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New York Times Attacks Expert Who Opposes `Speculation' Lawsuits

Dec 30 2013, 12:31pm CST | by

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New York Times Attacks Expert Who Opposes `Speculation' Lawsuits
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New York Times Attacks Expert Who Opposes `Speculation' Lawsuits

The New York Times had an expose Friday about academics who — stop the presses! — supplement their university salaries by doing consulting work on the side. The problems with this story by reporter David Kocieniewski have been amply described by Felix Salmon over at Reuters (among other things, the Times reporter buried the fact that a University of Illinois expert highlighted in the story doesn’t even work for the business school that received all that tainted commodities-exchange money).

As I read Kocieniewski’s story, however, I was thinking of something else. His attack on University of Houston Professor Craig Pirrong seemed so strident, so highly engineered, that it resembled something I might hear in the courtroom — or maybe coming out of the mouth of a lawyer or public-relations person trying to undermine a witness in an important case.

Pirrong’s views aren’t all that controversial if you believe in free markets, and are skeptical that any one person or firm can manipulate the prices of widely traded commodities like oil, natural gas or aluminum. But they are infuriating to populist politicians who want to blame everything that goes wrong in the economy on greedy international bankers — and lawyers who make millions off of class actions designed to play on similar sentiments with potential jurors.

So I did some poking around. Kocieniewski’s last expose was a virtually indecipherable (to me, anyway) piece in July about how the vampire squids at Goldman Sachs were manipulating the price of aluminum by moving it around in warehouses the bank controlled in Detroit. Once again, the reporter left out some information readers might find illuminating, including the fact that aluminum prices fell steadily during most of the time he described, from a peak of $1.20 per pound in May 2011 to a current price of less than 80 cents, according to Kitco. Whoever was making money on aluminum, it wasn’t the people who stored it in warehouses over that time period hoping prices would rise. (Aside: Goldman made money the old-fashioned way, by charging rent, just as commodities giant Cargill discovered in the late 1800s after losing its shirt trading grain in the pits of Chicago.)

I remember thinking then that the article read like the kind of thing lawyers throw a reporter’s way before they file suit, just to prime the pumps of public opinion. And sure enough, less than two weeks later Superior Extrusion filed a class action in federal court in Michigan against Goldman and the London Metals Exchange, mirroring the allegations we’d read in the Times piece. Behind that lawsuit was the New York firm Lovell Stewart Halebian Jacobson, which describes itself as “the premier class action law firm for prosecuting claims involving commodity price manipulation and price fixing.”

The aluminum lawsuit is only slightly more comprehensible than the Times story that preceded it. It at least acknowledges that aluminum prices fell during most of the proposed class period from February 2010 to July 2013. It accuses Goldman and the LME of profiting anyway, by storing excessive amounts of aluminum in Goldman’s Detroit-area warehouses and dribbling it out onto the markets at artificially low rates.

This is an old, familiar story. Remember the Soviets railing against “speculators” who hoarded grain and caused famine to spread across Russia? Apparently Goldman was doing the same thing in Detroit, partly by offering a $250 per ton “incentive” for aluminum dealers to use its warehouses. How that squares with Goldman making monopoly profits on its rent isn’t explained, since “incentive” means the same thing as “discount.”

The lawyers do have an explanation for why all that stockpiled aluminum didn’t just draw in metal from other parts of the country. After all, in a modern economy, things called trucks and trains can haul commodities to a market with an excess of demand, just as long as the price premium in that market exceeds the cost of transportation. Ah, but Goldman was smarter than that. By running its scheme, which somehow involved shuttling aluminum from warehouse to warehouse within Detroit, it inspired warehouse owners in other cities like Baltimore to do the same thing.

The key piece of evidence: Aluminum in storage in warehouses outside of Detroit only fell 50% during the economic recovery, from the huge inventories that built up during the financial crisis, while the lawyers at Lovell Stewart Halebian believe it should have fallen more. Meanwhile aluminum stocks actually rose in Detroit.

“This large contra-economic trend increase has restrained and trapped such a large portion of the available U.S. supplies of aluminum that it has been inflating aluminum prices since 2010,” the lawyers say, leaving to the readers’ imaginations how much more than 33% prices should have fallen amid a recovering economy and reborn auto industry in Detroit.

To prosecute such a lawsuit, you need economic experts. The simple phrase “inflating aluminum prices since 2010″ will probably require  a million dollarsworth of academic research, from the type of professor the Times excoriated in its piece last Friday. The defense will need experts, too.

Enter Pirrong. While the Times used a Freedom of Information Act request to uncover Pirrong’s relationships with financial firms, it could have just tried Google. Here’s Pirrong in 2008, testifying before U.S. House Committee on Agriculture about the influence of “speculators” on commodities prices. In a nutshell: He doesn’t see much influence. But he discloses in the third paragraph that he has “served as a consultant for several exchanges,” including designing commodities futures contracts. Busted.

More interesting is this bit of work Pirrong did a few years ago for corporate defense lawyers at Skadden, Arps. Pirrong attacked the theories the Federal Energy Regulatory Commission used to pursue Energy Transfer Partners for allegedly manipulating gas prices in Texas. His work may have helped ETP reduce the fines it paid FERC, to $30 million from the FERC’s original demand of almost $200 million. It also may have helped convince the judges at the Fifth Circuit Court of Appeals in New Orleans to chuck out a private class action against ETP based on similar claims in 2010. The lawyers on that case? Lovell Stewart Halebian. (Other cases include a lawsuit by investors who felt burned by selling Facebook shares in the IPO, which have now almost doubled. And a $77 million settlement of claims that Amaranth Advisors manipulated gas prices in 2006, shortly before it drove itself into insolvency with bad bets on gas.)

Don’t be surprised if you see this firm filing another blockbuster lawsuit against the banks for manipulating commodities prices soon. But when you read about it in the Times, ask yourself the questions I always ask. If the speculators are so good at driving up prices, why can’t they keep them there? And what about speculators who short commodities in hopes of driving prices down? Are they less skillful? Or just less exciting to sue?

And always remember, most commodities trading is a zero-sum game. For somebody to win, somebody else has to lose. Reuters recently reported that Rusal, the world’s largest aluminum producer, is mulling legal action to stop the LME’s reforms designed to stop the abuses the Times wrote about in July, shortly before Lovell Stewart Halebian filed its lawsuit in August. Rusal’s complaint? The reforms would flush so much aluminum out of warehouses onto the market that it would drive down already depressed aluminum prices.

No doubt the academic experts are licking their chops over that one.

Source: Forbes


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