Monday, December 27, 2010

The Decline of Trust: Follow-up to Andrew Maguire post

Earlier this year I blogged about an alleged case of silver manipulation as raised by Andrew Maguire to the CFTC. If you haven't already, I urge you to read that post before continuing on with this post.

I ended my post with a challenge to any serious journalist to properly investigate Andrew Maguire's case. So far I have yet to see anything resembling a real investigation undertaken by the media establishment. While I cannot say for sure why this is given how much of a juicy story the Andrew Maguire case appears to be. I am beginning to see an interesting pattern emerge that may partly explain why this is. I must say that I'm a bit surprised by my own findings, but they are enough for me to draw conclusions.

For a period of time the only newspaper that reported the Andrew Maguire story was the New York Post. You can read the first report here which was first published in March (shortly after Maguire blew the whistle). A follow-up report can be found here. However, a third story was published shortly after I posted my last blog entry which in hindsight is most interesting. You can read it here. What's interesting about the last post is that one week following its original publication, a correction was issue which basically nullified the entire story. Namely, JPMorgan responded by saying there was no investigation to begin with. The correction is posted at the bottom of the story. The NYPost never countered.

Fast forward to October 8th of this year. Reuters reported that CFTC commissioner Bart Chilton had publicly announced that the CFTC was investigating silver manipulation. Oddly, the statement wasn't from the CFTC itself. Rather Chilton felt the public deserved some answers, speaking on his own accord. You can read that story here.

By the end of October, Reuters published a follow-up story reporting that the CFTC was in particular investigating JPMorgan and HSBC for silver manipulation. You can read that story here. This would appear to directly contradict the statements made to the NYPost back in May, that they were NOT being investigated for silver manipulation. JPMorgan declined to comment on the matter.

A day later, Reuters reported the first of at least five class action suits lawsuit filed by investors targeting JPMorgan and HSBC. Here is the article, and here is a scanned in copy of the court filing as filed in the Southern District of New York. About a week later, a second class action lawsuit was filed. You can read the court filing here. A week after that, a third law firm posted a press release announcing they were investigating silver manipulation by JPMorgan and HSBC on behalf of their clients. As a follow-up, Reuters posted another article providing historical context to these cases. The article begins with the obligatory mention of the Hunt brothers, some mention of "gold bugs" and "conspiracies", but no mention of Andrew Maguire himself.

To be fair to the media establishment, on November 3rd Andrew Maguire was mentioned by name in this Wall Street Journal article describing a fourth lawsuit against JMorgan and HSBC. You can read that article here. Apart from that brief mention in the WSJ, most newspapers either leave out mentioning Andrew Maguire by name, or they describe a "London based Metals Trader".

For those that are curious about how the manipulation works, a fifth class action lawsuit was just launched on December 28th, which describes in detail HOW the manipulation works and how JPMorgan and HSBC profited from it. It also describes WHY they were in a unique position to do so.

Let's pause for a moment and ask some questions. Why is it that only the NYPost originally reported on the story? Why didn't NYPost continue to follow the story they claim to have broken after it developed? Why doesn't Reuters mention the name of Andrew Maguire? Why doesn't the WSJ and Reuters print or mention the original e-mail transcript of the correspondences by Andrew Maguire to the CFTC? Is this just a one-off oversight?


But around the same time Bart Chilton's announcement was made, another interesting and related story came to light. Namely, The Washington Post reported that one of the two CFTC judges (Judge Painter) had announced his retirement and that he had issued an Order requesting that all seven of his open cases NOT be transferred to the other CFTC judge, Judge Levine. I have quoted the key paragraph of the one page order (which you can read here) below so you can see for yourself:

There are two administrative law judges at the Commodity Futures Trading Commission: myself and the Honorable Bruce Levine. On Judge Levine's first week on the job, nearly twenty years ago, he came into my office and stated that he had promised Wendy Gramm, then Chairwoman of the Commission, that we would never rule in a complainant's favor. A review of his rulings will confirm that he has fulfilled his vow. Judge Levine, in the cynical guise of enforcing the rules, forces pro se complainants to run a hostile procedural gauntlet until they lose hope, and either withdraw their complainant or settle for a pittance, regardless of the merits of the case. See Michael Schroeder, If You've Got a Beef With a Futures Broker, This Judge Isn't for You - In Eights [sic] Years at the CFTC, Levine Has Never Ruled in Favor of an Investor, Wall St. J., Dec. 13, 2000, at A1 (copy attached).

In the last sentence of the previous paragraph, Painter cites an article that appeared on the front page of the Wall Street Journal back in 2000. You can read that article following Painter's Order here. It is a well researched investigation into the conduct of Judge Levine and sure enough does raise some important and relevant questions. It's not entirely one sided, but it does put Levine on the defensive. You would not be unreasonable to think the Wall Street Journal would publish a follow-up article vindicating their original investigation. Right?

Wrong. The Wall Street Journal has taken an entirely different and rather underhanded tack. Namely, Sarah Lynch penned an article which is a blatant smear on Judge Painter, describing him as a mentally ill alcoholic who would sleep at work and who was a failure in his private life. Sandwiched in the middle of the article we find a very brief mention of Painter's Order against Levine, which is immediately followed by "Judge Levine declined to comment, but a former colleague defended Judge Levine's record and said he is fair." The article continues to smear Painter to the very end quoting a doctor that diagnosed him with "cognitive impairment, alcoholism and depression". The tone and content is more in line with something you might read in The National Enquirer or US Weekly. The article seems highly uncharacteristic and rather beneath a newspaper like the Wall Street Journal with such a distinguished history.

Reading Lynch's WSJ article after reading Schroeder's original investigative article and the recent Washington Post article left me feeling stunned. The only thing I will say in the article's defense is that it does help to explain why Painter kept this to himself for so long. I suspect his enemies were holding a grenade over his head, and clearly they've pulled the pin.

I am not the only person who noticed this miscarriage of journalism. Barry Ritholtz was equally disgusted and contacted Sarah Lynch for an explanation. Lynch response was summarized as:

Lynch wrote back to note she did a story on the judge last Friday, but it ran on newswires but was not picked up by WSJ. (Reporters have no control over those editorial decision). The current article is a follow up to that prior piece.

This would all suggest that Lynch's article was taken out of context and something immoral is going on within the higher ranks of the WSJ with respect to reporting around the CFTC and the silver manipulation story.


I recently went to see the movie "Inside Job". The film documents the reasons that led up to the 2008 economic meltdown, the impact it has had so far, and why nothing has substantially changed in terms of policy and regulation. What surprised me was how interconnected the corruption is. There is no grand conspiracy of the sort you might think is required to fake the moon landing, or plan 9/11 as an inside job. Rather, the conspiracy is of incentives and motives which readers of Freakonomics will quickly recognize.

The movie describes the interconnectedness between the big investment banks (e.g. Goldman Sachs, JP Morgan, Morgan Stanley, etc.), the Federal Reserve, the government executive branch (both Bush and Obama), the government regulators (i.e. SEC and CFTC), the rating agencies (i.e. Moodys, S&P, and Fitch), and even the prestigious business schools (e.g. Harvard, Columbia, Wharton, etc.). On that last one, I have to admit I never realized that so many business professors were on the payrolls of these banks. Actually, they're usually not on a direct payroll, but rather work as consultants through intermediaries like Analysis Group. Inside Job argues that influence into academia is so pervasive that most of these school's curriculum has morphed to reflect the will of the banks, and tends to be very negative in view of regulation.

In light of this I would argue then that the media establishment, which has become highly consolidated is also susceptible to the same conspiracy of motives that has adversely influenced some of the world's most respected economic professors. In this blog post I have attempted to present evidence supporting my theory.

Newspapers like the Wall Street Journal are generally regarded as pillars of the fourth estate. I no longer believe the WSJ should be trusted and I'm sure others feel the same way. Since 2008, trust in governments, banks, rating agencies, business schools, and the media has been in steady decline. This is not good for any society.

I don't believe there is any silver bullet to resolve this. However, by continuing to shine as much light on media biases I believe it is possible for us through Citizen Journalism and other forms of grass roots reporting to get out of these dark days, hold the media to account, and in turn hold the government, banks, and corporations to account. Looks like an uphill battle, but I'm an optimist.