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NEW YORK (Reuters) - Federal regulators and aggrieved investors face an uphill battle to prove allegations that two of the biggest silver trading firms are manipulating the market, if history is any guide.
On Wednesday, JPMorgan Chase & Co and HSBC Holdings Plc were hit by two complaints from traders accusing the banks of conspiring to drive down silver prices. They claimed that the firms reaped up to hundreds of millions of dollars of illegal profits.
The lawsuits are likely to highlight the challenges faced by the Commodity Futures Trading Commission, which has put fighting price manipulation and fraud high on its agenda for reforming financial markets. A senior CFTC official has singled out silver.
"The silver markets are international, liquid markets with hundreds of participants engaging in hedging and speculation," said Terrence Martell, director of the Weissman Center for International Business at Baruch College in New York. "It's a complex issue that is not easy to deal with, and that's why there are so few manipulation charges."
Silver has featured prominently in modern commodity market scandals. In the most memorable case, the Hunt brothers of Texas hoarded the precious metal, aiming to corner the market and control global prices starting in the late 1970s.
But the silver market collapsed in 1980 and the Hunt brothers declared bankruptcy. Their losses grew and in 1989 they were convicted of conspiring to manipulate the market.
A more recent comparison was the case between Barrick Gold Corp, one of the world's largest gold miners, and bullion and coin dealer Blanchard & Co, which accused Barrick of manipulating the gold price in league with JPMorgan Chase. Barrick and Blanchard settled the lawsuits they brought against each other in 2005.
HSBC declined to comment on the current case and JPMorgan was unavailable for comment for this story.
The defendant banks, among the world's largest, are by far the biggest U.S. commercial banks participating in precious metals derivative contracts, a report by the U.S. Treasury's Office of the Comptroller of the Currency showed.
Martell, a former chief economist at the Commodity Exchange Inc (COMEX), said traditionally it has been a challenge to differentiate between an intent to manipulate and legitimate commercial activities by banks.
Just the banks' derivatives positions alone are not sufficient to lead to any kind of conclusion, Martell said.
However, Jeffrey Williams, who wrote a book about the Hunt brothers silver manipulation lawsuit and was called an expert witness in that case, said the complexity of the silver futures market could favor the plaintiffs in this case.
"What's common in these cases is that they are extremely complex events over periods of months and years. It's not "who-ran-the-red-light" kind of court cases, and that makes it very difficult for anybody, particularly juries, to understand," he said.
"That tends to favor plaintiffs, I believe. That was true of the Hunt case."
The latest manipulation charges were filed one day after the CFTC proposed regulations to give it greater power to thwart traders who try to manipulate prices.
Commissioner Bart Chilton, known as an outspoken proponent of regulation to protect investors and consumers, said that he believes there had been "fraudulent efforts to persuade and deviously control" silver prices.
"The case is significantly aided by the fact that a commissioner...said that he believed that there were violations to the Commodity Exchange Act in the futures market for silver," said David Kovel, partner at law firm Kirby McInerney LLP.
Kovel said he may be representing a client in the suit.
The CFTC most recently began probing allegations of silver price manipulation in September 2008.
The CFTC must show what has transpired in the market since 2004, when it told silver investors in an open letter that there was no manipulation at that time.
Among those that would claim vindication if the courts rule against JPMorgan and HSBC is the Gold Anti-Trust Action Committee, an outspoken gold advocacy group which lends moral, if not legal, support to anyone claiming that gold and silver prices are artificially lower than they should be.
"I'm sure we have talked to the plaintiffs in the case," said Chris Powell, secretary and treasurer of GATA.
Some conventional investors view GATA as a conspiracy-theory group, with very little evidence to back up its claim that governments, central banks and commercial banks have colluded to keep the price of gold weak.
"The gold bugs have been on this silver manipulation case for some time. The gold bugs are not treated, I think, with all that (much) credibility by the CFTC, and that may have been a stigma attached to this case," Kovel said.
While the CFTC has in the past levied heavy fines for trading rule violations, only once in its 36-year history has it successfully concluded a manipulation prosecution -- in a 1998 proceeding concerning prices for electricity futures.
On the other hand, individual investors were able to receive huge settlements awarded through civil proceedings in commodity manipulation cases.
The latest lawsuits against the banks are reminiscent of the lawsuit against Nelson Bunker Hunt, William Herbert Hunt and Lamar Hunt, the most notorious case in the history of silver manipulation.
One big difference -- the Hunts were buying silver, while JPMorgan and HSBC are accused of selling the metal short using futures and options to hold prices down.
A U.S. jury found that the brothers conspired to fix the prices of silver in 1979-80. During that time the price of silver soared from below $11 an ounce to a record $50.35, then tumbled back to around $11.
Ironically, silver prices have more than doubled since the CFTC first started looking into alleged market manipulation in 2008. On Friday, silver traded at $24.68 an ounce.
"The Hunt Brothers litigation has some similarity to our case, in terms of the allegations of manipulation in the silver futures market. Plaintiffs ultimately prevailed in that case. We hope to hold defendants in our case similarly accountable," said Hollis Salzman, attorney at Labaton Sucharow LLP representing a plaintiff in the case.
The CFTC accused the Hunts of hoarding more than 100 million ounces of silver bullion. Nelson and William Hunt were fined $10 million by the CFTC for attempting to corner the silver markets in 1989.
At the end, the brothers were ordered to pay about $134 million in damages to Peruvian state-owned mining company Minpeco S.A., the plaintiff.
Editing by Alden Bentley and Dave Gregorio