GATA Lawsuit Page 3
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 reponse 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. |
