Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Foreign commercial banks alleged to have colluded to manipulate gold prices, (Apr 8, 2014)

By Linda O’Brien, J.D., LL.M.

A pension benefit fund has filed a complaint in the federal district court of New York City on behalf of a putative class of individuals and entities that directly traded gold or gold derivatives with certain foreign commercial banks on an exchange in the United States, alleging that the banks colluded to manipulate the London Gold Market Fixing Ltd (Alaska Electrical Pension Fund v. Bank of Nova Scotia, April 4, 2014).

Bank of Nova Scotia, Barclays Bank PLC, Deutsche Bank, AG, HSBC Holdings PLC, and Societe Generale are foreign commercial financial services companies that own and are members of the London Gold Market Fixing Ltd. (“London Gold Fix”). The financial institutions participate each trading day in a twice-daily price setting and reporting process for gold and gold derivatives. The institutions have actively traded gold futures contracts on the Commodity Exchange (COMEX) in New York. The Alaska Electrical Pension Fund is a pension benefit fund that has purchased and sold gold, gold futures, and gold options on the COMEX.

The most common benchmark globally for the price of gold has been the London Gold Fix. By its very nature, the Gold Fix is not transparent and vulnerable to conspiratorial and manipulative behavior. The Gold Fix is controlled by a small number of financial institutions with a direct financial interest in where the prices are set. There is virtually no oversight and no prohibition on trading during the price setting process. This allows the financial institutions to gain an unfair trading advantage, since the pricing information exchanged during the process provides insight into the immediate future direction of gold and gold derivative prices, according to the complaint.

The complaint states that, from 2004 through the present, the financial institutions have exploited the Gold Fix by conspiring to fix the prices of gold and gold derivatives, including COMEX gold futures. The defendants have used their power and insight as administrators of the Gold Fix to profit at the expense of uninformed market participants. As a result of the financial institutions’ unlawful conduct, the pension fund allegedly purchased and sold gold at artificial prices and suffered damages.

Statistical analysis indicated unusually large spikes of gold prices occurred during the price setting period when the financial institutions are free to share information with each other and their clients. The studies show that trades in gold futures following the start of the price setting period are predictive of the fixing price direction. The analysis also found statistically significant return advantages for the “informed trader” that far exceeded trading costs. Such profits could provide strong motivation to exploit market practice by trading based information obtain during the price setting process, the complaint alleges.

The U.S. Commodity Futures Trading Commission and German financial regulatory agency have commenced investigations into potential gold price manipulation. The defendant financial institutions have also been investigated in connection with allegations of manipulation of the London Interbank Offered Rate (LIBOR) rates and foreign currency.

The plaintiff asserts claims for unjust enrichment and violations of Section 1 of the Sherman Act and Commodity Exchange Act. The action seeks declaratory and injunctive relief, treble damages, pre-judgment interest, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 14 CV 2391.

Attorneys: Samuel H. Rudman and Patrick J. Coughlin (Robbins Geller Rudman & Dowd LLP) for Alaska Electrical Pension Fund

Companies: Bank of Nova Scotia; Barclays Bank PLC; Deutsche Bank, AG; HSBC Holdings PLC; Societe Generale N.A.

News: Antitrust NewYorkNews