Civil Action No.
00-CV-12485-RCL
______________________________________
)
Reginald H. Howe, )
Plaintiff, )
)
v. )
)
Bank for International Settlements, )
Alan Greenspan, )
William J. McDonough, )
J.P. Morgan & Co. Inc., )
Chase Manhattan Corp., )
Citigroup, Inc., )
Goldman Sachs Group, Inc., )
Deutsche Bank AG and )
Lawrence H. Summers, )
Secretary of the Treasury, )
Defendants. )
______________________________________)
COMPLAINT
I. Jurisdiction
1. This is a complaint for damages and injunctive
relief arising out of manipulative activities in the gold market
from 1994 to the present time orchestrated by government officials
acting outside the scope of their legal or constitutional authority
and certain large bullion banks active in the over-the-counter
gold derivatives markets and on the Commodities Exchange ("COMEX")
in New York. The complaint alleges horizontal price fixing in
violation of Section 1 of the Sherman Act, securities fraud in
violation of Section 10(b) and Rule 10b-5 of the Securities Exchange
Act of 1934 ("Exchange Act"), common law fraud and
breach of fiduciary duty by the directors of the Bank for International
Settlements with regard to holders of its American issue, and
violations of the Constitution by federal officials acting under
color of federal law but wholly outside the scope of their legal
or constitutional authority. Subject matter jurisdiction of the
federal claims is based on 15 U.S.C. s. 15(a) (antitrust) and
s. 78aa (violations of the Exchange Act), 28 U.S.C. s. 1331 (federal
question), s. 1337 (commerce and antitrust) and s. 2201 (declaratory
relief), and 12 U.S.C. s. 632 (international banking and financial
transactions). Supplemental jurisdiction of the common law claims
is based on 28 U.S.C. s. 1367.
II. Parties, Venue and Standing
2. The plaintiff, Reginald H. Howe, is an
American citizen, residing currently and at all times material
hereto at 49 Tyler Road, Belmont, Massachusetts 02478. He is
suing in his individual capacity as: (1) the duly registered
holder of six shares of the American issue of the Bank for International
Settlements; and (2) the holder of 1200 depositary shares of
Gold-Denominated Preferred Stock, Series II, of Freeport-McMoran
Copper & Gold, Inc. The plaintiff is the proprietor of The
Golden Sextant (www.goldensextant.com), an internationally
recognized website containing commentaries, essays and analyses
relating to gold, and a member of Golden Sextant Advisors LLC.
The plaintiff has engaged in research and analysis on gold derivatives,
which are instruments such as forward contracts, futures, options
and swaps whose value is tied to -- or derived from -- the price
of gold, and in this connection has uncovered considerable evidence
of their use to manipulate gold prices.
3. While the plaintiff has not assigned any
part of this action to others and retains full control thereof,
he has received and expects to continue to receive support, both
financial and informational, from the Gold Anti-Trust Action
Committee Inc. ("GATA"), a civil rights and educational
organization formed under Delaware law in January 1999 to expose
manipulation of the gold market by certain bullion banks. The
plaintiff was a contributor to GATA's study on the gold market,
Gold Derivative Banking Crisis, which is posted at its
website (www.gata.org) and has been downloaded in full PDF format
more than 20,000 times. The plaintiff was also a member of the
GATA delegation that met with the Hon. Dennis L. Hastert, Speaker
of the U.S. House Representatives, in May 2000 to present to
him the conclusions of the GATA study. Much of the evidence cited
in this complaint comes from GATA's many friends and supporters
worldwide.
4. The defendant Bank for International Settlements
("BIS"), frequently described as "the central
banks' central bank," describes itself as an international
organization but has not been so designated under the International
Organizations Immunities Act, 22 U.S.C. s. 288 et seq.
The BIS is headquartered at CH-4002 Basle, Switzerland. Its principal
owners and customers are the central banks of the major industrial
nations. The BIS accepts gold deposits, makes gold loans, holds
approximately 200 metric tonnes of gold for its own account,
and is an active participant in the gold market. Its manager
responsible for foreign exchange and gold, Giancomo Panizzutti,
received the "Man of the Year Award" from the COMEX
at its annual gold dinner in New York recently. Under the auspices
of the BIS, gold derivatives (along with foreign exchange, interest
rate, equity and other derivatives) are subject to significant
regulation and reporting, including: (1) the Basle Capital Accord,
which sets minimum bank capital adequacy requirements for off-balance
sheet derivatives; and (2) protocols for disclosure of information
regarding derivatives, both in the financial statements of individual
firms and through reports prepared by national regulatory authorities
as well as by the BIS from country data submitted to it.
5. The defendant Alan Greenspan is Chairman
of the Board of Governors of the U.S. Federal Reserve System
("Fed"), 20th Street and Constitution Avenue, NW, Washington,
D.C. 20551. Mr. Greenspan has served ex officio as a director
of the BIS continuously since September 1994. When the BIS was
formed in 1930, 15% of its original capital -- the so-called
American issue or tranche -- was subscribed publicly in the United
States, thereby giving the Fed the right to vote these shares
when, as and if it assumed the two seats allocated to the American
issue on the BIS's board. However, by a public pronouncement
issued May 15, 1929, Secretary of State Henry L. Stimson forbade
"any officials of the Federal Reserve system either to themselves
serve or to select American representatives as members of the
proposed International Bank." In fact, the two American
seats on the BIS's board remained vacant until July 1994, when
Mr. Greenspan, without any formal authorization by Congress,
the President or the Secretary of State, acted to assume them
for the Fed. Since September 1994, the Fed's two nominees have
participated fully in the affairs of the BIS and voted the shares
of the American issue.
6. The defendant William J. McDonough is President
of the Federal Reserve Bank of New York ("N.Y. Fed"),
33 Liberty Street, New York, New York 10045. Mr. McDonough has
served as a director of the BIS continuously since September
1994, occupying the second seat allocated to the American issue
under the BIS's original plan of organization. As of August 2000,
approximately 7127 metric tonnes of "earmarked" gold
belonging to foreign official institutions, mostly central banks,
were held in custody accounts at the N.Y. Fed, down from 8621
tonnes at the end of 1995. At the end of 1999, the N.Y. Fed held
gold certificates covering over 40% of the total U.S. gold stock,
far more than any other Federal Reserve Bank, and up from 30%
ten years previously.
7. The defendant J.P. Morgan & Co. Inc.
("Morgan") is a global financial services firm with
its head office at 60 Wall Street, New York, New York 10260,
and a usual place of business at 2 International Place, Boston,
Massachusetts. Morgan is a major international bullion bank.
Its wholly-owned commercial bank subsidiary, Morgan Guaranty
Trust, is required to provide regular quarterly reports on its
gold derivatives to the U.S. Controller of the Currency ("OCC").
As of June 2000, Morgan reported US$29.7 billion notional amount
of gold derivatives, up from $18.4 billion one year earlier.
8. The defendant Chase Manhattan Corp. ("Chase")
is a bank holding company with its head office at 270 Park Avenue,
New York, New York 10017, and a usual place of business at 101
Federal Street, Boston, Massachusetts. Chase is a major international
bullion bank and recently often a heavy seller of gold on the
COMEX. Its wholly-owned commercial bank subsidiary, Chase Manhattan
Bank, is required to provide regular quarterly reports on its
gold derivatives to the OCC. As of June 2000, Chase reported
US$35 billion notional amount of gold derivatives, up from $20.5
billion one year earlier.
9. The defendant Citigroup, Inc. is a diversified
financial services holding company with its head office at 153
East 53rd Street, New York, New York 10043, and a usual place
of business at 1 International Place, Boston, Massachusetts.
Citibank N.A. ("Citibank"), Citigroup's wholly-owned
commercial bank subsidiary, is a major international bullion
bank, and is required to provide regular quarterly reports on
its gold derivatives to the OCC. As of June 2000, Citibank reported
US$11.4 billion notional amount of gold derivatives, up from
$7.2 billion one year earlier. Together, Morgan, Chase and Citibank
accounted for about 83% of all gold derivatives reported to the
OCC in June 2000, and 75% one year earlier. In combined notional
amount, the gold derivatives of these three banks increased by
over $30 billion, or by over 65%, during this one year period
while those of all other reporting U.S. commercial banks remained
virtually flat at slightly over $15 billion.
10. The defendant Goldman Sachs Group, Inc.
("Goldman") is a global investment banking and securities
firm with its head office at 85 Broad Street, New York, New York
10004, and a usual place of business at 125 High Street, Boston,
Massachusetts. Goldman is a major international bullion bank
and recently often a heavy seller of gold on the COMEX. Goldman
is generally regarded as a major purveyor of gold derivatives.
However, not being a commercial bank, Goldman does not report
its gold derivatives to the OCC.
11. The defendant Deutsche Bank AG ("Deutsche
Bank") is an international bank with its head office at
Taunusanlage 12, D-60262, Frankfurt am Main, Germany, and a usual
place of business at One Federal Street, Boston, Massachusetts.
Deutsche Bank is a major international bullion bank and recently
often a heavy seller of gold on the COMEX. In June 1999 Deutsche
Bank acquired Bankers Trust, a U.S. commercial bank which itself
had a significant gold derivatives business. In its 1999 annual
report, Deutsche Bank reported approximately US$51.2 billion
notional amount of gold derivatives at year-end, up from $16.2
billion one year earlier. Most of this increase came in the last
half of the year.
12. The defendant Lawrence H. Summers is the
Secretary of the Treasury. Pursuant to 31 U.S.C. s. 5302, the
Secretary of Treasury has exclusive control of the Exchange Stabilization
Fund ("ESF") subject only to the approval of the President.
The ESF and the Fed are the only instrumentalities of the federal
government with broad statutory authority to trade in gold. This
authority was conferred at a time when the dollar was officially
defined by Congress as a specified weight of gold, and when maintenance
of the dollar's official gold value was a matter of substantial
legal and practical concern. Public financial statements of the
ESF provide evidence of its intervention in the gold market,
particularly since 1998.
13. Collectively the defendants represent
all the principal parties required for a just and complete adjudication
of the price fixing claims. The publicly reported gold derivatives
of two other major international banks engaged in this business,
UBS AG and Credit Suisse Group, do not show the same extraordinary
growth patterns over the past two years as the gold derivatives
of the defendant bullion banks, nor have these two Swiss-based
banks recently been reported as frequent heavy sellers of gold
on the COMEX. An examination of the gold hedging activities of
the world's two largest gold mining companies, AngloGold Ltd.
based in South Africa and Barrick Gold Corp. based in Canada,
suggests that both companies have material non-public knowledge
of the gold price fixing scheme which they have used to their
advantage, but neither company appears to play a critical role
in implementing the scheme.
14. The plaintiff purchased his BIS shares,
which then traded over-the-counter in Basle but now trade on
the Swiss Exchange, in 1989 through an American brokerage firm.
The shares were held in street name until 1997, when the plaintiff
registered them in his name on the books of the BIS and soon
thereafter received share certificate no. 031419 inscribed to
him at his U.S. address, where the certificate remains. The plaintiff
purchased his 1200 depositary shares of Gold-Denominated Preferred
Stock, Series II, of Freeport-McMoran Copper & Gold, Inc.,
at various times from 1995 through 1999. By its terms, each depositary
share pays a quarterly cash dividend equal to the value of 0.0008125
ounce of gold and will be redeemed in February 2006 for the cash
value of 0.1 ounce of gold. The quarterly dividends are cumulative,
but to date all payments have been timely made based on the arithmetic
average of the London PM gold price over the relevant preceding
five-day period.
15. By a "Note to Private Shareholders"
dated September 15, 2000, mailed to the plaintiff at his U.S.
address, the BIS gave notice that its board planned to vote at
a meeting on January 8, 2001, to compel all private holders of
the American, Belgian and French issues to surrender their shares
against a payment of SwF16,000 (approx. US$9280) per share notwithstanding
an opinion from J.P. Morgan & Cie SA, a wholly-owned French-based
subsidiary of Morgan, setting the per share net asset value at
US$19,099, or more than twice what the BIS proposes to pay for
the shares that it plans to take.
16. Venue is based on 28 U.S.C. s. 1391(b)(2)
as to all defendants, s. 1391(c) with respect to the corporate
defendants having usual places of business in Boston, Massachusetts,
s. 1391(d) with respect to the BIS and Deutsche Bank, and s.
1391(e)(2) and (3) with respect to Messrs. Greenspan, McDonough
and Summers, all of whom are acting "under color of [federal]
legal authority" with respect to the matters alleged notwithstanding
that their conduct falls wholly outside their legal and constitutional
authority. Venue of the claims under the Exchange Act is also
based on s. 27 thereof, 15 U.S.C. s. 78aa. Venue of the claims
under the Sherman Act is also based on s. 12 of the Clayton Act,
15 U.S.C. s. 22, as to the corporate defendants.
III. Development of Today's Gold
Market
17. From 1792 to the closure of the gold window
in August 1971, gold functioned in an official monetary role
under the Constitution and laws of the Unites States. Gold's
use in ordinary domestic coinage ended in 1934 with the monetary
measures of the New Deal, including the devaluation of the dollar
from $20.67/ounce to $35/ounce and a general prohibition on the
ownership of gold by United States citizens. Under the Bretton
Woods Agreements (59 Stat. 512 (1945)) adopted after World War
II, gold remained at the center of the international monetary
system and the United States committed itself to redeeming dollars
presented by official foreign monetary institutions at the legal
standard of $35/ounce. When the United States unilaterally ceased
redeeming dollars for gold in August 1971, the Bretton Woods
system collapsed. Since then, the international payments system
has moved to floating exchange rates with no currency convertible
into gold at fixed parities. The Second Amendment to the Articles
of the International Monetary Fund ("IMF"), adopted
under U.S. pressure in 1978, further limits the use of gold for
official monetary purposes.
18. In 1972, Congress authorized and directed
the Secretary of the Treasury to establish a new par value for
the dollar of $38/ounce (Pub. L. 92-268, s. 2, 86 Stat. 116 (1972)),
which it amended in 1973 to $42.22/ounce or 0.828948 IMF Special
Drawing Right. Pub. L. 93-110, s. 1, 87 Stat. 352 (1973). Effective
April 1, 1978, Congress repealed the 1973 par value act, leaving
the dollar for the first time since 1792 statutorily undefined
with reference to gold or silver. Pub. L. 94-564, s. 6, 90 Stat.
2661 (1976), repealing 31 U.S.C. s. 449. See 31 U.S.C. ss. 314,
821, repealed by Pub. L. 97-258, s. 5, 96 Stat. 877 (1982).
19. In 1974, Congress eliminated the restrictions
that it had adopted forty years earlier on private ownership
of gold by American citizens. Shortly thereafter trading of gold
contracts was resumed on the COMEX. In 1977, Congress repealed
the prohibition on gold clauses in private contracts, enabling
the issue of gold-linked securities. Under the Gold Bullion Coin
Act of 1985 (31 U.S.C. s. 5112, as amended by Pub. L. 99-185,
99 Stat. 1177), Congress authorized the United States to resume
issuing gold coins having a legal tender face value but to be
sold to the public at a price equal to the market value of the
bullion at the time of sale plus costs of minting and distribution.
20. By its actions described in paragraphs
18-19 above, Congress effectively relegated gold to the status
of an ordinary commodity for purposes of federal law, leaving
its value against the dollar to be determined by market forces
and without intervention by the Treasury, the ESF or the Fed,
none of whom were given any legislative guidance whatsoever with
respect to any particular price or price level for gold.
21. Although gold is now an ordinary commodity
under federal law, it retains its intrinsic character as permanent,
international money. Many of the world's nations, and most of
its central banks, continue to hold significant quantities of
gold as a part of their international monetary reserves. Of the
estimated approximately 120,000 metric tonnes of above-ground
world gold stocks, some 32,000 tonnes are currently claimed as
reserves by official monetary institutions. (One metric tonne
equals 32,150.7 troy ounces.) After the U.S. dollar, gold is
the second largest component of official international monetary
reserves. In addition, its price is widely regarded as an important
economic indicator, particularly as a measure of U.S. inflationary
pressures and the international strength of the dollar.
22. Because of its intrinsic character as
money and its availability in quantity, gold functions in today's
international markets as a stateless currency. Like any major
currency, gold is not only borrowed and loaned at interest, but
also arbitraged in spot and forward markets against other currencies
on the basis of relative interest rates. Although gold interest
rates are generally referred to as "lease" rates, the
term is technically a misnomer. Gold is borrowed to be spent
and repaid like a currency, not rented to be used and returned
like a house or a car.
23. Since they were delinked, the dollar and
gold have developed different interest rate structures. Lease
rates on gold generally run at significantly lower levels than
dollar interest rates, creating a situation of "contango"
in gold futures, meaning that the dollar prices of gold for future
delivery are higher than the spot price for current delivery.
(The opposite of contango is "backwardation," meaning
that spot prices are higher than futures prices.) Against the
dollar, the contango on gold expressed as a percentage is roughly
the U.S. Treasury bill rate less the lease rate. For gold to
go into backwardation, this number would have to turn negative,
i.e., the lease rate would have to exceed the Treasury
bill rate.
24. Unlike other commodities where situations
of contango and backwardation often result from varying expectations
about future versus current supply, contango or backwardation
in gold -- as in currencies -- is governed by relative interest
rates since ordinarily neither gold nor currencies are subject
to significant constraints with regard to current versus future
supply. Currencies can be printed at virtually no cost by their
issuing authorities. Gold, because it is produced for accumulation
rather than consumption, is unique among commodities in that
nearly all the gold ever produced remains in above-ground stocks,
including the approximately 32,000 metric tonnes in official
reserves.
25. Gold is traded internationally on a 24-hour
basis in both physical and paper forms, with major markets in
London, New York, Hong Kong, Tokyo, Zurich and Dubai. However,
from the perspective of price discovery, the most important markets
are the London Bullion Market Association ("LBMA")
and the COMEX. Historically, the London market has been by far
the largest in terms of volume or turnover. It does significant
business in both bullion and paper instruments, but lacks transparency.
The COMEX does relatively little business in physical gold, being
principally a futures and options market. Zurich and Dubai are
major physical markets. Most gold derivatives are traded over-the-counter
between or among bullion banks, other financial institutions,
gold mining companies, hedge funds, speculators and others. Unlike
gold derivatives traded in standardized form as futures or options
on exchanges such as the COMEX, over-the-counter gold derivatives
are private contracts specially tailored to the requirements
of the parties.
26. Annual new mine production of gold in
1999 was approximately 2500 metric tonnes, about the same as
in 1998 and as estimated for 2000. At the same time, annual gold
demand is running at over 4000 tonnes. Notwithstanding the annual
excess of demand over supply, gold prices are well below the
total cost of production for most mines. These low prices have
forced closure of several, including the historic Homestake mine
in Lead, South Dakota, high-grading in many others, and numerous
job losses. Indeed, general conditions in the gold mining industry
are the worst they have been since the 1960's. The deficit between
new mine supply and demand, which has been growing steadily during
the period covered by this complaint, has been met by scrap recovery,
by some sales of official gold, and most importantly, by leased
gold mostly from central banks.
27. Central banks lease gold either by making
gold deposits with, or by making gold loans to, bullion banks,
the largest of which are major international banks or other financial
institutions. In both cases, the gold is placed with a bullion
bank usually at a very low rate of interest, often 2% or less.
This so-called "leased" gold is then sold into the
market and the currency proceeds delivered for investment or
other use by the bullion bank and/or its customer. When the gold
deposit is called or the gold loan comes due, the physical gold
required for repayment must generally be repurchased in the market.
But during the term of the deposit or loan, the central bank
retains the leased gold as an asset on its books and as part
of its official gold reserves notwithstanding that the buyer
of the leased gold owns it free and clear. The obligation to
repay this gold to the central bank puts the bullion bank and/or
its customer in a short physical position, i.e., they
owe physical gold that they do not have.
28. This short position creates a risk to
the borrower that when the loan comes due, the gold required
for repayment may not be available in the market at prices at
or below those at which it was sold. To mitigate this risk, gold
borrowers typically hedge their exposure through the purchase
of forward contracts or call options, which in turn are usually
hedged by their purveyors, creating a complex web of derivative
instruments.
29. Bullion banks, acting as agent or principal,
are usually on both sides of these transactions. When acting
as agent, their customers include gold producers (mining companies),
fabricators (e.g., jewelry manufacturers), investors,
traders and speculators. Gold producers often borrow gold through
their bullion banks and sell it forward in order to earn the
contango on some portion of their future production as well as
to gain a measure of protection against falling prices. They
may then make repayment by delivering gold from new production.
Investors, traders and speculators often take advantage of gold's
low lease rates to fund higher-yielding investments through the
so-called gold carry trade. In addition, major banks sometimes
borrow gold through their treasury departments for purposes of
general funding.
30. Most central banks do not disclose the
amount of gold that they have on lease. Bullion banks are even
more secretive about the amounts of gold that they have borrowed.
Accordingly, the current size of the aggregate short physical
position is a subject of considerable controversy. Informed estimates
range from 5000 to well over 10,000 metric tonnes, or several
years of annual production. In April 2000 at a conference in
Australia, Dinsa Mehta, head of global commodities trading for
Chase, suggested a possible total short position of around 7000
tonnes, an amount that a recent report from Salomon Smith Barney
describes as "simply too large to ever be repaid."
31. Gold derivatives, like other over-the-counter
derivatives, are generally measured by their notional values,
which are the face or reference amounts from which derivative
payments are determined. Notional value is similar in concept
to open interest, but measures it by face value of contracts
instead of their number. Although a tiny portion of all derivatives,
gold derivatives are very large in relation to physical gold
supplies. Converted at the 1999 year-end gold price of about
$290/ounce, the total market value of the world's roughly 120,000
metric tonnes of above-ground gold is $1.1 trillion, official
gold reserves amount to almost $300 billion, and annual new mine
production is a little over $23 billion. At the end of 1999,
the BIS reported $243 billion total notional amount of gold derivatives,
which converted at the same year-end price amounts to some 26,000
metric tonnes, ten times annual new mine supply and almost as
large as total official reserves. As of June 30, 2000, the BIS
reported that the total notional amount of gold derivatives had
grown to $262 billion, or by 8%, notwithstanding falling gold
prices during the period.
32. The gold derivatives of certain bullion
banks, particularly Morgan and Chase, are also quite large in
relation to their capital. For example, at the end of 1999, Morgan
reported total risk-based capital of $12.1 billion and gold derivatives
having a total notional value of over $38 billion, equivalent
to roughly 3600 to 4000 metric tonnes of gold. On a position
of this size and assuming an equal split between long and short
contracts, should a swift upward move in gold prices to $600/ounce
result in 20% of its counterparties being unable to deliver,
Morgan could quite possibly suffer losses amounting to as much
as 10% of notional value, or $3.8 billion, nearly a third of
its capital.
33. Today prudential rules developed over
centuries of experience with gold banking under earlier monetary
regimes are ignored. Formerly bullion reserves of 40% against
short-term gold liabilities were usually required. But today,
no physical gold reserves are generally required or maintained.
Gold derivatives may give theoretical protection against gold
price risk, but they can neither replace physical gold when demanded
nor substitute for it as a financial asset without credit risk,
i.e., one that is not another's liability. Aimed at reducing
firm risk, gold derivatives have instead created massive systemic
risk in the precise area where the role of the lender of last
resort is inherently limited -- gold banking. The Fed cannot
print gold to rescue either the bullion banks or other banks
that have used the gold carry trade as a source of apparently
cheap funding. What it can do, for a while at least and contrary
to law, is actively to assist and support manipulation of gold
prices so that rising prices do not result in the short positions
of the bullion banks causing them crippling and possibly fatal
losses.
IV. Manipulation of Gold Prices
34. This complaint alleges manipulation of
gold prices from 1994 to the present time by a conspiracy of
public officials and major bullion banks. This manipulative scheme
appears directed at three objectives: (1) to prevent rising gold
prices from sounding a warning on U.S. inflation; (2) to prevent
rising gold prices from signaling weakness in the international
value of the dollar; and (3) to prevent banks and others who
have funded themselves by borrowing gold at low interest rates
and are thus short physical gold from suffering huge losses as
a consequence of rising gold prices.
35. Support for the price fixing allegations
in this complaint comes from various sources, including: (1)
official reports of the BIS, OCC, Fed and ESF; (2) analyses of
market data; (3) statements by certain participants in the manipulative
scheme; and (4) statements by others with knowledge of the manipulative
scheme.
36. The basic model for the manipulation appears
to be the London Gold Pool, which operated without formal agreement
under the auspices of the BIS from 1961 to 1968. However, the
present scheme differs in three critical respects: (1) it aims
to subvert the free market price of gold rather than to defend
an official price sanctioned by formal international agreement;
(2) leasing rather than outright sales is the preferred method
of bringing central bank gold to market; and (3) gold derivatives,
built on a foundation of leased gold, are a new and important
tool giving the manipulators a high degree of leverage.
37. While using gold derivatives to force
down prices whenever possible, the manipulators must also find
or coerce sufficient supplies of gold bullion to meet strong
physical demand, particularly from Asia, responding in part to
the low prices resulting from their own manipulations.
38. In July 1998, Fed Chairman Alan Greenspan,
testifying before the House Banking Committee, stated: "Nor
can private counterparties restrict supplies of gold, another
commodity whose derivatives are often traded over-the-counter,
where central banks stand ready to lease gold in increasing quantities
should the price rise." This statement amounted to a declaration
that the gold price had been and would continue to be controlled.
Not only did it constitute an open invitation to take advantage
of the gold carry trade at very little risk, but also it pressured
private holders of gold bullion to sell or lease their gold,
thus augmenting the physical supply needed by the manipulators.
39. In a formal letter to Senator Joseph I.
Lieberman dated January 19, 2000, Mr. Greenspan elaborated on
his 1998 congressional testmony: "This observation simply
describes the limited capacity of private parties to influence
the gold market by restricting the supply of gold, given the
observed willingness of some foreign central banks -- not the
Federal Reserve -- to lease gold in response to price increases."
Thus the Fed chairman himself has admitted that some central
banks lease gold not to earn a return on it as they often claim,
but primarily to supply physical gold to the bullion banks during
periods when strong demand is pushing up prices.
40. Table 3.13 in the monthly Federal Reserve
Bulletin shows month-end balances of total foreign earmarked
gold held at Federal Reserve Banks, virtually all of which is
kept at the N.Y. Fed. Foreign earmarked gold decreased from 8865
metric tons at the beginning of 1995 to 7318 tonnes at the end
of 1999, or by almost 1550 tonnes. While some of this decline
may represent official sales rather than leasing, in general
over this period surges in outflows from the N.Y. Fed coincided
with periods of strength in gold prices. Mr. Greenspan's congressional
testimony in July 1998 also corresponded with the first appearance
of a noticeable slowdown in withdrawals of foreign earmarked
gold from the N.Y. Fed in the face of rising gold prices.
41. According to reliable reports received
by the plaintiff, the IMF is now leasing gold through the BIS.
As an international financial institution, the IMF qualifies
to use the banking facilities of the BIS. Although the IMF claims
neither to lease gold nor to have legal authority to do so, a
gold deposit made by the IMF to its account at the BIS might
arguably be distinguished from a gold loan. Such a deposit would,
however, provide physical gold for lease by the BIS. In its most
recent annual report for the year ending March 31, 2000, the
BIS disclosed that during the year gold deposits by central banks
fell almost 12% from 927 metric tonnes to 819 tonnes, and that
gold held in bars declined almost 20% from 813 tonnes to 658
tonnes. At the same time, the BIS's total gold lending increased
47 tonnes to 360 tonnes, almost double the level of 185 tonnes
as of March 31, 1996.
42. The IMF holds over 3200 metric tonnes
of gold. American and British officials tried to tap this supply
for manipulative purposes in 1999 through the proposed sale of
over 300 tonnes ostensibly to fund aid to heavily indebted poor
countries, an initiative that received strong support from both
the Clinton administration and the Blair government. On May 7,
1999, just as gold threatened to surge over $300/ounce in response
to new doubts whether the proposed IMF gold sales would go forward,
the British announced that the Bank of England, on behalf of
the Exchange Equalisation Account in the British Treasury, would
sell 415 tonnes of gold in a series of public auctions. Although
this announcement came with no warning and was completely unexpected
by most, the previous evening Bill Murphy of GATA reported in
his Midas column at Le Metropole Cafe: "Deutsche
Bank's bullion desk is calling their clients saying that the
gold market is stopping at $290."
43. Various British officials have offered
wholly unpersuasive explanations of these auctions as an effort
to diversify Britain's international monetary reserves. But British
gold reserves were already low compared to those of other major
European nations. British officials have not agreed on who made
the decision. However, the timing virtually guarantees not only
that it came directly from the prime minister, but also that
he must have had extraordinary reasons for making it. His government
was a leading supporter of the proposed IMF gold sales. The announcement
clumsily put Britain in the position of front-running the IMF,
ultimately a significant factor in forcing it to change tack.
The manner of the British sales -- periodic public auctions in
which the entire lot is sold at the lowest price accepted for
any portion -- is so inconsistent with obtaining the best available
return for British taxpayers that it has triggered an inquiry
by Britain's National Audit Office.
44. Intertwined connections of present and
former government officials and high ranking executives of the
bullion banks and certain major gold mining companies have facilitated
the conspiracy to manipulate gold prices. These connections include
but are not limited to: Robert E. Rubin, former U.S. treasury
secretary, previously co-head of Goldman and now a top executive
at Citigroup; Frank B. Arisman, managing director of gold operations
at Morgan and a director of AngloGold; Vernon E. Jordan, presidential
confidante and a member of Barrick Gold's international advisory
board; and E. Gerald Corrigan, former N.Y. Fed president and
now a managing director at Goldman.
45. Many of the most egregious manipulative
activities have occurred on the COMEX, which has high international
visibility, but being predominantly a paper market, is more easily
subject to manipulation. Over the past two years, Goldman, Chase
and Deutsche Bank have regularly appeared as heavy sellers of
gold on the COMEX whenever necessary to kill any significant
rally. In the past year, many observers of the gold market have
noticed a tendency for gold prices to rise in overseas trading
only to be knocked back to prior levels on the resumption of
trading in New York. Recently, amidst volatility in many other
markets caused in part by a disputed presidential election in
the United States, gold settled on the COMEX for 21 straight
trading days within $1 of $266/ounce.
46. Among the more rigorous analyses of the
gold market is an article by Michael Bolser entitled "Anomalous
Selling in COMEX Gold, 1985 to November 2000" recently published
at The Golden Sextant. Mr. Bolser identifies six extreme
episodes of very heavy or "preemptive selling" in COMEX
gold since 1994. For this purpose, preemptive selling is defined
as the COMEX closing price falling by more than three times the
decline in the London PM fix from the AM fix on the same day.
In other words, if the AM fix is $300 and the PM fix is $295,
the COMEX price would have to fall by more than $15 to less than
$280 in order for the day to register as one with preemptive
selling. For each month, the days with preemptive selling are
taken as a percentage of the total trading days, and the percentages
for each month are then charted.
47. Although defined solely on a statistical
basis, each period of extreme preemptive selling coincides with
a period when gold prices displayed marked weakness in circumstances
where historical trading patterns called for just the opposite
behavior. Although the manipulative scheme has operated on a
daily or as needed basis to control and subdue gold prices, analysis
of these six periods of extreme preemptive selling illustrates
the operation of the scheme.
48. Since January
1985, there have been only seven episodes of preemptive gold
selling on the COMEX in excess of two standard deviations from
the mean, of which only three have exceeded three standard deviations.
Of these seven episodes, all but one have occurred since January
1994. These six are shown graphically as waves 1 through 6 on
Figure #7 below, which is taken from Mr. Bolser's addendum.
49. The only other preemptive gold selling
in excess of two standard deviations occurred very briefly in
early 1985. It was followed in late 1986 by a longer period of
heavy preemptive selling not quite reaching the level of two
standard deviations. This 1986 episode, which took place as gold
prices moved sharply higher while the Iran-Contra affair unfolded,
is the longest sustained high level of preemptive selling until
1994. It corresponds with the most significant activity of the
ESF in the gold market prior to 1999 as revealed by tables 1.18
and 3.12 in the relevant monthly Federal Reserve Bulletins. (See
paragraphs 62-63.)
50. The first wave of preemptive selling in
excess of three standard deviations occurred in mid-1994, coincident
with Mr. Greenspan's decision to assume the two seats on the
BIS's board allocated to the American issue. Gold prices, which
had been in a generally rising mode for the prior year and a
half, went into an extended sideways move that lasted until 1996.
The OCC reports on gold derivatives only go back to the first
quarter of 1996, at the end of which the total notional amount
of gold derivatives held by reporting U.S. commercial banks stood
at $57.6 billion. Thus by mid-1994 it is probable that American
bullion banks had already established a short position in physical
gold of sufficient size and risk to concern the Fed.
51. The second and third waves of preemptive
selling took place in 1996. At the beginning of the year, there
was an episode (wave 2) in excess of two standard deviations,
followed in mid-1996 by an episode (wave 3) in excess of three
standard deviations. The first took place as gold threatened
to push significantly over $400/ounce. The second started gold
prices on a long downward course to under $300 by late 1997.
According to reliable reports received by the plaintiff, the
Fed was telling certain persons in early 1996 that gold would
not pass $415/ounce. At the same time, the near zero interest
rate policy adopted by Japan in mid-1995 to try to address its
deepening financial problems was impacting the gold market in
three ways: yen gold prices on the Tokyo Commodities Exchange
were moving into backwardation; dollar gold prices were rising;
and lease rates were climbing, suggesting strong demand for physical
gold.
52. Noting "the extraordinary rise in
gold lease rates" at the end of 1995, the BIS in its 66th
annual report cited "gold lenders follow[ing] their usual
practice of reducing their credit exposures at end-year,"
explaining that "those who needed to borrow gold to sell
it short had to offer unusual compensation." A story headlined
"Sharp Rise in Gold Lease Rates Revives Market" in
The Wall Street Journal on December 5, 1995, reported
that lease rates had fallen back the prior two days as "central
banks and other investors made more metal available,...in part
because of persuasion from the Bank of England, the unofficial
custodian of the world's bullion market." At the annual
gold roundtable of The Wall Street Transcript in December
1995, not one of the six analysts present expressed any serious
worry over negative effects on gold prices from unusually high
central bank gold sales or gold loans in 1996. However, by the
end of 1996, the gold price was in rapid descent, falling to
around $345/oz. in early 1997, and touching well below $300 by
the end of that year.
53. The fourth wave of preemptive selling
in excess of two standard deviations, occurred with the collapse
of Long-Term Capital Management ("LTCM") during the
Russian default crisis of October 1998. According to reliable
reports received by the plaintiff, LTCM had funded itself using
the gold carry trade and was short 300 to 400 metric tonnes of
gold at the time of its collapse. To prevent the covering of
this short position from driving gold prices higher, the N.Y.
Fed arranged an off-market transaction, probably involving Chase.
It is similarly reported that the principals of LTCM received
some form of immunity or accomodation on condition that they
not reveal or discuss LTCM's short gold position.
54. On September 26, 1999, fifteen European
central banks, with the European Central Bank, Banque de France
and Bundesbank in key leadership roles, announced without prior
warning an agreement to limit their gold sales and not to expand
further their gold lending. Unveiled in Washington, D.C., after
the annual meetings of the IMF and World Bank, this agreement
is generally referred to as the Washington Agreement. According
to most European press reports, the agreement was prepared in
secrecy and without the knowledge of American, British or BIS
officials, although the Bank of England was given and accepted
an opportunity to sign onto the agreement just before the announcement.
The Washington Agreement triggered an explosive rally in gold
prices.
55. The fifth wave of preemptive selling in
excess of two standard deviations occurred in response to this
rally as the Fed, the Bank of England and the BIS struggled to
halt and reverse it. According to reliable reports received by
the plaintiff, this effort was later described by Edward A. J.
George, Governor of the Bank of England and a director of the
BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc:
We looked into the abyss if the gold price
rose further. A further rise would have taken down one or several
trading houses, which might have taken down all the rest in their
wake. Therefore at any price, at any cost, the central banks
had to quell the gold price, manage it. It was very difficult
to get the gold price under control but we have now succeeded.
The U.S. Fed was very active in getting the gold price down.
So was the U.K.
56. A major consequence of the gold rally
following the Washinton Agreement was the near bankruptcy of
Ashanti Goldfields Ltd., a large gold mining company based in
Ghana, due to huge paper losses from hedging strategies devised
for it by Goldman apparently on the assumption that gold prices
could not rally as they did. Goldman's actions with respect to
Ashanti were the subject of scathing comment, including allegations
of serious conflicts of interest, in an article by L. Barber
and G. O'Connor, "How Goldman Sachs Helped Ruin and then
Dismember Ashanti Gold," Financial Times (London),
Dec. 2, 1999. The principal shareholders of Ashanti, which is
listed on the New York Stock Exchange, are Lonmin and the Government
of Ghana.
57. The following table shows the total notional
amount of gold derivatives, all maturities, of Chase, Morgan,
Citibank and Other as reported by the OCC from December 1998
through June 2000. All amounts are in US$ billions. (Columns
do not add due to rounding and exclusion of separately stated
figures for Bankers Trust prior to June 1999.) The largest relative
and absolute increases are highlighted in bold.
Bank 12/98 3/99 6/99 9/99 12/99 3/00 6/00
Chase 24.1 23.7 20.5 22.6 22.1 31.5 35.0
Morgan 16.8 15.1 18.4 30.5 38.1 36.3 29.7
Citibank 6.7 7.3 7.2 10.7 11.8 11.8 11.4
Other 15.0 13.5 14.2 19.3 15.7 15.9 15.7
Total 68.3 65.1 61.4 83.3 87.6 95.5 92.1
58. In the foregoing table, the figures for
9/99 are as of September 30. Accordingly, they reflect positions
as of four trading days after announcement of the Washington
Agreement. During these four days the gold price moved from about
$265/ounce to over $300. The rally continued into October, with
gold prices trading as high as $325 during the first two weeks,
and then generally declining to just under $300 by the end of
the month. For the rest of 1999 and into February 2000, gold
traded in a $20 dollar band under $300. In the second week of
February, a sharp rally took gold to over $315, but again the
price was quickly brought under control, and it remained generally
in the $280-290 range from the beginning of March through June,
although falling into the low $270's in May.
59. In January 2000, Barrick Gold revealed
that following the Washington Agreement it had purchased call
options covering 6.8 million ounces of gold, or over 210 metric
tonnes, to protect itself against possible losses on its forward
contracts in 2000 and 2001. According to reliable reports received
by the plaintiff, these call options were purchased from Morgan,
which has offices in Toronto in the same building as and one
floor above Barrick Gold's. The risk of selling call options
in this volume to a company possessing the power to take unilateral
actions that could drive gold prices much higher suggests that
the underlying motive and purpose of this transaction must have
been market manipulation.
60. The sixth and most recent wave of preemptive
selling, this time in excess of three standard deviations, occurred
in mid-2000, driving gold prices from $290/ounce to below $270.
Canadian Imperial Bank of Commerce ("CIBC"), which
apparently has assumed overall responsibility from Goldman for
managing Ashanti's hedge book, is advising Ashanti regarding
sale of a 50% interest in its Geita gold project in Tanzania
to AngloGold. This transaction, which became unconditional on
November 30, 2000, and is expected to close by December 15, required
the approval of Ashanti's bullion banks and its shareholders,
including Lonmin and the Government of Ghana. According to reliable
reports received by the plaintiff, representatives of CIBC held
discussions with Fed officials while this transaction was pending.
In the course of these discussions, Mr. Greenspan's desire to
hold down gold prices was expressed. Ashanti's financial problems
presented a major risk not only to its survival but also to the
balance sheets of its bullion banks.
61. Goldman recently recommended three gold
mining stocks: AngloGold, Barrick Gold and Placer Dome, Inc.
The first two, as noted in paragraph 13 above, are heavy hedgers
who appear to have material non-public knowledge of the gold
price manipulation scheme. According to reliable reports received
by the plaintiff, Chase intimidated Placer Dome, also a heavy
hedger, into denying that it had contributed to GATA when it
in fact had. All three of these companies, although making announcements
about reducing their hedge books in the wake of the Washington
Agreement, have since returned to active hedging programs, including
the writing of call options on gold, a sure sign that they do
not expect any repetition soon of the fall 1999 gold rally.
62. The published financial statements of
the ESF indicate that it has participated in the gold price fixing
scheme along with the Fed. The monthly Federal Reserve Bulletins
contain a table 1.18 showing end-of-month balances in the Fed's
gold certificate account and a table 3.12 showing end of month
balances in the total U.S. gold stock, including the ESF. The
quarterly U.S. Treasury Bulletins also contain a table IFS-1
showing the U.S. gold stock, which states in footnote 2: "The
Treasury values its gold stock at $42.2222 per fine troy ounce
and pursuant to 31 United States Code 5117(b) issues gold cerificates
to the Federal Reserve at the same rate against all gold held."
Accordingly, any difference between the end-of-month figures
reported in tables 1.18 and 3.12 reflects gold held or owed by
the ESF.
63. From 1974 through 1985, end-of-year (December)
balances in tables 1.18 and 3.12 matched precisely except for
1978, when there was a minor difference of $1 million ($11,718
million in the gold certificate account and $11,719 million in
the account including the ESF). At the end of 1986, there was
$20 million less, equal to almost 15 metric tonnes at $42.2222/ounce,
in the account including the ESF than in the gold certificate
account. Examination of the month-end figures reveals the following
differences when subtracting the account including the ESF from
the gold certificate account: October 1986, $18 million; November
1986, $14 million; December 1986, $20 million; and January 1987,
$13 million. In February 1987, the account including the ESF
exceeded the gold certificate account by $26 million, and in
March 1987 the two accounts were brought back into balance. The
preemptive selling in 1986 thus coincided with a unique period
in which the ESF appears to have borrowed from the U.S. gold
stock to sell bullion into the market, later replacing its gold
borrowings with purchased bullion.
64. Tables 1.18 and 3.12 remained in balance
on a year-end basis from 1987 through 1995 except for 1988 and
1991, when at year-end the account including the ESF was less
than the gold certificate account by $3 million and $2 million,
respectively. However, beginning in December 1996, tables 1.18
and 3.12 show a pattern of increasing discrepancies between the
Fed's gold certificate account and the account including the
ESF. The latter exceeded the gold certificate account by $1 million
at year-end 1996 and $3 million at year-end 1997. However, the
account including the ESF was $1 million less than the gold certificate
account at the end of November 1997. At year-end 1998, the account
including the ESF was $5 million less than the gold certificate
account, but had been $1 million more at the end of the previous
May. For the first time since 1986, there was a series of small
monthly discrepancies between the two accounts in the first half
of 1999, after which they remained in balance until year-end,
when the account including the ESF showed a record $41 million,
or approximately 30 metric tonnes, excess over the gold certificate
account ($11,089 million versus $11,048 million). In January
2000 the two accounts were brought back into balance at $11,046
million.
65. These discrepancies between the Fed's
gold certificate account and the account including the ESF strongly
point to losses on gold trading, probably incurred primarily
through some form of participation in gold derivatives, as the
reason for the ESF's recent poor trading results. The ESF's profits
or losses (-) on foreign exchange (the account that historically
included gold) by fiscal quarter for 1997 through March 2000,
as reported in table ESF-2 of the relevant quarterly U.S. Treasury
Bulletins, are shown below. All amounts are in US$ millions.
Fiscal Oct./ Jan./ Apr./ Jul./ Total
Year Dec. Mar. Jun. Sep. FY
2000 -1627 -394
1999 1699 -817 -500 1257 1637
1998 -754 -333 -135 576 -646
1997 -383 -1093 402 -538 -1613
66. While the Asian financial crisis might
explain the ESF's losses in 1997, the Clinton administration
reported to Congress that it did not engage in any currency interventions
from 1998 through March 2000. During this period, the ESF's profits
generally coincided with periods of falling gold prices while
its losses coincided with rising gold prices. Its third largest
quarterly loss ever occurred in the last calendar quarter of
1999, coincident with the explosion in gold derivatives on the
books of Morgan, Chase, Citibank and Deutsche Bank. However,
the ESF achieved excellent trading results in the prior calendar
quarter dominated by falling gold prices resulting from the May
1999 announcement of British gold sales.
V. BIS's Proposed Freeze Out of
Private Shareholders
67. By a "Note to Private Shareholders"
dated September 15, 2000, the BIS gave notice that its board
planned to vote at a meeting on January 8, 2001, to compel all
private holders of the American, Belgian and French issues to
surrender their shares against a payment of SwF16,000 (approx.
US$9280) per share. In the same note, the BIS stated that it
had received an opinion from J.P. Morgan & Cie SA, a wholly-owned
French-based subsidiary of Morgan, setting the per share net
asset value at US$19,099.
68. According to the BIS's note, 72,648 shares
comprising 13.73% of its total capitalization are held by private
shareholders, including all 33,078 shares of the American issue.
The remaining shares are owned by central banks, but the Fed
owns none. In 1999, the BIS issued a total of 12,000 new shares
to several new central bank members, including the European Central
Bank, at a price of 5020 gold francs per share, payable in gold
or an equivalent amount in a currency acceptable to the BIS based
on the market price of gold at the date of payment.
69. Article 20 of the BIS's Statutes provides:
"The operations of the Bank for its own account shall only
be carried out in currencies which in the opinion of the Board
satisfy the practical requirements of the gold or gold exchange
standard." Since its opening in 1930, the BIS has used the
Swiss gold franc of that date as its unit of account, making
conversions against various currencies as appropriate at market
or historic rates against gold. Both the BIS's profit and loss
statements and its balance sheets are published in gold francs.
The gold franc is defined under Article 4 of its Statutes as
0.29032258 grams fine gold, and is indicated on its financial
statements by a "GF" prefix.
70. The GF5020 per share price on the new
shares issued in 1999 equals 1457.317 grams, or 46.8538 troy
ounces, which at US$280/ounce equals $13,119, more than the amount
that the BIS is proposing to pay its private shareholders but
less than the net asset value per share assigned by Morgan. In
stating the freeze-out price for its private shareholders in
current Swiss francs rather than gold francs, the BIS violated
both its statutes and all its prior practices, particularly with
respect to transactions on capital account.
71. The principal justifications given by
the BIS and Morgan for discounting the freeze-out price to less
than half of net asset value are that private shareholders do
not have voting rights and their shares have low trading liquidity.
No BIS shares have voting rights. The right to vote pertains
to each member central bank (or approved proxy therefor) based
on the number of shares allocated to, and taken down under, that
bank's non-fungible issue without regard to whether ownership
of the shares rests with the central bank or in private hands.
All original shareholders, whether private persons or central
banks, paid in exactly the same amount of gold per issued share.
The right to vote was not then, and has not since, ever been
given a value, let alone a value in derogation of the full property
value of the shares. The effort to compare the BIS to a corporation
in which there are two classes of shares, voting and non-voting,
is without any foundation in the Statutes of the BIS or its prior
practices.
72. The liquidity argument is similarly bogus.
No mention or consideration is given to the observed fact that
the liquidity of the Belgian and French issues is much lower
than that of the American issue. If liquidity were a valid consideration,
the discount applied to the Belgian and French issues would be
greater than that applied to the American issue, and holders
of the American issue would receive a higher price. What is more,
there are many steps that the BIS could take, particularly in
cooperation with its member central banks or other financial
institutions, to increase the market liquidity of its privately
held shares, including the issuance of public certificates against
these shares as authorized under Article 16 of its Statutes.
73. Describing
the rationale for the freeze-out, the BIS states: "This
measure is intended to enable the BIS to pursue better its objectives
of promoting international monetary and financial cooperation."
Further on, the note continues:
Indeed, unlike a commercial bank, the prime
objective of the BIS is to employ its resources in support of
its public interest functions. ... The existence of a small number
of private shareholders, whose interest is essentially financial,
is no longer seen to be in line with the international role and
future development of the organisation. The BIS is, moreover,
the only international organisation in the monetary and financial
field to have private shareholders (in contrast to the IMF, the
World Bank and the OECD).
74. As the note itself admits, the BIS is
unique in having private shareholders whereas the IMF and the
World Bank, both created in the wake of World War II, do not.
However, the United States joined both of these Bretton Woods
organizations pursuant to treaties presented by the President
and approved by the Senate. What is more, U.S. contributions
to both organizations required appropriations approved by Congress.
75. The United States was not a party to the Convention establishing
the BIS. Participation of the Federal Reserve in the BIS rests
solely on its dual public/private nature and the private shares
originally subscribed in the United States. A major reason for
this unique structure is that when the BIS was formed amidst
the isolationist atmosphere of 1929-30, it was assumed that Congress
would neither approve the Convention nor authorize a subscription
of shares by the Fed. In fact, the Secretary of State expressly
forbade the Fed to participate either directly or indirectly
in the BIS, and neither Congress nor the President has ever taken
any official action with respect to the United States joining
the BIS or participating in its affairs.
76. The BIS's note fails to give the precise
language of the several amendments proposed to implement the
freeze-out. However, the note does affirm that "... shares
withdrawn from private shareholders will not be cancelled, but
will be redistributed among central bank shareholders of the
BIS on 8 January 2001 in the manner determined by the EGM."
This language suggests that some undisclosed proposal for redistributing
the shares must already exist. Unless the American issue is to
be purchased by the Fed, there will be no basis for its continued
voting or participation in affairs of the BIS. However, since
the Fed is not presently a shareholder, it does not qualify as
a potential distributee under a literal reading of the language
quoted.
77. In addition to their capital contributions,
the private shareholders are responsible for three important
attributes of the BIS: (1) creating plausible justification for
some minimal level of American participation through the Fed
or, in its absence, some acceptable private American financial
institution; (2) requiring that the BIS's operations meet general
standards of fiduciary duty to ordinary shareholders, including
the pursuit of sound banking practices and publication of audited
financial reports; and (3) providing the potential sanction of
private shareholder actions should the BIS, under the direction
of its central bank members or through the collusion of some,
operate in a manner that violates its Statutes.
78. A basic guiding principle of the BIS is
set forth in Article 19 of its Statutes, which states: "The
operations of the Bank shall be in conformity with the monetary
policy of the central banks of the countries concerned."
As Henry H. Schloss in The Bank for International Settlements
(North-Holland Publishing Co., Amsterdam, 1958) points out (p.
41): "This provision was important in allaying fears of
those who objected to an international superpower which could
destroy a country's sovereignty."
Count 1
(Price Fixing)
79. This count runs against all defendants,
and incorporates by reference all the allegations of part IV,
paragraphs 34-66.
80. The manipulative activities of the defendants
in the gold market constitute horizontal price fixing and are
illegal per se as set forth by the Supreme Court in United
States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223-224 (1940):
Under the Sherman Act a combination formed
for the purpose and with the effect of raising, depressing, fixing,
pegging, or stabilizing the price of a commodity in interstate
or foreign commerce is illegal per se. ... Where the means
for price-fixing are purchases or sales of the commodity in a
market operation..., such power may be found to exist though
the combination does not control a substantial part of the commodity.
In such a case that power may be established if as a result of
market conditions, the resources available to the combinations,
the timing and the strategic placement of orders and the like,
effective means are at hand to accomplish the desired objective.
But there may be effective influence over the market though the
group in question does not control it. Price-fixing agreements
may have utility to members of the group though the power possessed
or exerted falls far short of domination and control. ... Proof
that a combination was formed for the purpose of fixing prices
and that it caused them to be fixed or contributed to that result
is proof of the completion of a price-fixing conspiracy under
s. 1 of the Act.
81. Mr. Justice Douglas, who wrote this opinion
of the Court, described perfectly the current international gold
price fixing cartel a half century before its time. The defendants,
through an intentional and coordinated scheme involving the use
of gold derivatives when possible and leased official gold when
necessary, have conspired to restrain gold prices and to prevent
them from rising to the levels that would otherwise prevail in
a free market. This scheme has been carried out on various world
gold markets, including but not limited to the COMEX, through
orchestrated sales in needed amounts at critical times and price
levels.
82. This price fixing conspiracy involves
an unholy alliance of certain high public officials and large
bullion banks. The former have participated in order to camouflage
and mitigate their own public policy failures, and specifically
to prevent rising gold prices from: (1) signaling a warning of
future U.S. inflation; (2) affecting the international standing
of the U.S. dollar; (3) calling further attention to huge and
unprecedented U.S. trade deficits; (4) impeding the inflows of
foreign capital necessary to offset these large trade deficits;
(5) causing political embarrassment to the Clinton administration
and its claims of economic success; and (6) inflicting severe
financial losses on favored banks and other financial institutions
that have funded themselves using the gold carry trade.
83. Through their participation in the price
fixing conspiracy, the defendant bullion banks have made many
hundreds of millions of dollars while assisting their political
friends, who have done whatever they can to protect the bullion
banks from the risks of their short positions in physical gold
as well as from any effective form of legal sanction.
Count 2
(Securities Fraud)
84. This count runs against the BIS, Alan
Greenspan, William J. McDonough and Morgan (collectively the
"BIS defendants"), and incorporates by reference all
the allegations of count 1 plus part V, paragraphs 67-78.
85. The BIS defendants are persons within
the meaning of the Exchange Act. Section 10(b) thereof and Rule
10b-5 promulgated thereunder make it unlawful for any person
in connection with the purchase or sale of any security, whether
or not listed in the United States, by use the mails or any other
instrumentality of interstate commerce: (a) to employ any device,
scheme or artifice to defraud; (b) to make any untrue or misleading
representation, whether by affirmation or omission, as to a material
fact; or (c) to engage in any practice that operates as a fraud
or deceit.
86. As set forth in Count 1, the BIS defendants
have acted jointly and in concert with the other defendants to
manipulate gold prices to lower levels than would otherwise have
prevailed. Although central banks are major holders of gold,
their real power comes from their issuance and control of paper
currencies. When they try to enhance their reputations by manipulating
gold prices in today's free market, they damage all investments
that closely correlate with the price of gold, including the
value of BIS shares.
87. Historically there is a high correlation
between gold prices and market prices on the Swiss Exchange for
BIS shares. This correlation, which continued to manifest itself
in the wake of the Washington Agreement, rests in part on the
approximately 200 tonnes of physical gold that the BIS holds
for its own account. Although the percentage of the share price
directly attributable to its own gold holdings has declined as
its other reserves have grown, there remain over 12 ounces of
gold per share, equal to around $3400/share at $280/ounce gold.
Additionally, as described in paragraphs 69-70, since the BIS
maintains its books in gold francs, the gold price acts directly
on its accounts, affecting any calculation of net asset value.
Because the price of gold directly impacts both the market value
and the net asset value of its shares, any actions by the BIS
aimed at depressing gold prices operate in direct opposition
to the interests of its private shareholders.
88. With full knowledge of the manipulative
activities in the gold market and with specific intent to defraud
the BIS's private shareholders, including the plaintiff, the
BIS defendants have sought to take advantage of artificially
and illegally depressed gold prices to freeze-out the BIS's private
shareholders at a grossly unfair and inadequate share price.
In furtherance of this fraudulent scheme, Morgan prepared a valuation
opinion at the request of the BIS specifically for use in connection
with the freeze-out. As a participant in the gold price fixing
conspiracy and with full knowledge thereof, Morgan had to know
that its valuation opinion could and would be used to perpetrate
a fraud.
89. The BIS defendants have knowingly and
intentionally failed to disclose material facts, and knowingly
and intentionally made false and misleading statements of material
facts, with respect to the manipulation of gold prices, including
but not limited to: (1) the leasing of gold by central banks
for the specific purpose of halting increases in gold prices;
(2) the manner and means of handling LTCM's large short position
in gold at the time of its collapse; (3) the true reasons for
the British gold auctions; (4) the efforts of the Fed and the
Bank of England to "quell" and "manage" the
gold price after the Washington Agreement; (5) the manner and
means by which gold reserves of the IMF are currently being employed
in an effort to restrain gold prices; (6) the role played by
the ESF in manipulating gold prices; and (7) the official support
being given to Morgan, Chase, Deutsche Bank and perhaps other
bullion banks to enable them to maintain and enlarge their huge
volumes of gold derivatives.
90. The total notional amount of gold derivatives
reported by Morgan, Chase and Citibank at June 30, 2000, converted
to metric tonnes at $280/ounce, amounts to 8461 tonnes, slightly
more than the total official gold reserves of the United States.
The year-end 1999 gold derivatives of Deutsche Bank converted
at the year-end gold price of $290/ounce amount to roughly 5000
metric tonnes, or some 1500 tonnes more than Germany's official
gold reserves. Gold derivatives positions of these magnitudes
concentrated in four banks are simply too large and too risky
to represent normal business done in ordinary course.
91. The BIS defendants have knowingly and
intentionally failed to disclose material facts, and knowingly
and intentionally made false and misleading statements of material
facts, with respect to other matters relevant to the proposed
freeze-out of the BIS's private shareholders, including but not
limited to: (1) the critical role of gold prices in determining
the value of BIS shares; (2) the unprecedented practice of trying
to ascribe or assign a monetary value to voting rights in the
BIS; (3) the issuance of new shares to the European Central Bank
and other central banks in 1999 at a price substantially in excess
of the proposed freeze-out price; (4) the proposed redistribution
of the private shares to central banks already holding shares,
including to which banks and at what prices these shares are
to be distributed; and (5) the effect that withdrawal of the
American issue will have on the Fed's participation in the BIS
in view of the fact that it is not a shareholder.
Count 3
(Common Law Fraud and Breach of Fiduciary
Duty)
92. This count runs against the BIS, Alan
Greenspan, William J. McDonough and Morgan, and incorporates
by reference all the allegations of counts 1 and 2.
93. Quite apart from the provisions of the
Exchange Act, count 2 sets forth a claim for common law fraud.
The fraudulent scheme, which is extensive, blatant and intentional,
also involves clear and knowing violations of law, including
the Sherman Act, the Constitution, and Articles 19 and 20 of
the Statutes of the BIS, by all the BIS defendants. Accordingly,
punitive damages are fully warranted against each.
94. The BIS, Alan Greenspan and William J.
McDonough have also breached their fiduciary duty to the plaintiff
by issuing new shares in the BIS at less than full net asset
value. Whatever argument might be made in favor of issuing a
few shares at low prices to new central banks to encourage them
to join the BIS, a nominal amount of shares would be sufficient
for this purpose. Issuing more than a nominal amount of shares
to the European Central Bank, which is basically an association
of major central banks that are already members of the BIS, or
to other central banks constitutes unwarranted and unjustified
dilution.
Count 4
(Constitutional Violations)
95. This count runs against the BIS, Alan
Greenspan, William J. McDonough and Lawrence H. Summers, Secretary
of the Treasury, and incorporates by reference all prior allegations
in so far as relevant.
96. Since 1994, Alan Greenspan and William
J. McDonough have served as directors of the BIS, assuming the
two seats on its board allocated to the American issue. So far
as can be determined from the public record, neither of them
has been authorized so to serve by Congress, the President or
the Secretary of State.
97. The
monetary provisions of the Constitution grant to Congress sole
and exclusive power to determine the gold value of the dollar.
"The Congress shall have power ... To coin Money, regulate
the Value thereof, and of foreign coin." U.S. Const., Art.
1, s. 8, cl. 5. "No State shall ... coin Money; emit Bills
of Credit; make any Thing but gold and Silver Coin a Tender in
Payment of Debts." U.S. Const., Art. 1, s. 10, cl. 1.
The Supreme Court has refused to decide whether
Congress may constitutionally sever any meaningful link between
the dollar and gold or silver, i.e., whether the U.S.
monetary system in place since the closing of the gold window
in 1971 is constitutional. But quite apart from this issue, if
there is to be a link between the dollar and gold, the Constitution
vests in Congress exclusive power to define it. This determination
does not and cannot rest in the uncontrolled discretion of the
Fed or the ESF, particularly when that discretion is exercised
in secret and away from public view.
98. In his letter of January 19, 2000, to
Senator Lieberman, Fed Chairman Greenspan conceded: "Most
importantly, the Federal Reserve is in complete agreement with
the proposition that any such transactions on our part, aimed
at manipulating the price of gold or otherwise interfering in
the free trade of gold, would be wholly inappropriate."
Similarly, various officials working under the Secretary of Treasury,
but not Secretary Summers himself, have purported to deny that
the ESF has intervened in the gold market. Although these denials
do not reflect the truth, they do reflect actual knowledge that
any such interventions would be and are illegal and unconstitutional.
99. Because the Fed cannot conduct any monetary
policy that violates the Constitution or laws of the United States,
neither can the BIS when the Fed, with or without proper U.S.
authorization, is a participant in its activities. Coordinating
the London Gold Pool from 1961 to 1968 to maintain official gold
parities established by law and international treaty is one thing.
Recreating a similar operation in today's free gold market is
quite another, particularly when that operation is used as a
means to circumvent the Constitution and thus also constitutes
a violation by the BIS of Article 19 of its Statutes.
100. These four defendants have conspired
in a scheme which is directed, among other things, at taking
the plaintiff's six shares of the American issue of the BIS without
paying him fair value therefor or granting him due process of
law in connection therewith.
Relief Requested
Wherefore, the plaintiff requests the following
relief:
(1) A permanent injunction enjoining Alan
Greenspan, William J. McDonough, their subordinates and their
successors in office, and the Secretary of the Treasury, acting
through the Exchange Stabilization Fund or otherwise, from intervening
in the gold market, directly or indirectly, for the purpose of
affecting or with intent to affect gold prices;
(2) A permanent injunction enjoining J.P.
Morgan & Co. Inc., Chase Manhattan Corp., Citigroup, Inc.,
Goldman Sachs Group, Inc., and Deutsche Bank AG, or any of their
officers, employees, agents or subsidiaries, from manipulating
or trying to manipulate gold prices, directly or indirectly,
on the Commodities Exchange in New York or elsewhere;
(3) An order directing Alan Greenspan and
William J. McDonough to resign forthwith as directors of the
Bank for International Settlements, to withdraw their designations
of alternates to serve in their absence, and to refrain from
any further participation in its affairs or activities;
(4) An order directing the Bank for International
Settlements to redeem and cancel all shares of its American issue,
including the six shares owned by the plaintiff, paying for each
share in gold an amount equal to its net asset value in gold
francs, plus an appropriate amount for goodwill;
(5) An award of damages to compensate for
the decrease in the gold franc value of the plaintiff's shares
of the American issue of the Bank for International Settlements
resulting from the illegal manipulation of gold prices by the
defendants;
(6) An award of damages to compensate for
the decreased dividend payments received by the plaintiff on
his depositary shares of Gold-Denominated Preferred Stock, Series
II, of Freeport-McMoran Copper & Gold, Inc., resulting from
the illegal manipulation of gold prices by the defendants;
(7) An award of treble damages, costs and
attorneys' fees on the plaintiff's price fixing claims;
(8) An award of punitive damages on the plaintiff's
common law fraud and breach of fiduciary duty claims;
(9) Such other relief as the Court may deem
appropriate.
Demand for Jury Trial
The plaintiff demands trial by jury for all
issues so triable.
By the plaintiff,
/s/ Reginald H. Howe
________________________
Reginald H. Howe, Pro Se
e-mail: row@ix.netcom.com
December 7, 2000