Sunday, November 17, 2013

An Analysis Of The CME's Comex Gold/Silver Inventory Report Legal Disclaimer

The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only.   - CME legal disclaimer placed on the Comex daily gold and silver warehouse stock reports
I wanted to elaborate on Friday's post to make it crystal clear to everyone WHY the CME suddenly slapped that disclaimer on the Comex gold/silver warehouse inventory reports.  It seemed to me that the CME might be liable for legal claims - when the Comex ultimately defaults - which seek damages based on the argument that the Plaintiff relied on the CME reports in making a decision to invest in a gold/silver futures contract prior to the date that the disclaimer first appeared.

What I'm really trying to ferret out here is exactly why the CME waited five years after acquiring the Comex before applying the disclaimer to the inventory report.  My assessment is that, per my article Friday, given the extreme decline in gold inventory on the Comex the beginning of the year, the CME - by invoking the disclaimer - is worried about the reliability of the gold/silver inventory reports.  Recall that the reports are generated based on paper reports submitted by banks who operate the Comex vaults.  In other words, the CME is relying on the reliability of these reports without actually verifying that the content of the reports is based on a provable fact - i.e. that the inventory reported by the banks exists as reported without doing an independent physical audit to verify that the reports are legally valid.

As it turns out, based on Federal Rules of Civil Procedure (FRCP), even though the CME waited 5 years before invoking and applying the disclaimer on the inventory reports, the CME has for all intents and purposes legally insulated itself for any legal claims that may arise from publishing the inventory when the Comex defaults and has shifted the burden to the individual vault operators who submit the data that the reports are based on. I called on a friend and colleague who is one of the sharpest attorneys I have ever met to give his assessment of the timing of the CME's application of the inventory report disclaimer:
The disclaimer language at issue appears to be tailored specifically not only to forestall ALL fraud cases based on that element, but to do so at the pleading stage of the case, i.e., BEFORE THERE IS ANY DISCOVERY OF THE DEFENDANT'S DOCUMENTS AND INFORMATION, by way of a dismissal under [Federal Civil Rules of Procedure] 12(b)(6) or the State court equivalent.

One of the trickier elements in a civil fraud case (criminal is slightly different on this point) is proving that you reasonably relied on the misrepresentation at issue, meaning you did in fact rely on it, and that your reliance was reasonable (an objective standard to winnow out idiotic plaintiffs).  The intent behind the disclaimer is to provide a legal override of such facts, like a trump card.
Federal Civil Rules of Procedure 12(b)(6) allows a defendant to ask a judge to dismiss the lawsuit before any real litigation takes place based on a "failure to state a claim even accepting all facts stated in plaintiff's complaint as true."  In order to compel a judge to deny the Defendant's motion to dismiss under this Rule, the Plaintiff must show that it's possible for him to prove a set of facts in court that shows he is legally entitled to the "relief " (damages from investing in this situation) requested in the legal claim because he bought Comex futures in reliance on the truthfulness of the CME Comex inventory reports at the time he made the investment. As my friend states:  "the intent behind the disclaimer is to provide a legal override of such facts, like a trump card" - which leads to the Defendant's argument that the Plaintiff failed to state a claim.  As applied to the CME situation, the Plaintiff will fail in its pursuit in damages against the CME.

Think about what FRCP 12(b)(6) requires if someone were to go after the CME because they bought a gold futures contract in May 2013 - before the disclaimer was slapped on the Comex gold inventory report - expecting to stand for delivery of the gold at contract expiry.  The Comex defaults.  The Plaintiff (person who bought the contract) files a claim against the CME for fraudulent misrepresentation because the Plaintiff relied on the Comex gold inventory report published by the CME in making his decision to get long the contract on the basis that the Comex had enough gold to make on the delivery of the gold. 

You see the problem here in satisfying the requirement under FRCP (or State-equivalent) 12(b)(6)?  The Plaintiff has to produce evidence showing several things, including some kind of proof that shows beyond reasonable doubt that his decision (the "claim") was made specifically with reliance on the CME/Comex report before the disclaimer was slapped on it.  In order to satisfy that a bona fide claim has been stated under the Rules of Evidence requirement,  it would minimally have to be something like a dated journal entry with a date-stamp on it and a witness affidavit that testifies that the witness watched the plaintiff make the journal entry on the date as shown. Even that would be questionable.  The only thing I can think of that would satisfy this would be to write yourself a memo and mail it to yourself in order to get a postal stamp on the envelope and leave the envelope sealed.  Anyone ever go to this length before executing a trade?

It is clear to me, and to my friend who is an attorney, that the CME's lawyers determined it was necessary at this point in time to invoke the disclaimer because the risk of fraud is clear and present with regard to the reports being submitted by JP Morgan, HSBC and Scotia in relation to the extreme and unprecedented rate of decline in the reported Comex gold and silver inventory.  And this particular disclaimer gives the CME a shield of legal protection that extends all the way back to its date of acquisition.

The bottom line here is that it is highly probable that the real inventory that is sitting in the gold and silver vaults of JP Morgan, HSBC and Scotia is quite a bit less than the inventory being reported in the daily stock reports.  This conclusion, of course, is consistent with the type of fraudulent behavior for which these banks have already been  successfully prosecuted and/or forced to settle.  What it implies is that the Comex may indeed be closer to default than any of us can possibly understand.   In this context, and notwithstanding Ted Butler's dismissal of this matter, it is clear that CME is concerned enough about this possibility and was compelled to invoke a powerful  legal shield from liability in order to evade the potential legal liability to which its member banks will be exposed.  It is also clear that business entities that rely on the Comex as a source of safekeeping and of deliverable physical gold are taking an increasingly large amount risk in relying on the Comex for this purpose.

25 comments:

  1. Excellent research, Dave. This is the best analysis of this important issue, and clear symptom of an impending crisis, that i have seen.

    Well done, and thanks.

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    1. Thanks for the feedback - appreciate it

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  2. It stands to reason that this band of thieves know exactly what they are doing.
    How appropriate to design 3 letters to correctly describe ones intentions and actions > CME = Crime Made Easy.

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  3. To begin with, Butler's intransigence in regards to the obvious criminal manipulation at the Comex is consistent and hardly surprising.
    "In an article posted March 18 2010 on SilverSeek.com "Its the Message, Not The Messenger", high profile silver maven Ted Butler expresses his profound regrets for his expected non-appearance at the much heralded CFTC hearings on gold and silver position limits on March 25. Apparently Butler, who has tirelessly advocated his crusade against the manipulation of the precious metals markets for the better part of three decades has been hamstrung by allegations of financial impropriety for his 1984 involvement "in an incident involving orange juice futures" during his tenure as broker at Drexel Burnham Lambert."
    Though the source of much expectation and anticipation, the expected and to some, inevitable CRIMEX default, appears to me somewhat dubious at best. Your excellent and rigorous analysis of the potential legal implications of such only confirms that signal event is at the very least certainly not imminent and perhaps no foregone conclusion. It will take considerable international pressure on both the CRIMEX and the LBMA to effect any substantial damage to the cartel, a process however that seems well underway. Yet given the seemingly endless capacity for the evasions of captured regulatory agencies as well as the complete absence of congressional oversight regarding the series of institutional defaults such as MF Global, Knight Capital etc..why are we tho think that the criminal shenanigans and naked short selling are any different?
    http://kushmonster.blogspot.com/2010/03/in-article-posted-march-18-2010-on.html

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  4. Excellent work as usual Dave. Now how to expedite a complete bona fide audit of the Comex inventory? Regards.

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  5. Thanks Dave. appreciate the effort and staying on top of this issue.

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    Replies
    1. Dave makes Sherlock Holmes look like Jeff Spicoli (Fast Times at Ridgemont High).

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    2. Nice comment Marcus! Thanks! I love Spicoli. Sean Penn's greatest character.

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  6. Fabian Calvo who in my humble opinion is a upright guy, describes how America is being looted and explains how the very wealthy are procuring hard assets prior to the dollars eventual devaluation.
    http://usawatchdog.com/end-of-the-road-rush-to-hard-assets-fabian-calvo/

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  7. Distinguished Jurist Lecture: Hon. Jed S. Rakoff, “The Paucity of Criminal Prosecutions Arising from the Financial Crisis: Unaccountable?” Time: 4:30 PM – 5:30 PM

    November 19, 2013

    Location: Silverman 245A, Bernard Segal Moot Court Room

    Reception to follow. Open to the public.

    Many people believe the financial crisis from which we are still suffering was the product, not just of mistakes and wrong guesses, but fraudulent practices and misrepresentations. Yet few if any high-level executives associated with these alleged misdeeds have been criminally prosecuted. Bringing to bear his combined experience as a former federal prosecutor, former white collar criminal defense lawyer, and (for the past 18 years) experienced federal jurist, Judge Rakoff suggests that the paucity of such prosecutions may be tied, not just to the facts of any given case, but to disturbing trends in federal regulatory and prosecution policies over the past decade and more.

    http://www.ritholtz.com/blog/2013/11/the-paucity-of-criminal-prosecutions-arising-from-the-financial-crisis-unaccountable/

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  8. Why Does the Media Ignore Timothy Geithner’s Disastrous Leadership of the NY Fed?

    By William K. Black
    (Cross posted at Benzinga.com)

    Remember nine months ago when Timothy Geithner assured us that it was “extremely unlikely” he would take a position on Wall Street?

    The media meme when Geithner announced that he was stepping down as Treasury Secretary and taking a position as a “senior fellow” with the Council on Foreign Relations (CFR) was what a superior human he was for not taking a job with Wall Street. The “extremely unlikely” (to no one’s surprise) was announced nine months later. The private equity firm Warburg Pincus has hired Geithner as its President.

    “The unusually low-key announcement — made with little fanfare on a Saturday morning — is Mr. Geithner’s first foray into the private sector in 25 years, after serving in the Treasury Department, the International Monetary Fund and the Federal Reserve Bank of New York.”

    The IMF and the NY Fed are far more private than public and they both exist primarily to serve banks. They NY Fed is owned by the private banks it supposedly examines and supervises and the banks elect bankers to act as the NY Fed’s directors (including until very recently the supposed “public interest” directors). They are not subject to U.S. government caps on pay, and in the case of the IMF the employees have their pay increased to compensate for the U.S. taxes they are supposed to pay (which Geithner did not pay for many years). Geithner’s disastrous “public service” at the NY Fed and the IMF made him a multi-millionaire at great cost to the public.

    http://neweconomicperspectives.org/2013/11/media-ignore-timothy-geithners-disastrous-leadership-ny-fed.html#more-6924

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  9. JPMorgan and Bloomberg News: Leading Wall Street’s Blundering Herd

    This is just the latest example of arrogance run amok on Wall Street today; the theory being that unlimited wealth permits one to do what one damn well pleases and the lawyers and public relations teams will mop up the residue.


    http://wallstreetonparade.com/2013/11/jpmorgan-and-bloomberg-news-leading-wall-street%E2%80%99s-blundering-herd/

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  10. Treasury Printing of One Hundred Dollar Bills Exploding


    Not only did the total value of currency printed in 2012 triple compared to 2002, but the majority of the increase was solely due to the printing of our famous American -- Benjamin Franklin. In 2012 of the total $358 billion printed in Federal Reserve Notes, the $100 bill accounted for $303 billion, or 84% of this amount.[...]

    The huge increase in the printing of the $100 bill this past decade coincides nicely with the massive increase of U.S. Govt debt and Federal Reserve policy of QE monetization.

    http://www.economicpolicyjournal.com/2013/11/treasury-printing-of-one-hundred-dollar.html

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  11. Do you think the increase in QE/Money printing is causing stress in the repo collateral market and thus a reach for gold collateral? More leasing means more pressure on gold and draining of physical stocks if gofo goes negative? Thoughts?

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    1. I'm going to write a blog about all that - stay tuned

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    2. Great! I may be biased, but I think collateral stress by the bullion banks is the elephant in the room.

      And I find it extraordinary that investors do not notice that the gold price is presently defined by a market which operates using around 90 to 1 leverage ratio--or higher?. If you you don’t watch the repo market, basis and cobasis then you won’t see the stresses in the repo market which causes selling pressure on gold through bank gold leasing, swapping and rehypothecating.

      The more I study this situation, the more mind-boggling it becomes. Some days I wonder if gold opens $1,000 higher. THIS will not end well.

      My questions: Why did Germany do a massive U-turn and demand its sovereign Gold reserves from the NY Fed?

      Why did the Fed say it would take seven years to return the gold? (I can guess.)
      Is it sustainable for nigh almost all this year's physical Gold mine supply to have been delivered through one small future market in Shanghai?

      Paul Mylchreest has done a bit of work on gold and the repo market.

      Also, search Alhambrapartners.com research blog on Gold, GOFO and REPO

      Here is a research piece on rising GOFO rates preceeding every major gold smackdown this past year.

      http://www.alhambrapartners.com/2013/10/21/gold-and-collateral-appear-tied-to-now-faded-debt-ceiling-drama/

      Look forward to your work. Let me know if you need any info.

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  12. I ran across this theory on silver which came out a couple of years ago. It does have a
    certain ring to it :

    Submitted by SD Contributor Marshall Swing
    IT’S ABOUT TIME FOR ME TO WRITE MY PIECE ON $15 SILVER AND $500 GOLD, I THINK.

    IT SEEMS QUITE OBVIOUS THAT SOME PEOPLE GET INTO THE MARKET NOT HAVING THE STRENGTH TO WITHSTAND THE VOLATILITY EVEN THOUGH WHAT DREW THEM IN WAS THE LOGIC BEHIND THE PM STORY AND ITS VALIDITY IN TIME OF HYPERINFLATION AS A STORE OF WEALTH.

    WHEN SILVER IS $500-$1000 THOSE WHO SOLD AT $26 WILL BE SORRY BECAUSE THEY WILL HAVE NOTHING IN THE END AFTER THE CRASH…

    IT DOES NOT MATTER WHAT HAPPENS WITH THE WORLD’S ECONOMY, LIKE SOME ARE TALKING, (SUCH AS FABER), ABOUT COMMODITIES CRASHING WITH THE SLOWDOWN IN THE GLOBAL ECONOMY. WHEN THE WEALTH OF THE WORLD RUSHES INTO GOLD AND SILVER WHEN THERE IS NOTHING LEFT IT WILL NOT MATTER THAT PM WEALTH MIGHT HAVE DEVALUED 50-75% IN THE CRASH.

    FAKE WEALTH WILL STAY DOWN WHILE REAL PM WEALTH WILL SOAR.


    IF SILVER IS $15 AT THE BOTTOM AND $1000 AT THE TOP THEN THAT IS 6,700% JUST BASED ON TODAY’S MATH.


    BUT IF THERE IS THE GREAT DEFLATION THAT I THEORIZE, THEN WHAT WAS $1000 GOES TO NOTHING SO WHAT BECOMES $1000 IS ACTUALLY MANY, MANY MULTIPLES OF THAT $1000 AS COMPARED TO THOSE WHO HAVE NOTHING.


    THAT IS MULTIPLYING 1000 TIMES NOT JUST 67 TIMES IN RESPECT TO THOSE WHO HAVE NOTHING AND THE COMING REVALUATION OF THE WORLD WEALTH IN TERMS OF AN ASSET BACKED TRADE SYSTEM OF CURRENCY (SDR).


    SO $15 SILVER OUNCE AT THE BOTTOM IS REALLY $15,000 IN TERMS OF RELATIVE WEALTH, IF MY LOGIC IS CORRECT.


    CATCH MY DRIFT?

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  13. "Unless Congress acts, during the last week of December an estimated 1.3 million people will lose access to an emergency program providing them with additional weeks of jobless benefits. A further 850,000 will be denied benefits in the first quarter of 2014.

    Congressional Democrats and the White House, pointing to the sluggish recovery and the still-high jobless rate, are pushing once again to extend the period covered by the unemployment insurance program. But with Congress still far from a budget deal and still struggling to find alternatives to the $1 trillion in long-term cuts known as sequestration, lawmakers say the chances of an extension before Congress adjourns in two weeks are slim."

    http://www.nytimes.com/2013/11/18/business/extension-of-benefits-for-jobless-is-set-to-end.html?nl=todaysheadlines&emc=edit_th_20131118&_r=1&

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  14. Dave, I wish that they can interview you at King World News. Hopefully, they will contact you for an interview. Your articles are great and filled with great research.

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    1. Thanks for the feedback! I really appreciate it.

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  15. Just a few observations from me, nothing more...

    During the dot com and housing booms/bubbles, Wall Street and all of the financial know-it-all professionals sang praises concerning these investments. Those who raised warning flags or blogged of a crash were called chicken little types who knew nothing of modern finance. Only after the bubbles burst were the bloggers vindicated while the financial know-it-alls tried desperately to talk up the recovery of these investments, which never happened and likely will never happen for a few decades to come.

    Now we turn out attention to gold.

    The financial pros on Wall Street come up with every argument under the sun to bash gold while trying to pass off their overpriced stocks as the go-to investment.
    A few of us who are actually paying attention to the recent past events, and note the success rate of these financial pros, we soon realize that a monkey throwing darts at a list of stocks has an equal if not better chance of picking winners as these overpaid shills on Wall Street.

    While Wall Street experts (and I use the term 'experts' very, very loosely) tend to call gold a religion.
    Well if gold is a religion then the buying of overpriced stocks is a cult, and a cargo cult at that (shares of miners are the exception since they are nowhere near their all time highs).

    I don't know if we will see the end of the financial world, but we seem to be headed for a Zimbabwe scenario. Zimbabwe's stock market produced the biggest gains of any stock market on the planet, but if a person in Zimbabwe sold all of their stock, the proceeds from the sale might allow them to buy One loaf of bread, provided there was a seller of bread willing to accept Zimbabwe currency.

    It took years for the London Gold Pool to eventually fail, expect it to take a few more years before the CRIMEX, LME and CME to run out of gold.

    Hang on for the crazy ride ahead, its gonna be a doozy.

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  16. Max Kahan sets the gold standard
    The longtime merchant oversees a bare-bones outfit in the diamond district that hauls in millions.


    "In my business, you make it on volume—lots of it," Mr. Kahan said.

    During the past decade, lots of volume is exactly what he had. Between 2003 and 2011, his firm's revenue quadrupled, peaking at just under $1 billion. That reflected the soaring price of gold, which reached more than $1,900 an ounce two years ago and pushed jewelers and most anyone else with gold to sell to Mr. Kahan's door. The 2008 crisis also stoked the fire, as panic-stricken consumers raised cash by selling gold. Kahan's revenue more than doubled that year, even though gold prices didn't rise all that much.

    "Scrap was coming through in a big way," Mr. Kahan recalled.

    But eventually that boom went bust, and with gold prices retreating to about $1,300 an ounce, Mr. Kahan's business is weakening dramatically. Revenue fell by 24% last year and is expected to sink by another 31% this year. Still, it could be worse. Many of his competitors have disappeared in recent years, with employment among diamond-district wholesalers falling by more than half last decade, according to a 2011 study prepared by the industry with the Pratt Center for Community Development and the Fiscal Policy Institute.

    http://www.crainsnewyork.com/article/20131117/FINANCE/311179997

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  17. Hedge Funds Flee Gold

    Nov 19 2013 | 10:58am ET

    Hedge funds scaled back their commodities investments last week, yanking money from gold for the third straight week.

    Net-long investments by hedge funds and other investors across 22 commodities fell by about $18 billion over the three weeks ended Nov. 12, according to the Commodity Futures Trading Commission. That's the largest such drop since February and March.

    Investors pulled more than $4 billion from gold during the week ended Nov. 12.

    http://www.finalternatives.com/node/25334

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  18. Gold Benchmarks Said to Be Reviewed in U.K. Rates Probe

    http://www.bloomberg.com/news/2013-11-19/gold-benchmarks-said-to-be-under-review-by-u-k-as-probe-widens.html

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  19. Venezuela reported planning to pawn its gold through Goldman Sachs
    Submitted by cpowell on Tue, 2013-11-19 18:33. Section: Daily Dispatches

    1:34p ET Tuesday, November 19, 2013

    Dear Friend of GATA and Gold:

    The Venezuela newspaper El Nacional, the voice of that tortured country's political opposition, reports today in the story appended here that, after triumphantly repatriating its gold reserves two years ago, Venezuela has sunk so much economically under its predatory socialist regime that it will raise cash by pawning its gold through Goldman Sachs.

    That gold almost surely will be delivered by Goldman Sachs to the use of the Western central bank gold price suppression scheme.

    Presumably Venezuela's friend China could have bid directly for the gold and apparently didn't, maybe suggesting that China may be glad of the resulting discounting of gold on the international market, especially since the Venezuelan gold well may end up in Beijing anyway after nicekly knocking prices down in its travels.

    The translation below, done largely by Google Translator, is far from perfect but may convey the idea well enough.

    CHRIS POWELL, Secretary/Treasurer
    Gold Anti-Trust Action Committee Inc.

    * * *

    Venezuela's Central Bank to Trade Gold with Goldman Sachs

    http://gata.org/node/13264

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