Howe v. Bank for Intern. Settlements

• Citation: 194 F.Supp.2d 6
• Decision Date: 26 March 2002
• Docket Number: No. CIV.A. 00-CV-12485-R.,CIV.A. 00-CV-12485-R.
• Court: U.S. District Court — District of Massachusetts
• Parties: Reginald H. HOWE Plaintiff, v. BANK FOR INTERNATIONAL SETTLEMENTS, Alan Greenspan, William J. McDonough, J.P. Morgan & Co. Inc., Chase Manhattan Corp., Citigroup, Inc., Goldman Sachs Group. Inc., Deutsche Bank AG, and Lawrence H. Summers, in his individual capacity, Paul O'Neill, Secretary of the Treasury Defendants.

194 F.Supp.2d 6

Reginald H. HOWE Plaintiff, v. BANK FOR INTERNATIONAL SETTLEMENTS, Alan Greenspan, William J. McDonough, J.P. Morgan & Co. Inc., Chase Manhattan Corp., Citigroup, Inc., Goldman Sachs Group. Inc., Deutsche Bank AG, and Lawrence H. Summers, in his individual capacity, Paul O'Neill, Secretary of the Treasury Defendants.

No. CIV.A. 00-CV-12485-R.

United States District Court, D. Massachusetts.

March 26, 2002.

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Reginald H. Howe, Belmont, Pro se.

Robert J. Kaler, Gadsby & Hannah LLP, George B. Henderson, U.S. Attorney's Office, Boston, Richard M. Ashton, Katherine H. Wheatley, Stephen H. Meyer, Board of Governors of the Federal Reserve System, Washington, DC, John C. Englander, J. Anthony Downs, Goodwin Procter LLP, James R. Carroll, Skadden, Arps, Slate, Meagher & Flom, John D. Donovan, Jr., Ropes & Gray, Christopher R. Dillon, Ropes & Gray, Brian E. Pastuszenski, Testa, Hurwitz & Thibeault, Matthew A. Martel, Testa, Hurwitz & Thibeault, Boston, Jonathan I. Blackman, Mitchell A. Lowenthal, Allyson W. Haynes, Cleary, Gottlieb, Steen & Hamilton, David D. Joy, David S. Cohen, Office of the General Counsel, U.S. Department of the Treasury, Washington, DC, for Alan Greenspan, J.P. Morgan & Co., Inc., Chase Manhattan Corp, Citigroup, Inc., Goldman Sachs Group, Inc., Deutsche Bank AG, Lawrence H. Summers, in his individual capacity, Bank for International Settlements, Treasury, Defendants.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS

LINDSAY, District Judge.

I. Introduction

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").¹ The plaintiff translates these factual allegations into four legal claims against eight defendants:

(1) that all of the defendants violated section 1 of the Sherman Act, 15 U.S.C. § 1;

(2) that Chairman of the Board of Governors of the Federal Reserve System, Alan Greenspan ("Greenspan"); President of the Federal Reserve Bank of New York, William J. McDonough ("McDonough"); J.P. Morgan Chase & Co. ("Morgan Chase");² and the BIS (collectively "the BIS defendants") violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5;

(3) that the BIS defendants committed common law fraud and breaches of fiduciary duty; and

(4) that Greenspan, McDonough, former Secretary of the Treasury Lawrence Summers ("Summers"),³ and the BIS violated the Fifth Amendment of the Constitution by depriving him of property without due process of law.

The defendants have each filed motions to dismiss all of the counts against them on various grounds. These motions and the motion of the United States to be substituted as a defendant for Greenspan with respect to Count 3 are now before the court. For the reasons stated below, I grant all of the motions.

II. Background

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 (1st 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. Id.

Howe describes himself in the complaint as "the proprietor of The Golden Sextant (www.goldensextant.com), an internationally recognized website containing commentaries, essays and analyses relating to gold, and a member of Golden Sextant Advisors LLC." Compl. ¶ 2. He brings this action pro se, as the holder of six shares in the BIS and 1200 shares of Gold-Denominated Preferred Stock, Series II, of Freeport-McMoran Copper & Gold, Inc. Id. In addition to the defendants specifically identified above, he also names as defendants Citigroup, Inc. ("Citigroup"), the Goldman Sachs Group, Inc. ("Goldman"), and Deutsche Bank AG ("Deutsche Bank").

A. The Alleged Gold Price-Fixing Conspiracy

The complaint avers the following with respect to the alleged conspiracy to fix the price of gold.

Gold was long at the center of the international monetary system. From 1792 until 1971, it had an official monetary role in the United States. Compl. ¶ 17. Since the demise of the Bretton Woods system in 1971, however, gold has become, at least in theory, an ordinary commodity, whose price is determined by the market forces of supply and demand. Id. ¶ 20. Many nations and central banks continue to hold substantial gold reserves, although a number have sold off some or all of their reserves in recent years. Id. ¶¶ 21, 26; see also, e.g., THE COMPTROLLER AND AUDITOR GENERAL, HM TREASURY, EXECUTIVE SUMMARY TO THE SALE OF PART OF THE UK GOLD RESERVES 4 (2001) (hereinafter "SALE OF UK GOLD RESERVES").

In recent years, the annual production of gold from mining has been approximately 2,500 metric tons per year. Compl. ¶ 26. Demand has been higher, averaging more than 4,000 metric tons annually. Id. Notwithstanding the annual excess of demand over supply, gold prices are well below the total cost of production for most mines, forcing the closure of a number of mines. Id. According to the plaintiff, the deficit between new mine supply and demand has been met by scrap recovery, by some sales of official gold, and most importantly by leased gold, largely from central banks. Id.

Gold is traded in many international markets; the most important, from the perspective of the allegations in this case, are the London Bullion Market Association ("LBMA") and the Commodities Exchange ("COMEX") in New York. Id. ¶ 25. Gold is traded in both physical form and in paper form through derivatives. Id. One aspect of this trade is gold leasing, in which central banks gain a return on their gold reserves by "lending" the gold to bullion banks, generally at very low interest rates. Id. ¶ 27. Bullion banks, the plaintiff alleges, use this "gold carry trade" to fund other investments by selling the borrowed gold and investing the proceeds. Id. The obligation to repay the leased gold to the central banks puts the bullion banks in a "short" physical position. Id.

The price of gold reached a high of $850 per ounce in 1980. SALE OF UK GOLD RESERVES 2. Over the past twenty years, the price has generally declined. Id. Since the end of 1997, gold has generally traded at between $250 and $300 per ounce. Compl. at 20.

The plaintiff alleges that the defendants have conspired since 1994 to manipulate the price of gold. He asserts that:

This manipulative scheme appears directed at three objectives: (1) to prevent rising gold prices from sounding a warning on U.S. inflation; (2) to prevent rising gold prices from signaling weakness in the international value of the dollar; and (3) to prevent banks and others who have funded themselves by borrowing gold at low interest rates and are thus short physical gold from suffering huge losses as a consequence of rising gold prices.

Id. ¶ 34.

The plaintiff asserts that the defendants have attempted to further these aims by periodically selling or leasing large quantities of gold in order to depress its price. He claims, for example, that "surges in outflows [of foreign earmarked gold] from the N.Y. Fed coincided with periods of strength in gold prices," id. ¶ 40, and that "Goldman, Chase and Deutsche Bank have regularly appeared as heavy sellers of gold on the COMEX whenever necessary to kill any significant rally," id. ¶ 45. The plaintiff also provides data on what he calls "waves of preemptive selling," days on which "the COMEX closing price [fell] by more than three times the decline in the London PM fix from the AM fix on the same day." Id. ¶ 46. He alleges that "[a]lthough defined solely on a statistical basis, each period of extreme preemptive selling coincides with a period when gold prices displayed marked weakness in circumstances where historical trading patterns called for just the opposite behavior." Id. ¶ 47.

The plaintiff identifies "discrepancies between the [Federal Reserve System's] gold certificate account" and the total U.S. gold stock, which includes the gold held by the Exchange Stabilization Fund (ESF).⁴ Id. ¶ 65. He interprets these discrepancies as strong evidence of "losses on gold trading." Id. He also documents the size of, and changes in, the total gold derivative holdings of Chase, Morgan and Citibank. Id. ¶ 57.

The plaintiff also identifies two supposedly incriminating statements, one made by a third party about one of the defendants and the other by a defendant himself. First, the plaintiff states that "according to reliable reports received by the plaintiff," Edward A.J. George, Governor of the Bank of England and a director of the BIS, stated that, upon a rise in the price of gold in 1999 in the wake of an agreement by fifteen European central banks to limit their gold sales:

We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.

Id. ¶ 55. Second, the...