The long awaited ruling from Judge Lindsay has arrived.  All claims against the Bank for International Settlements (BIS) and the other defendants have been dismissed.

When I received this news, my initial reactions were dismay and disappointment, but I was also surprised.  The wrongdoing by the Defendants appears so clear-cut, and the evidence that has emerged to date so compelling, I wondered how this case could possibly be dismissed?  But then I thought more deeply about this dismissal and my own understanding of the law.

If there is one thing I have learned in my 30-plus years of business experience, there are right and wrong, and then there is the law as it is written and interpreted in America today.  After all, if President Clinton could claim innocence because of ‘what the definition of is is’, who knows what could be possible in a complex case like Reg’s? 

As I started to read the Judge’s ruling, my question was quickly answered.  To put it in non-legal terms because I am not an attorney, the answer is that the Defendants may be guilty, but in the eyes of the court, the law is the law.  Or in other words, Reg Howe may be right, but the Judge denied him the opportunity to pursue these claims.  The reason? 

Reg in the opinion of the Judge does not have ‘standing’.  In other words, the case may have merit, and Reg may have convinced the Judge of wrongdoing by the Defendants.  Indeed, given that the Judge did not say that the factual allegations are insufficient to bring a price fixing case, one can reasonably conclude that the Judge believes Reg’s case has merit.  But regrettably, Reg was unable to persuade the Judge that within the scope of the law that he has ‘standing’.  In essence, the Judge said that Reg is the wrong person to bring this case to trial.

The ruling from the Judge began forthrightly and candidly: “This case involves allegations of ‘an unholy alliance of high public officials’ and ‘large bullion banks’ to manipulate the price of gold. Compl. ¶ 82. The plaintiff, Reginald H. Howe (the ‘plaintiff’ or ‘Howe’), asserts that various combinations of the defendants committed two interrelated sets of wrongful acts: first, that all of the defendants conspired to depress the price of gold; and second, that a subset of the defendants conspired to set an unfairly low price in the mandatory redemption of shares of the Bank for International Settlements (the ‘BIS’).” 

The Judge then describes the aforementioned “wrongful acts” as “factual allegations”.  Having only completed just the first paragraph of a 38-page ruling, I could sense that I had an interesting read ahead of me.  And in fact, my interest perked up considerably in the next section, entitled “Background”.

The Judge began this section by stating: “The facts set forth below are those alleged in the complaint as well as uncontested matters of public record, which have been adverted to by the parties in their papers. Alternative Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1 st Cir. 2001) (noting that a district court properly may consider matters of public record in deciding 12(b)(6) motions to dismiss).  I must accept as true the allegations in the complaint and construe in the plaintiff’s favor all reasonable inferences from those allegations.”  Then through another three pages he lays out in detail key facts that Reg presented in his complaint.

As I read the ruling it became clear that the Judge was not dismissing the case because the allegations were unfounded.  Nor was the Judge saying that the factual allegations made by Reg were insufficient.  To the contrary.  The Judge said nothing negative about the allegations put forth by Reg.  For that reason one can reasonably conclude that there is merit to Reg’s argument that the Defendants committed “wrongful acts”, and perhaps more importantly to the future of this case, that the allegations presented by Reg are sufficient for this case to allege price fixing by the Defendants.

Thus, I didn’t have to wait long to answer my question about how this case could possibly be dismissed.    It was not because the Defendants didn’t manipulate the price of gold.  Rather, the case was dismissed for a reason that I consider to be a technical matter.  The Judge said that Reg did not have standing.

To explain this point, the Judge states: “...there are many participants in the gold and gold derivatives markets who could allege a more direct injury than does the plaintiff.  For example, there are many gold mining companies and private investors in gold (not to mention those central banks with gold reserves) that the plaintiff does not allege to be involved in the conspiracy.  All of these persons or entities would be more directly injured than the plaintiff by a scheme of the kind he alleges.” 

In Judge-speak, there are “more appropriate plaintiffs” than Reg.  And as if his point is not sufficiently obvious, he says further: “…it seems clear that there is sufficient incentive for any of the many gold mining companies or private investors in gold or gold derivatives to bring suit.”

Will the gold industry please stand up?  In this remarkable statement the Judge is giving us here an open invitation for a gold mining company to take over Reg’s complaint and his allegations of price fixing.  Is there a gold mining company out there to whom Reg can pass the baton? 

So the gist of the ruling came quickly, but I’m glad that I continued reading the Judge’s memorandum.  There were some surprises, unbelievable even to my jaded eyes.

For example, one surprise involved the Judge’s statement as follows: “Thus when there is no evidence that Congress intended to subject federal government agencies, officials, and instrumentalities to the antitrust laws – indeed, when all evidence points in the opposite direction – it is inappropriate for a court to infer such an intent.” 

The ghastly conclusion reached by the Judge of this reading of the law is: “For all the reasons set forth above, I conclude that Greenspan, McDonough and the Secretary of the Treasury in their official capacities are not ‘persons’ within the meaning of the antitrust laws. They enjoy the protection of sovereign immunity.”  In other words, they are above the law.  You can only sue them if they first allow you to sue them.  Now where did the Founding Fathers put that clause in the Constitution?

The Judge observes: “All of the relevant case law, as discussed above, indicates that government officials are not subject to the Sherman Act, and both the Federal Reserve and the ESF have statutory authority to trade in gold.”  And therefore to manipulate its price?  Interestingly, the Judge never addresses that thorny issue.

Having read this far through the ruling, it was becoming clear that the Judge was stretching to justify his conclusions.  But the most egregious statement was yet to come in the tortured reasoning offered in the following conclusion: “The seventeen directors of the BIS voted unanimously to adopt the mandatory share redemption plan.  Only two of the directors, Greenspan and McDonough, are defendants in this case.  Given the votes of the other directors, the share redemption would have gone forward regardless of Greenspan’s and McDonough’s votes.”

Aside from the fact that some of the other directors may have voted differently if Greenspan and McDonough had not been able to vote, the issue here is the simple matter of right or wrong.  Theft is not made right just because a preponderant number of directors self-proclaim it to be right.

I stopped reading here.  I only completed 35 pages.  Why go on?  I got the picture.

Clearly, to my mind the Judge was grasping for reasons to throw the case out, and frequently, his twisted logic defies reason.  A gold mining company has standing, but as a shareholder of Freeport Gold’s gold-denominated preferred shares Reg does not?  Then there's the comment that Greenspan and McDonough are only two votes at the BIS, and they would have been out-voted by the other directors anyway.

So Reg loses in court, but he still wins.  Reg wins because this ruling appears so contrived in so many respects, even the most casual observer who chooses to read it will readily understand that this ruling says little about justice, but everything about power.  In the end, this ruling says that the Defendants Greenspan, Summers and McDonough are above the law.  Even the Stuart kings of Britain yearned for such unbridled power.  But this privilege of sovereign immunity does not extend to the other Defendants, which brings up another reason Reg wins.

Reg wins because the court did not say that his allegations were insufficient.  Thus, the Judge practically provides a roadmap that explains how this case can go forward. 

First, the Judge has in effect invited a mining company to take up this case, because he states that a mining company has ‘standing’ and would therefore be an “appropriate plaintiff” under the law.  Second, and perhaps more importantly, the Judge did not say that the factual allegations made by Reg are insufficient to bring a price fixing case.  That opening left by the Judge – which is big enough to drive a Mack truck through – must be making the attorneys for JP Morgan Chase, Deutschebank, Citibank, Goldman Sachs and the BIS very nervous indeed.  None of these banks qualify for the privilege of sovereign immunity.

The upshot is that the Judge is allowing this case to go forward, but only with a different plaintiff, and provided further that Greenspan, Summers and McDonough are not named as Defendants.  And it is not hard to imagine what is necessary to make that event happen. 

There are only two ingredients needed to move this case forward – an attorney well versed in price fixing and a gold mining company.  Here is how I think we could expect to see this scenario develop at a purely practical level.

It would require that the attorney works on contingency, and the gold mining company hires this attorney to bring suit.  I would expect that the attorney would only require payment for out-of-pocket expenses, with the balance of his remuneration coming on contingency if he successfully litigates the case. 

This case could even be a class action suit on behalf of all gold mining companies injured by the price fixing of the named bullion banks.  The claims could easily run into the billions, which would be more than sufficient to attract some of this nation’s top attorneys experienced in litigating price fixing cases.

There are some 10 million ounces of gold mined in the States each year, or some 45 million ounces over the last five years.  I can easily make – and others can as well – the case that gold should be at least $500 per ounce, based on historical valuations and other methodologies that measure gold’s value.  For example, Frank Veneroso’s work shows that gold’s equilibrium price is over $600 per ounce.  But in fact, the average price during the past five years when the alleged price fixing has occurred has only been $288 per ounce.  Even if we just accept a $500 valuation, the potential claims are huge. 

Because of the price fixing, sales revenue of the US gold mining industry averaged $288 ounce instead of $500 per ounce.  At $212 times 45 million ounces, revenue was $9.5 billion less than it would have been if there were no price fixing.  And this value only shows the impact on the US gold mining industry.  There may in fact be an opportunity for non-US gold mining companies to be involved in a class action suit, which considerably expands the scope of the claim.  Using this same methodology, lost sales revenue for the gold mining industry worldwide during this 5-year period approaches $80 billion.

Just a fraction of that amount of money is large enough to attract a first-class attorney specializing in price fixing, and willing to work on contingency.  All we need now is a US-based gold mining company ready to accept Judge Lindsay’s invitation to pursue Reg’s allegations of price fixing. 

OK, gold mining companies.  Which of you will it be?