Legal Outline for Suit Against CFTC For Failing to Complete Investigation on Silver Manipulation

cftcBecause of the recent furious decline in value of real and paper silver, and the belief by many that manipulation is the major (if not only) cause, I have been asked what might be done to force the non-regulating regulator, the CFTC, to begin regulating in regard to the existing concentration.

After studying the silver futures market since the days of C.V. Myers—and focusing on it intensely for the past several years—my opinion is that if there has been, and currently is, a concentration in the silver market, it would constitute not only manipulation but consequently the disruption of market integrity, and the prevention of fair competition among silver investors, speculators, hedgers and others. Certainly, the esteemed Ted Butler has made an overwhelming case that there has been, and currently is, such a concentration/manipulation.

In light of the CFTC’s foot-dragging in concluding its unreasonably delayed investigation and/or required report concerning concentration /manipulation, I have been considering how to break the self-created CFTC log-jam that has caused incalculable financial losses as a result of the uncertainty engendered by the apparently languishing investigation.

As I will fully develop below, a lawsuit is feasible that will force either the Director of Investigations and/or the Commission itself to disgorge the Report of the CFTC’s four-year-plus investigation into concentration in the silver futures market. The hope would be that the investigation’s conclusions, either way, will allow investors, speculators, hedgers and others to make rational decisions, unlike currently when the concentration skewers free market choices and decisions.
Below is only the outline for a lawsuit, not the Petition itself.

 

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Professor Emeritus
HENRY MARK HOLZER
Brooklyn Law School

2135 W. Fox Fire Street
Highlands Ranch, CO
80129

(303) 658-0859 (Tel)
(720) 389-9492(Fax)

hank@henrymarkholzer.com
www.henrymarkholzer.blogspot.com
www.henrymarkholzer.com

April 19, 2013

________________________

MEMORANDUM

Introduction

Because of the recent furious decline in value of real and paper silver, and the belief by
many that manipulation is the major (if not only) cause, I have been asked what might
be done to force the non-regulating regulator, the CFTC, to begin regulating in regard to
the existing concentration.

After studying the silver futures market since the days of C.V. Myers—and focusing on it
intensely for the past several years—my opinion is that if there has been, and currently
is, a concentration in the silver market, it would constitute not only manipulation but
consequently the disruption of market integrity, and the prevention of fair competition
among silver investors, speculators, hedgers and others. Certainly, the esteemed Ted
Butler has made an overwhelming case that there has been, and currently is, such a
concentration/manipulation.

In light of the CFTC’s foot-dragging in concluding its unreasonably delayed
investigation and/or required report concerning concentration/manipulation, I
have been considering how to break the self-created CFTC log-jam that has caused
incalculable financial losses as a result of the uncertainty engendered by the apparently
languishing investigation.

As I will fully develop below, a lawsuit is feasible that will force either the Director of
Investigations and/or the Commission itself to disgorge the Report of the CFTC’s four-
year-plus investigation into concentration in the silver futures market. The hope would
be that the investigation’s conclusions, either way, will allow investors, speculators,
hedgers and others to make rational decisions, unlike currently when the concentration
skewers free market choices and decisions. I am not encouraging such a lawsuit,
nor stirring up litigation. Nor has anyone paid me to prepare and disseminate this
Memorandum. I am simply responding to questions about whether anything can be
done to force the CFTC to resolve the uncertainty pervading the silver market about
whether there is concentration/manipulation. Because if there is, investors, speculators,
hedgers and others cannot make rational decisions, which in turn skewers free market
choices and decisions.

Below is only the outline for a lawsuit, not the Petition itself. If there is a lawsuit,
Petitioners’ lawyer(s) will want to draft the actual pleading.

Petition for a Writ of Mandamus

Because the Commodities Futures Trading Commission (hereafter “CFTC” or
“Commission”) is a federal agency a lawsuit would be brought in the United States
District Court for the District of Columbia.

In the context of commodity futures regulation, “manipulation” of the market can be
caused by various acts and failures to act, among them “concentration.”

Among the most egregious examples of concentration is the infamous 1976 Maine
potato default case.”1

By its verdict the jury found that these defendants conspired to reduce the
price of the 1976 Maine potatoes futures contracts. Defendants accomplished
this by purchasing vast amounts of the “short” side of futures contracts and
becoming obligated to deliver millions of pounds of Maine potatoes that they
did not have. By purchasing so heavily on the short side, the conspirators
artificially inflated the perceived supply of Maine potatoes, thereby driving
down both the futures prices and cash prices. Defendants did not attempt to
obtain the potatoes that they were obligated to deliver. Nor did they offset, which
they could have done by purchasing long positions in an amount sufficient to
equalize their extensive short position. Instead, defendants simply defaulted on
their delivery obligations. With so many selling positions not offset by buying
positions, there was a surplus of sellers, which effectively caused the price of
Maine potato commodities contracts to plummet. By May 4, 1976 Strobl had sold
his long futures on Maine potatoes at a significant loss. The jury found that this
conspiracy existed before May 4 and that it depressed the futures price on May

Strobl v. New York Mercantile Exchange, et al., 768 F.2d 22.

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1976 Maine potatoes prior to that date.2

Needless to say, as the court did, the conspiracy severely depressed the price of potato
futures. Not to put too fine a point on what happened, the potato short sellers sold so
many paper contracts—note that the court said “vast amounts”—that, without anything
else, their selling alone was responsible for lowering the price.

Based upon public data concerning the silver futures market published regularly
by the CFTC—its weekly Commitment of Traders Report (COT) and monthly Bank
Participation Report—in the opinion of many knowledgeable investors, speculators,
hedgers and others, in recent years there has been a major concentration in the silver
futures market.

Long-time observer/analyst of the silver futures market Ted Butler recently calculated
that, in his opinion, the short-side concentration amounts to as much as 35% of the
entire COMEX silver futures market and the equivalent of 25% of the annual world
mine production of silver.

An ongoing investigation commenced by the Enforcement Division of the Commodities
Futures Trading Commission (CFTC) in late 2008—not publicly disclosed until October
26, 2010, two years later, by Commissioner Bart Chilton—was/is concerned with
manipulation of the silver futures market.

In making that 2010 public disclosure of the CFTC investigation “the Commissioner
commented that he believed there had been repeated, fraudulent efforts ‘to persuade
and deviously control’ prices in the silver markets.” * * * . . . it is noted that the CFTC
has yet to file a complaint against any party in the market manipulation that the
Commissioner announced to be going on.”3

Since the commencement of the investigation in late 2008, over four years ago, neither
the general public nor the “silver world” has been informed whether the CFTC’s Director
of Enforcement has completed that investigation or, if it has been completed, the
Director has reported its results to the Commission and made a recommendation for
“such enforcement action as he deems appropriate” as mandated by 17 Code of Federal
Regulations Section 11.2. The delay has been unreasonable by any standard.

Because concentration resulting in manipulation must inevitably skewer legitimate
commodity futures investment, speculation, and hedging decisions, individuals,
corporations and other organizations who must make those decisions have been
severely injured by not knowing whether any short-side concentration, if one exists,
has adversely affected otherwise legitimate silver futures trading. Their lack of

This quotation is taken from the Opinion and Order of United States District Judge Robert P. Patterson,
Jr. in the recently decided In re Commodity Exchange, Inc., Silver Futures and Options Trading
Litigation, 2012 Westlaw 67000236, USDC, SDNY, December 21, 2012.

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knowledge is caused by the CFTC’s four-plus years of silence.4

Ideally, Petitioners should include those referred to in the previous paragraph:
individuals and/or corporations and/or other organizations which have been injured
by the Director’s and/or the Commission’s unreasonable investigation delay in fulfilling
their responsibilities as required by statute and regulations.

For example, assuming that the Enforcement/ CFTC investigation had been concluded
prior to May 2011 and found that an illegal concentration/manipulation existed in
the silver futures market (and thus the spot silver market price was kept artificially
lower than a free market would set it), investors, speculators, hedgers and others
could have made more informed decisions and many of them would not have suffered
considerable financial losses when that month’s rapid and severe price drop occurred.
Let alone in the last few weeks. Accordingly, such Petitioners should be able to satisfy
the indispensable jurisdictional requirement of “standing to sue.”

The Respondents would be the CFTC, the commissioners in their official capacity, and
the Director of Enforcement in his official capacity.

In 7 United States Code, Section 5 (a), Congress made an explicit finding that:

The transactions subject to this chapter . . . are affected with a national
public interest by providing a means for managing and assuming price risks,
discovering prices, or disseminating pricing information through trading in
liquid, fair and financially secure trading facilities.5

In Section (b), Congress explicitly stated that:

It is the purpose of this chapter to serve the public interests described in
subsection (a) of this section through a system of effective self-regulation

It is important to understand that in a lawsuit Petitioners should not claim there has been “repeated,
fraudulent efforts ‘to persuade and deviously control’ prices in the silver markets,” as Commissioner
Chilton has publicly asserted, or that there actually has been, or is currently, concentration-caused
manipulation. There is no need, given what the lawsuit seeks to accomplish and what it alleges. Doing so
would only create a distracting target for the CFTC and any intervenors to shoot at.

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of trading facilities, clearing systems, market participants and market
professionals under the oversight of the Commission. To foster these public
interests, it is further the purpose of this chapter to deter and prevent price
manipulation or any other disruptions to market integrity; to ensure the
financial integrity of all transactions subject to this chapter and the avoidance of
systemic risk; to protect all market participants from fraudulent or other abusive
sales practices and misuses of customer assets; and to promote responsible
innovation and fair competition among boards of trade, other markets and
market participants.6

In 9 United States Code, Section 1, Congress prohibited manipulation:

It shall be unlawful for any person, directly or indirectly, to use or employ, or
attempt to use or employ, in connection with any swap, or a contract of sale
of any commodity in interstate commerce, or for future delivery on or subject
to the rules of any registered entity, any manipulative or deceptive device or
contrivance, in contravention of such rules and regulations as the Commission
shall promulgate. . . .7

In 9 United States Code, Section 3, Congress prohibited “other manipulation”:

In addition to the prohibition in paragraph (1), it shall be unlawful for any
person, directly or indirectly, to manipulate or attempt to manipulate the price of
any swap, or of any commodity in interstate commerce, or for future delivery on
or subject to the rules of any registered entity.8

These four sections of federal law could not be clearer in their intention: There is a
public interest in commodity markets being fair and financially secure, and thus
manipulation is unlawful.

To implement these statutory mandates, the CFTC has promulgated regulations, which
possess the status of law.

In 17 Code of Federal Regulations, Section 11.2 the Commodities Futures Trading
Commission provided for its authority to conduct investigations:

(a) The Director of the Division of Enforcement . . . may conduct such
investigations as he deems appropriate to determine whether any persons
have violated, are violating, or are about to violate the provisions of the
Commodity Exchange Act . . .or the rules, regulations or orders adopted
by the Commission pursuant to that Act. . . . * * * The Director shall report

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to the Commission the results of his investigations and recommend to the
Commission such enforcement action as he deems appropriate.* * *9

This Regulation is unambiguous in providing that while the Director and the CFTC
has the discretion to investigate or not—“may conduct such investigations”—he has no
discretion once he does investigate: “he shall report . . . and recommend.”10

Because it is public knowledge that an investigation was commenced in 2008, there are
only these possibilities: (1) either the investigation was concluded, or (2) it was not. Only
the Director and the Commission know which has occurred.

If it is (1) and the investigation has been concluded, then the subsidiary question is
whether the Director made his report. If he did, focus shifts to the Commission itself
and the question arises why it is hiding the report. If he did not, he and the Commission
are colluding in violation of the spirit and letter of the four federal statutes and one CFR
Regulation cited above.

If (2) is what has happened—the four-year-plus investigation has not been concluded—
Petitioners have a very clear statutory remedy.

The federal “All Writs Act” is found in 28 United States Code, Section 1651:

The Supreme Court and all courts established by Act of Congress may issue
all writs necessary or appropriate in aid of their respective jurisdictions and
agreeable to the usages and principles of law.

Recently, the Supreme Court of the United States had this to say about the writ that
Petitioners would seek in the case I am discussing, Mandamus:

As the writ is one of “the most potent weapons in the judicial arsenal,” three
conditions must be satisfied before it may issue.

First, “the party seeking issuance of the writ [must] have no other adequate
means to attain the relief he desires,” a condition designed to ensure that the writ
will not be used as a substitute for the regular appeals process.

Second, the petitioner must satisfy “the burden of showing that [his] right to
issuance of the writ is “clear and indisputable.”

Third, even if the first two prerequisites have been met, the issuing court, in the
exercise of its discretion, must be satisfied that the writ is appropriate under the
circumstances.

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These hurdles, however demanding, are not insuperable. This Court has issued
the writ to restrain a lower court when its actions would threaten the separation
of powers by “embarrass[ing] the executive arm of the Government,”, or result
in the “intrusion by the federal judiciary on a delicate area of federal-state
relations”. . . .11

In the case I am discussing, there is no “regular appeals process” for Petitioners to
exhaust.

As to the “clear and indisputable” requirement, see “Theory of the Case,” above.

I read the “appropriate under the circumstances” requirement to include the first two
conditions. Under the facts and law to be pleaded in the case I am discussing, the writ
should be appropriate.

In the case, the Mandamus would be sought to enforce another important federal
statute, the Administrative Procedure Act (APA)— specifically 5 United States Code,
Section 706, entitled “Scope of Review”:

The . . . court shall — (1) compel agency action unlawfully withheld or
unreasonably delayed. . . .12

That the All Writs Act (Mandamus) and Section 706 of the APA have been used in
tandem before—and in a case involving administrative delay—is not open to dispute.

In Public Citizen Health Research Group v. Commissioner, Food & Drug
Administration,13 (PCHRG) the question to be decided by the court was

whether the failure to date of the Food and Drug Administration1 to promulgate
a rule requiring certain warnings on labels of aspirin products violates the
prohibition of “unreasonably delayed” agency action in the Administrative
Procedure Act.

This case thus acknowledges that “unreasonably delayed” administrative inaction is an
appropriate subject for judicial inquiry.

Based on considerable scientific evidence suggesting that children with influenza
or chicken pox who take aspirin face a greatly increased risk of developing
Reye’s Syndrome, a rare but often fatal disease, appellant Public Citizen Health
Research Group (HRG) and others seek a court order mandating appropriate
warning labels on aspirin products.

Cheney v. United States District Court for the District of Columbia, 542 U.S. 367 (2004).

740 F.2d 21 (United States Court of Appeals, District of Columbia Circuit, 1984). All emphasis
throughout the quotations from this case has been added.

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The court then ruled that in that case it would stay its hand for a while:

We hold that in this case the principle of respect for the integrity of the
administrative process — as embodied in the exhaustion, finality, and ripeness
doctrines — precludes judicial review, prior to a definitive agency resolution,
of the substantive merits of whether aspirin products are misbranded unless
they carry a label warning of Reye’s Syndrome. We therefore affirm the District
Court’s decision to decline to address this issue at this point.

In other words, the FDA had not yet made a substantive decision about the misbranding
of aspirin products, so until it did there was no business for the District Court, let alone
for the Court of Appeals.

But in offering guidance for the federal district courts in an “unreasonably delayed”
case, and thus for a court that would have the silver manipulation case I am discussing,
the Court of Appeals in the aspirin case stated that:

We also hold, however, that when a petitioner asks the court to “compel agency
action * * * unreasonably delayed,” as in the present case, the court should
evaluate the pace of the agency decisional process.

In the context of a silver manipulation case, agency investigative process is synonymous
with “agency decisional process.” The aspirin court continued:

In deciding whether the pace of decision is unreasonably delayed, the court
should consider [1] the nature and extent of the interests prejudiced by delay,
[2] the agency justification for the pace of decision, and [3] the context of the
statutory scheme out of which the dispute arises.

Measuring a silver manipulation case’s facts against the three criteria formulated by the
PCHRG court, [1] there is no doubt that the public interest in fair commodities markets,
and the interests of the participants in those markets is substantial, [2] the agency’s
justification(s) for its delay will be interesting to hear, because there cannot be any
legitimate one, and [3] the context of the statutory and regulatory scheme, as discussed
above, could not be clearer: honest, not rigged commodity/silver markets.

The PCHRG court’s concluding comments could not be more applicable to a silver
manipulation case:

We stress that the present case places on the District Court a grave responsibility
to ensure that the pace of agency action does not jeopardize the lives of hundreds
of children. We therefore remand for a determination of whether FDA and HHS
are unreasonably delaying resolution of HRG’s petition for a rule requiring a
Reye’s Syndrome warning label on aspirin products.

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Thankfully, in a silver manipulation case at stake would be not the lives of children.
That said, however, the stakes are high—particularly in these times of fiscal and
economic uncertainty.

The final piece in this mosaic of the CFTC’s apparent disregard of the public interest and
statutory and regulatory commands is one example, among others, of egregious agency
delay. The case is In re Core Communications, Inc.14 Aspects of the case are complex
because of the seemingly endless machinations by the FCC and the court’s opinion has
to be read to be believed. For my purposes, however, the following is what is important.

Core sought mandamus to compel under Section 706 (1) of the APA “action unlawfully
withheld or unreasonably delayed” by the FCC. Again, there is guidance for the United
States District Court for the District of Columbia, where a silver manipulation case
would be filed.

There is no per se rule as to how long is too long to wait for agency action. In [an
older case] we outlined six factors relevant to the analysis. We cautioned that those
factors are not “ironclad,” but rather are intended to provide “useful guidance in
assessing claims of agency delay.” The first and most important factor is that “the
time agencies take to make decisions must be governed by a rule of reason.” The
remaining five are:

Before I get to the other five factors, it should be noted that whatever is meant by “a rule
of reason,” a four-year-plus investigation about a prima facie example of concentration
and thus manipulation of the silver futures market lacks not only reason but is patently
irrational.

(2) where Congress has provided a timetable or other indication of the speed
with which it expects the agency to proceed in the enabling statute, that statutory
scheme may supply content for this rule of reason;

While it doesn’t appear that Congress has provided a timetable for the duration of the
Director’s investigation, it can be argued that there is an “indication” can be found in
Congress’s stress of the important public interests that gave rise to the Commodity
Exchange Act so many decades ago.

(3) delays that might be reasonable in the sphere of economic regulation are less
tolerable when human health and welfare are at stake;

It is true that unlike in the PCHRG case children’s lives are not at stake. Still in its
commodities statutes and regulations Congress and the CFTC itself have made clear
beyond doubt that regulation of commodities is of paramount importance.

(4) the court should consider the effect of expediting delayed action on agency
activities of a higher or competing priority;

531 F.3d 849 (United States Court of Appeals, District of Columbia Circuit, 2008).

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All I can say about this factor is that in the context of regulation of the commodity
futures market there can be on “higher or competing priority” that can trump rooting
out illegal concentration and manipulation.

(5) the court should also take into account the nature and extent of the interests
prejudiced by delay; and

As recited above, Petitioners and the countless others for whom they stand in have been
substantially prejudiced by the four-year-plus delay.

(6) the court need not “find any impropriety lurking behind agency lassitude in
order to hold that agency action is ‘unreasonably delayed.’ ”15

This means that to find an agency is guilty of unreasonable delay the court does not have
to find the CFTC is guilty of anything but the delay.

Footnote 4 bears repeating: “It is important to understand that in a lawsuit Petitioners
should not claim there has been ‘repeated, fraudulent efforts ‘to persuade and deviously
control’ prices in the silver markets,’ as Commissioner Chilton has publicly asserted, or
that there actually has been, or is currently, concentration-caused manipulation. There
is no need, given what a silver lawsuit seeks to accomplish and what it alleges. Doing so
would only create a distracting target for the CFTC and any intervenors to shoot at.”

In a silver litigation, Petitioners would seek a Writ of Mandamus merely ordering the
Director to immediately complete the investigation or, if he has finished, to render to
the Commission the report required by law.

It would be interesting to see where those chips would fall.

All emphasis throughout the quotations from this case has been added. All citations have been deleted.

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Comments

  1. The Rule of law is dead in the US. Until enough people get screwed over and revolt peacefully or otherwise – lawsuits are the equivalent of pissing in the wind. I commend the effort, but sadly the idea that this will see the light of day much less get any press is unthinkable sadly.
    The US government ably serves its paymasters, and the MSM walks in lock step delivering the rosy script they are told to. Foreign countries that don’t comply get the US military jack boot on their necks, and the US citizens who speak up feel the wrath of the department of homeland insecurity.
    The vast majority of people are asleep, and when it comes to asking the average person about gold and silver you usually get as cerebral an answer as you’d expect from your morning bowel movement. A couple weeks back as a joke I asked if a waitress ( a portly bleach blond 5 out of 10 on a good day who could barely see around her own self absorbed ego ) would accept a 5 ounce silver buffalo for a 50 dollar tab. She scoffed at me ” absolutely not, MAYBE if I COLLECTED COINS!”
     
     

    • God bless you Professor Holzer. You are undertaking a very important endevour, and hopefully the community here can offer you any assistance we can.
      The CFTC’s behavior is more appalling and ominous than criminal bankers like JPMorgan. Regulatory capture puts our civilization and the rule of law at risk.
      When I here the revelations of Brooksley Born, Justice Painter, I cringe. When I hear Bart Chilton deceptively, deviously managing perception, while his agency filibusters real manipulation reform, and trys to make this matter go away to the benefit of banks, I feel sickened, sad and angry.
      God speed to your efforts, as bring the crime of Chilton and his ilk into the light.

    • @strannick
      I agree completely.  Its about time we (the metals communities) started joining up the dots and presenting a complete picture.  Thisis worthwhile and he is no fool in his approach.  I say support him with three cheers and more, much more.  Dissent is unhelpfull at a time like this.

  2. Isn’t it a sad day when private company or individual(s) must FILE A LAWSUIT against a regulatory body like the CFTC for refusing to investigate mass manipulation of the silver market.  It’s so obvious a 3rd grader would figure out something is wrong within a couple months yet this has been going on for many years.  
     
     

  3. THE CFTC SHOULD BAN PAPER TRADING ON ALL COMMODITIES!

  4. I support Professor Holtzer’s proposal. Additionally, we need to educate people worldwide that fiat legal tender currency is an instrument of theft created by Governments and Banks. This is imposed on us to enrich themselves and their cronies at the expense of productive members of society. They intentionally devalue their fiat currency thus stealing value from the currency we are forced by law to use “in payment of debt”, so stay out of debt. To the greatest degree possible stop using fiat currency. Store value in precious metals. If enough people worldwide stopped using fiat currency and saved in silver and gold then the Bankers and Government could not so easily steal our savings.

  5. That’s cute, you think the rule of law is applicable to banks.  Maybe you didn’t get the memo from the ATTORNEY GENERAL – TBTF = TBTJ = ABOVE THE LAW

  6. I would also include in the lawsuit the failure by the CFTC to implement position limits as mandated by Dodd Frank. Not having position limits in place also allows the concentration to take place.

  7. Putting all facts and legal mumbo jumbo aside, how we can we force a corrupt government to enforce the law?  If they did anything, only a small fine would result and they would be right back at it the next day.  Metal price manipulation seems to be one of the cards in the foundation of the house of cards.  TPTB cannot and will not allow anything that remotely threatens their wealth and power.  Keeping as much physical metal off the market, exposing the fact supply and demand is a farce, may be all we can do.

  8. Avatar of IndenturedServant says:

    You go get ‘em tiger! Make sure your life insurance is up to date and all your affairs are in order. Me thinks the Central Banks will not look kindly on your efforts should they begin to bear fruit. Be sure to duck!
    I_S

  9. Frig ME 
    The combined law enforcement agencies of one large American city can find the two Boston terrorist suspects within 48 hours and have White Hat  in the bag, all shot to pieces,  with Black Hat in a body bag.  Done  and nearly over in 72 hours.
    After four years Blackhat Bart Cloo Soo can’t find his ass with both hands.  All the while, financial terrorists abscond with trillions in the dead of night.
    Even I can see there’s something wrong here.

  10. Someone is going to have a bad car accident or be robbed and killed, this will never make it to court.

  11. I also applaud the effort even though I do not see it amounting to much, if anything.  If an uncorrupted judge could be found (yes, BIG if) to hear the case, who knows what might happen?  I can see a temporary win this way but doubt that it would survive an appeal.
     
    That said, I did find the following somewhat humorous…
     
    “Because concentration resulting in manipulation must inevitably skewer legitimate commodity futures investment, speculation, and hedging decisions…”
     
    The correct word there is “skew”, which means deform and not “skewer”, which means impale.

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