trading.
In the United States, the Commodity Futures Trading Commission routinely reviews the prices of commodities but has not opened a formal investigation into gold, a person close to the agency said.
Deutsche Bank has announced that it will no longer participate in the fix, though it still remains a defendant in the consolidated cases. Caproni is considering whether to split the plaintiffs into two groups – one for those that trade physical gold and another for those that trade gold futures – but her decision will not come until at least the end of the month.