Metals Benchmark Pricing and Warehousing Under Further Scrutiny

K&L Gates LLP
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The two major legal issues currently facing the metals industry are benchmark pricing and metals warehousing. We have spoken regularly at industry events and to our clients about both of these topics and a number of you have expressed an interest in being kept up-to-date on developments.

This alert provides a brief update on two recent lawsuits involving the alleged manipulation of platinum, palladium and silver prices, as well as on the expansion of the lead warehousing investigation which has come about in the context of the Exide bankruptcy. These add to the various lawsuits and investigations on both sides of the Atlantic relating to the alleged manipulation of precious metals prices and the warehousing of aluminium and zinc.

Lawsuit regarding platinum and palladium prices
In late January 2015, a lawsuit was filed by metals investors in a New York federal court against a number of banks and a metals producer, accusing them of being involved in a nearly eight-year conspiracy to manipulate and rig the global benchmarks for physical platinum and palladium prices, as well as related financial derivative products.

The lawsuit alleges that the defendants, which participated in twice-daily teleconference calls to set prices for the physical metals markets, shared non-public confidential customer order information in order to glean information about the direction of prices and consequently execute trades in advance of those movements. They are also accused of using the information asymmetry to manipulate and set artificial benchmark prices to their benefit. At least one other private lawsuit (filed in late November 2014) has been brought against the same defendants on these grounds.

We also note that in December 2014, the traditional teleconference price-setting method for platinum and palladium was replaced with an electronic system based on actual transactions instead of banks’ submissions. This is designed to increase transparency and minimise the risks of collusion and manipulation between competitors involved in the price-setting process.

Lawsuit regarding silver prices
In the same week as the platinum and palladium lawsuit, another suit was filed in New York accusing an investment bank of manipulating to its advantage the silver futures market on the Chicago Mercantile Exchange, Chicago Board of Trade and the Commodity Exchange. A trader from the defendant bank is alleged to have instructed his floor brokers to enter artificial spread orders shortly before closing, thus providing inaccurate information to the exchange representative tasked with setting closing spread prices.

Separately, the traditional teleconference method of setting silver prices was also replaced last year (in August) with an electronic alternative. Gold is due to follow suit this March.

Lead warehousing investigation
A committee comprising unsecured creditors of the battery company Exide, which is currently undergoing bankruptcy proceedings, has in the last few weeks pushed for disclosure of documents it considers will assist in its investigation over possible anti-competitive practices relating to lead warehousing.

Last year, the creditors hired an economic consultancy firm to investigate whether there has been price manipulation in the lead market that may have harmed Exide, which uses the metal to make batteries. Exide itself also obtained court permission to engage legal counsel to assist with its own investigation. The creditors have said that their suspicions were sparked by media reports which suggested that the London Metal Exchange and a number of metal warehousing companies may possibly have colluded to drive up lead prices. They argue that, if true, Exide may have suffered harm and therefore have substantial antitrust claims.

In late January, a Delaware bankruptcy judge said he would be open to ordering the various respondent banks and companies to produce some (limited) documents in the creditors’ committee's investigation. We will continue to monitor developments relating to this investigation.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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