UNITED STATES DISTRICT COURT District of Massachusetts
Civil Action No. 00-CV-12485-RCL___________________________________________ ) Reginald H. Howe, ) Plaintiff, ) ) v. ) ) Bank for International Settlements, et al.,) Defendants. ) ___________________________________________)
For the reasons set forth in the memorandum below, the plaintiff, Reginald H. Howe, opposes the motions to dismiss filed by all defendants, the motion to substitute Paul O'Neill, Secretary of Treasury, insofar as it seeks dismissal of the complaint against former secretary Lawrence Summers individually, the motion to substitute the United States for Alan Greenspan, and the motion of the Bank for International Settlements either to dismiss or stay for arbitration, and in connection with the latter motion requests a trial by jury on all issues so triable.
Table of Contents Statement of the Case Statement of Facts 1. The Freeze-Out: Withdrawing the BIS's American Issue for the Fed.
2. Gold Lending and Gold Derivatives: The Dangerous Short Position.
3. Use of Gold Lending and Gold Derivatives To Suppress Gold Prices.
5. Relationship of Gold Prices to BIS and FCX Gold Preferred Shares.
Argument A. Sovereign Immunity Does Not Bar Suits for Injunctive Relief and Damages Based on Violations of the Fifth Amendment by Federal Officials Acting outside the Scope of their Legal or Constitutional Authority.
B. Neither the Secretary of the Treasury nor Federal Reserve Officials Have Authority to Manipulate or Set Gold Prices, either Directly or Indirectly.
1. Congress Has Mandated a Free Gold Market.2. Pre-1971 Statutes Do Not Permit Gold Market Intervention Today.
C. Defendants Summers, Greenspan and McDonough May Be Held Personally Liable in Damages Because They Knew or Should Have Known They Lack Authority to Manipulate Gold Prices.
D. Defendants Summers, Greenspan and McDonough Knew or Should Have Known They Lack Authority to Arrange for U.S. Membership in the BIS by Purchasing Shares without Authorization and Appropriation by Congress.
E. Defendants Summers, Greenspan and McDonough Knew or Should Have Known that Suppressing Gold Prices through the BIS or Otherwise Is Contrary to U.S. Foreign Policy toward Sub-Saharan Africa.
A. Participation in Gold Price Suppression by Federal Officials Abusing their Authority Coupled with Failure of the DOJ to Enforce the Sherman Act Counsel against Denying the Plaintiff Standing.
B. Under Standard Sherman Act Criteria, Plaintiff Has Standing to Bring Price Fixing Claims for both Damages and Injunctive Relief against the Defendant Bullion Banks.1. Actual Injury and Threatened Harm to Plaintiff's Property.
2. Direct Relationship of Antitrust Violation to Plaintiff's Injury.
C. The BIS and Federal Officials Acting outside the Scope of their Authority Are "Persons" Subject to Suit under the Sherman Act.
A. By Illegally Suppressing Gold Prices, Concealing the Manipulation, and Failing to Set the Freeze-Out Price in Gold Francs, the BIS Defendants Corrupted the Process of Valuing and Paying for the Shares.
B. By Acting without the Legal Authority They Misrepresented Themselves to Have, the BIS Defendants Foreclosed Plaintiff from Making a Voluntary Investment Decision and from Pursuing Other Remedies.
C. Numerous Misstatements and Omissions by the BIS Defendants as to Material Facts Provide Further Evidence of Scienter.
IV. PLAINTIFF'S CLAIMS AGAINST THE BIS ARE NOT WITHIN THE SCOPE OF ITS ARBITRATION PROVISION, WHICH HAS LAPSED, TO WHICH HE NEVER AGREED, AND WHICH FAILS TO MEET DUE PROCESS REQUIREMENTS.
A. The Treaty's Arbitration Tribunal Is Defunct.B. This Dispute Does Not Come within the Arbitration Clause.
C. Plaintiff Has Not Agreed to Arbitrate This Dispute.
D. The Arbitration Tribunal Does Not Satisfy Due Process.
E. Plaintiff Is Entitled to Jury Trial on Disputed Issues of Arbitrability.
V. OTHER DEFENSES SPECIFIC TO CERTAIN DEFENDANTS ARE WITHOUT MERIT, CORRECTABLE, OR BOTH.
A. This Action Is Not Cognizable under the Federal Tort Claims Act.
B. Service on the BIS Satisfies the Hague Convention.C. If Required, Any Defects in Service on Messrs. Summers or Greenspan Are Correctable.
D. The Corporate Shield Defenses of the Bullion Banks Are without Merit, as are Other Fact Specific Defenses of Citicorp and Deutsche Bank.
Conclusion *************************************
This is a complaint for damages and injunctive relief arising out of two intertwined events: (1) the unauthorized compulsory freeze-out by the Bank for International Settlements ("BIS" or "Bank") of its private shareholders, including U.S. holders of its American issue, with apparent intent to transfer all shares of that issue to the Federal Reserve at the freeze-out price, which is less than one-half of their admitted net asset value, a figure that expressed in gold francs -- the BIS's unit of account -- would itself be higher but for the undisclosed illegal manipulation of gold prices; and (2) price fixing in the gold market orchestrated through the BIS by Federal Reserve officials and the Secretary of the Treasury acting outside the scope of their legal or constitutional authority and in league with certain major U.S. and foreign bullion banks.
The plaintiff, Reginald H. Howe, is a resident U.S. citizen. Until implementation of the freeze-out on January 8, 2001, the plaintiff owned six shares of the BIS's American issue (complaint, para. 2, hereinafter "C. _"). He is also the owner of 1200 depositary shares of Gold-Denominated Preferred Stock, Series II, of Freeport-McMoran Copper & Gold, Inc. ("FCX gold preferred shares"), which pay quarterly dividends equal to a stated weight of gold multiplied by the arithmetic average of the London PM gold price over the relevant preceding five-day period. These shares will be redeemed in 2006 for the cash value of one-tenth ounce of gold calculated in the same manner (C. 14).
The BIS, based in Basle, Switzerland, is often referred to as the "central banks' central bank." Although it describes itself as an international organization, the BIS has not been so designated under the International Organizations Immunities Act (22 U.S.C. s. 288 et seq.). Its principal owners and customers are the central banks of the major industrial nations. The BIS accepts gold deposits, makes gold loans, holds approximately 200 metric tonnes of gold for its own account, and is an active participant in the gold market (C. 4).
Besides the BIS, the defendants are Alan Greenspan, Chairman of the Board of Governors of the U. S. Federal Reserve System ("Federal Reserve" or "Fed") and a director of the BIS (C. 5); William J. McDonough, President of the Federal Reserve Bank of New York ("N.Y. Fed") and a director of the BIS (C. 6); five major bullion banks, J. P. Morgan & Co., Chase Manhattan Corp., Citigroup, Inc., Goldman Sachs Group, Inc. and Deutsche Bank (C. 7-11); and Lawrence H. Summers, Secretary of the Treasury (C. 12), who by law exercises personal control over the Exchange Stabilization Fund ("ESF") subject only to approval by the President.
The complaint alleges interference with property rights and deprivation of property without due process in violation of the Fifth Amendment by federal officials acting outside their legal or constitutional authority (count 4 against the BIS, Greenspan, McDonough and Summers), price fixing in violation of section 1 of the Sherman Act (count 1 against all defendants), securities fraud in violation of section 10(b) and Rule 10b-5 of the Securities Exchange Act (count 2 against the BIS, Greenspan, McDonough and Morgan, collectively the "BIS defendants"), and common law fraud and breach of fiduciary duty (count 3 against the BIS defendants).
The statutory bases for jurisdiction and venue, which include several applicable federal statutes (C. 1, 16), are not challenged. The federal officials raise various defenses based on sovereign immunity. However, even if they were acting within their official capacities with respect to some or all of the events alleged, sovereign immunity is waived by 5 U.S.C. s. 702 as to declaratory or injunctive relief but not as to money damages. Mr. McDonough and Deutsche Bank raises issues regarding personal jurisdiction or venue.
Since the filing of the complaint on December 7, 2000, Morgan and Chase have merged into J.P. Morgan Chase & Co., and Paul O'Neill has become Secretary of the Treasury, automatically replacing Mr. Summers under F.R.Civ.P. 25(d)(1), but only to the extent that he was sued in his official capacity. Relevant events since December 7 as well as certain new or additional evidence are set forth in the plaintiff's affidavit filed herewith (cited as "P.A." followed by paragraph number or exhibit identification).
All the defendants have filed motions to dismiss, some jointly, so that there are a total of seven such motions supported by an equal number of separate memoranda. The motion to dismiss filed by the BIS contains an alternative request to stay for arbitration. The Department of Justice ("DOJ") has filed two additional motions. One seeks not only to substitute Paul O'Neill as Secretary of the Treasury in place of Lawrence Summers, but also by this device to dismiss the claims against Mr. Summers individually. The other seeks to substitute the United States for Alan Greenspan under the Federal Tort Claims Act.
In addition, four defendants have filed affidavits: (1) the BIS has filed an affidavit of Gunter D. Baer, including copies of various relevant documents (cited as "BIS.A." followed by paragraph number or exhibit identification); (2) the DOJ's memorandum in support of Alan Greenspan's motion to dismiss includes five exhibits (cited as "DOJ Ex."), authenticated by separate affidavits (four of these exhibits are reproduced in tab Z to plaintiff's affidavit); (3) Deutsche Bank has filed an affidavit that is materially and demonstrably incorrect and incomplete regarding its operations in Massachusetts; and (4) the N.Y. Fed has filed an affidavit regarding its limited activities in Massachusetts.
The purpose of the latter affidavit is to contest jurisdiction over the N.Y. Fed in Massachusetts. The affidavit assumes: (1) that Mr. McDonough is being sued in his capacity as president of the N.Y. Fed; and (2) that serving as a director of the BIS falls within the duties of that office. For reasons to be discussed, neither assumption is correct.
The principal factual allegations of the complaint are presented in three parts: Development of Today's Gold Market (C. 17-33); Manipulation of Gold Prices (C. 34-66); and BIS's Proposed Freeze-Out of Private Shareholders (67-78). For purposes of the motions to dismiss, they must be taken as true, drawing all reasonable inferences in favor of the plaintiff. Nicholson v. Moran, 961 F.2d 996, 997-998 (CA1 1992). Implementation of the freeze-out since the date of the complaint has revealed additional evidence regarding its true purpose, and thus will be addressed first here.
1. The Freeze-Out: Withdrawing the BIS's American Issue for the Fed. The BIS was established under a Convention among Germany, Belgium, France, Great Britain, Italy, Japan and Switzerland (P.A. Ex. A) in 1930 to promote cooperation among central banks and to administer the Young Plan, established by a treaty signed three days earlier (P.A. Ex. B), for final settlement of Germany's World War I reparations. By a public statement issued in 1929 (P.A. 2), then Secretary of State Henry L. Stimson declared that the United States would not be a party to either treaty, and "will not permit any officials of the Federal Reserve system either to themselves serve or to select American representatives as members of the [BIS]."
To deal with this situation and preserve a certain level of American participation, the Convention established a Constituent Charter for the BIS that gave it a unique corporate structure. Fifteen percent of the original issue of partially paid shares -- the American issue -- was allocated to Morgan and two other private American financial institutions in return for their guarantee of its public subscription in the United States. The remaining shares were allocated to the founding central banks to be taken up by them or subscribed publicly in their respective countries, as was done with parts of the French and Belgian issues. No voting rights attached to any of the shares, which all carried equal rights to participate in the profits of the bank or any distribution of assets. Voting rights were assigned exclusively to the member central banks in proportion to their respective issues. The Constituent Charter also assigned certain seats on the BIS's board to governors of the founding central banks or their designees.
Two board seats were allocated to the United States, but Federal Reserve officials did not assume these seats until 1994. Then, as described by Mr. Greenspan in the transcript of the Federal Open Market Committee's conference call on July 20, 1994 (P.A. Ex. I):
Up until the Maastrich Treaty, our relationships with the BIS seemed to be appropriately constrained to our periodic visits over there to deal with the G-10 on a consultative basis and to be involved with a number of their committees, but to have no involvement at all with the actual management of the BIS. With the advent of the Maastrich Treaty and the development of the European Monetary Institute, the potential of the BIS being effectively neutered because of the overlap in jurisdictions of the EMI and the BIS has led the BIS to move toward a much more global role, one that anticipates inviting a significant number of non-European members, 10 to 25 as I recall the range, to become members of the BIS. That would significantly alter its character from a largely though not exclusively European managed operation to one which is far more global in nature. It is possible, perhaps probable, that the BIS as a consequence will become a much larger player on the world scene. It was our judgment that it would be advisable for us to be involved in the managerial changes that are about to be initiated rather than to stay on the sidelines, as we chose to do through all those decades when we did not want to get involved with a European-type international organization. In contradistinction to that, we think it is important to be an active player in the development of this institution to make certain that we as the principal international financial player have a significant amount to say in the evolution of the institution. That's the basis upon which this decision has been made here at the Board, and it was one which we probably would not have addressed in any meaningful way had not the altered nature of the BIS itself become imminent.
The DOJ has attached to its memorandum on behalf of Mr. Greenspan previously non-public letters to him from Secretary of State Warren Christopher dated June 15, 1994, and Secretary of the Treasury Lloyd Bentsen dated May 25, 1994 (DOJ Ex. C), authorizing Messrs. Greenspan and McDonough to assume the two BIS board seats allocated to the Federal Reserve. The DOJ has also produced extracts from the minutes of the Federal Reserve Board meeting on June 6, 1994, showing a vote to approve this action (DOJ Ex. B). This document further indicates that "appropriate members of the Congress" were informed of the decision on June 20, 1994, but copies of these letters were not provided.
Finally, the DOJ has produced a 1997 letter by a deputy assistant attorney general (DOJ Ex. D) (www.usdoj.gov/olc/fed208.htm) opining that the conflict-in -interest statute (28 U.S.C. s. 208(a)) does not prevent Messrs. Greenspan and McDonough from serving in their official capacities as BIS directors. Noting that the BIS is "a profit-making institution and declares an annual dividend," the opinion rests heavily on the President's broad authority to conduct foreign affairs and Secretary of State Christopher's letter declaring that "active participation of the Federal Reserve on the BIS board will serve U.S. foreign policy interests."
On September 15, 2000, the BIS issued a press release (P.A. Ex. L) followed by a Note to private shareholders (BIS.A. Ex. K) announcing that on January 8, 2001, it would hold an extraordinary general meeting to vote on a proposal to compel private holders of its American, French and Belgian issues to surrender their shares against a payment per share of CHF 16,000 (approximately US$ 9300). The stated reason for the transaction was "to enable the BIS better to pursue its objectives" and "to employ its resources in support of its public interest functions" (P.A. Ex. K, p. 3, part C). Noting that neither the World Bank nor the International Monetary Fund has private shareholders, the BIS declared that such shareholders were "no longer seen to be in line with" its future development.
Citing a valuation opinion by Morgan's wholly-owned French subsidiary which placed the net asset value per share at US$ 19,099, the BIS asserted lack of voting rights as the principal justification for discounting this NAV figure by over 50% in reaching the freeze-out price. As already noted, no BIS shares carry voting rights, which prior to the freeze-out were assigned to each member central bank based on the number of shares subscribed under that bank's non-fungible issue without regard to whether ownership of the shares rested with the central bank or in private hands (C. 71). All original shareholders, whether private persons or central banks, paid in exactly the same amount of gold per issued share. The right to vote was not then or ever assigned a monetary value, let alone one in derogation of the full property value of the shares (C. 71).
Except for the Federal Reserve, all member banks of the BIS are shareholders. The privately held American issue provided the sole basis for Messrs. Greenspan and McDonough to take the two U.S. seats on the BIS board in 1994. The September 15 press release and Note left unclear on what basis or authority they proposed to retain these seats, or even to participate in the affairs of the BIS, after the freeze-out. This issue received some clarification in the amendments to the Statutes of the BIS, passed by unanimous vote of its central bank members on January 8, 2001, implementing the freeze-out (P.A. Ex. N).
These amendments included a transitional Article 18A, which provides that the board may redistribute as it deems appropriate the shares purchased from private shareholders by "offering them for sale to central bank shareholders against payment of an amount equal to that of the compensation paid to the private shareholders." In other words, the American issue is destined for purchase by the Fed at the freeze-out price.
2. Gold Lending and Gold Derivatives: The Dangerous Short Position. Gold is traded internationally on a 24-hour basis in both physical and paper forms, with major markets in London, New York, Hong Kong, Tokyo, Zurich and Dubai (C. 25). However, from the perspective of price discovery, the most important markets are the London Bullion Market Association ("LBMA") and the Commodities Exchange ("COMEX") in New York. The London market is the largest in terms of volume or turnover, doing significant business in both bullion and paper instruments, but lacks transparency. The COMEX does relatively little business in physical gold, being principally a futures and options market.
Gold derivatives are instruments such as forward contracts, futures, options and swaps whose value is tied to -- or derived from -- the price of gold (C. 2). Some gold derivatives are traded in standardized form as futures or options on exchanges such as the COMEX. However, most are traded over-the-counter in the form of specially-tailored private contracts between or among bullion banks, other financial institutions, gold mining companies, hedge funds, speculators and others (C. 25). Like other over-the-counter derivatives, gold derivatives are generally measured by their notional values, which are the face or reference amounts from which derivative payments are determined (C. 31). Notional value is similar in concept to open interest, but measures it by face value of contracts instead of their number. Although a tiny portion of all derivatives, gold derivatives are very large in relation to physical gold supplies.
Part III of the complaint summarizes the major characteristics of today's gold market (C. 17-33), including: (1) the continued use of gold as an international monetary reserve by central banks, who claim to hold some 32,000 metric tonnes of the approximately 120,000 tonnes of above-ground supplies (C. 21); (2) the loaning or leasing of gold by central banks to bullion banks at interest rates known as "lease rates" (C. 27); (3) the continuing and growing gap between annual new mine supply of around 2500 tonnes and annual demand for physical bullion now reliably estimated to exceed 4000 tonnes (C. 26); (4) the filling of this gap by official gold sales, scrap recovery and especially leased gold, mostly from central banks (C. 26); (5) declining gold prices from 1994 through 2000, putting the gold mining industry into a general condition of distress not experienced since the 1960's (C. 26); and (6) a huge build up of gold derivatives in certain bullion banks, especially the five that are defendants (C. 31-32, 57).
The fundamental point about leased gold is that it represents a short physical position. That is, when bullion banks borrow gold, they nearly always immediately sell it into the spot market for physical delivery, thereby receiving cash for the use of themselves or their clients (C. 27). Since lease rates typically run at 2% or less, borrowed gold represents a cheap source of financing provided that gold prices remain stable or decline (C. 29). On the other hand, a sharp rise in gold prices can cause painful or even catastrophic losses to borrowers who must repurchase gold at higher prices when their loans become due (C. 28). Gold derivatives, particularly forward contracts or call options, are frequently used to hedge this risk (C. 28).
While gold derivatives may be an effective means of hedging price risk under ordinary circumstances, they cannot guarantee immediately available supplies of physical gold, particularly in a sharply rising or illiquid market (C. 33). The Achilles' heel of today's gold market is the total short physical position, which informed estimates place at from 5000 to over 10,000 tonnes, or several years of annual new mine production (C. 30). This figure represents the total amount of loaned or leased gold that has been borrowed and sold into the market. Existing as gold receivables on the books of central banks and other lessors, it is gold that has left their vaults and can only be restored to them by physical repayment (C. 27).
3. Use of Gold Lending and Gold Derivatives To Suppress Gold Prices. Part IV of the complaint alleges that from 1994 to the date of filing, the defendants engaged in a scheme to manipulate gold prices (C. 34), probably patterned on the London Gold Pool, which operated without formal agreement under the auspices of the BIS from 1961 to 1968 in support of the then official gold price of US$ 35/ounce under the Bretton Woods Agreements (C. 36). The modern 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 (C. 34).
Sources for the price fixing allegations include: (1) official data on gold derivatives published by the BIS and the U.S. Controller of the Currency ("OCC") and on gold accounts at the Fed and the U.S. Treasury, including those for foreign custodial gold at the N.Y. Fed and gold held by the ESF; (2) analyses of market data, particularly with respect to anomalous gold price movements on the COMEX and between it and overseas markets; and (3) statements by participants in, or others with knowledge of, the manipulative scheme (C. 35).
The manipulative scheme utilizes leasing rather than outright sales as the preferred method of bringing central bank gold to market, and uses gold derivatives not only to hedge price risk but also to force down gold prices, particularly on the COMEX, where the leverage of gold futures contracts and options thereon can be employed to great effect. But while gold derivatives can be used to suppress prices, the manipulators must also coax or coerce sufficient supplies of gold bullion to meet strong physical demand, particularly from Asia, responding in part to low prices caused by their manipulative activities (C. 37).In July 1998, Fed Chairman Alan Greenspan, testifying before the House Banking Committee, stated (C. 38): "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise [emphasis supplied]." This statement, amounting to a declaration that gold prices were being suppressed, both invited bullion banks and others to borrow gold at low risk and pressured private holders of gold to sell or lease it since they could not expect significant price increases.
In a letter to Senator Joseph I. Lieberman dated January 19, 2000, Mr. Greenspan elaborated on his 1998 congressional testimony (C. 39; DOJ Ex. E): "This observation simply describes the limited capacity of private parties to influence the gold market by restricting the supply of gold, given the observed willingness of some foreign central banks -- not the Federal Reserve -- to lease gold in response to price increases [emphasis supplied]." Mr. Greenspan himself has thus admitted that some central banks lease gold for the purpose of supplying the bullion banks during periods when strong demand is pushing up prices.
Mr. Greenspan had at least two obvious vantage points from which to "observe" gold lending by central banks: the N.Y. Fed and his board seat at the BIS. A significant portion of the gold leased by foreign central banks appears to have come from the foreign earmarked gold accounts at the N.Y. Fed. These accounts decreased by over 1500 tonnes from 1995 to 1999, and the largest outflows generally coincided with periods of relative strong gold prices (C. 40). Central banks frequently use the BIS for their transactions in gold, which include making gold deposits that may subsequently be loaned out by the BIS. Gold lending by the BIS has increased sharply in recent years, indicating not only the important role of gold in its activities but also the active role that it plays in the gold market. In its annual report for the year ending March 31, 2000, the BIS disclosed that during the year its total gold lending increased 47 tonnes to 360 tonnes, almost double the level of 185 tonnes four years earlier (C. 41).
The most noticeable price fixing activities have occurred on the COMEX, which has high international visibility, but being predominantly a paper market, is more easily subject to manipulation (C. 45). Over the past two years, Chase, Goldman, and Deutsche Bank have regularly appeared as heavy sellers of gold on the COMEX whenever necessary to kill any significant rally (C. 8, 10-11, 45). In the past year, many observers of the gold market have noticed a pronounced tendency for gold prices to rise in overseas trading only to be knocked back to prior levels on the resumption of trading in New York. This anomalous phenomenon has recently been confirmed by two independent studies (P.A. 26, Ex. S; P.A. 28, Ex. T). In one (Ex. S), Professor H. J. Clawar calculates that for the year beginning January 25, 2000, net overseas price increases amounted to $ 160/ounce, while net decreases on the COMEX in New York equaled $ 173/ounce (P.A. 27). These two studies further confirm the analysis of Michael Bolser (P.A. Ex. Q) referenced in the complaint (C. 45-49) demonstrating very heavy or "preemptive" selling of gold on the COMEX at critical times since 1994 to counter threatened or developing price surges (C. 50-51, 53-55, 60).
During 1999, the gold market experienced two bizarre events that served to unmask the manipulative scheme. The first began with an initiative led by President Clinton and Prime Minister Blair to sell some gold held by the International Monetary Fund, ostensibly to fund aid to heavily indebted poor countries. On May 7, 1999, just as gold threatened to surge over $ 300/ounce in response to new doubts whether these IMF sales would proceed, the Bank of England announced that on behalf of the Exchange Equalisation Account in the British Treasury, it would sell 415 tonnes of gold in a series of public auctions. Although the announcement was completely unexpected by the market, Deutsche Bank apparently received advance warning (C. 42).
British officials have tried to explain the gold auctions as an effort to diversify Britain's international monetary reserves, yet British gold reserves were already comparatively low (C. 43). British officials cannot seem to agree on who made the decision, but it almost certainly came directly from the prime minister since it put Britain in the position of front-running the IMF's proposed sales for which he was a leading advocate. Nor is the manner of the British sales -- periodic public auctions in which the entire lot is sold at the lowest price accepted for any portion -- consistent with obtaining the best available return.
However, the bimonthly scheduling of the British gold auctions of 25 tonnes each is entirely consistent with a plan to manipulate gold prices on the COMEX. Each of the 11 auctions held so far has fallen within about a week of the bimonthly expiration of a COMEX gold futures and options cycle (P.A. 21-23, Ex. R). The auctions appear intentionally designed to supply gold for delta hedging each new options cycle and/or to meet demands for physical delivery into expiring futures contracts (P.A. 24-25).
Following announcement of the periodic British gold auctions in May 1999, gold prices declined from $ 290/ounce to around $ 260 by September, setting the stage for the second big unexpected gold event of 1999. On September 26, without prior warning and with the European Central Bank, Banque de France and Bundesbank in key leadership roles, 15 European central banks announced an agreement to limit their gold sales and not to expand further their gold lending (C. 54). Unveiled in Washington, D.C., after the annual meetings of the IMF and World Bank, this agreement is generally referred to as the Washington Agreement. According to most European press reports, the agreement was prepared in secrecy and without the knowledge of American, British or BIS officials, although the Bank of England was given and accepted an opportunity to sign onto the agreement just before the announcement.
The Washington Agreement triggered an explosive rally in gold prices, which was quickly met with a massive wave of preemptive selling in excess of two standard deviations (C. 55). According to reliable reports received by the plaintiff, this effort was later described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc (C. 55):
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.
A major consequence of the gold rally following the Washington Agreement was the near bankruptcy of Ashanti Goldfields Ltd., a large gold mining company based in Ghana, due to huge paper losses from hedging strategies devised for it by Goldman apparently in the conviction that gold prices could not rally as they did (C. 56). Goldman's actions with respect to Ashanti were the subject of scathing comment, including allegations of serious conflicts of interest, in an article by L. Barber and G. O'Connor, "How Goldman Sachs Helped Ruin and then Dismember Ashanti Gold," Financial Times (London), Dec. 2, 1999. The principal shareholders of Ashanti, which is listed on the New York Stock Exchange, are Lonmin and the Government of Ghana.
Another major result of the rally, although it took longer to surface publicly, was a huge increase in the gold derivatives of Morgan, Chase, and Citibank (C. 57). The following table shows the total notional amount of gold derivatives, all maturities, of Chase, Morgan, Citibank and Other as reported by the OCC from December 1998 through June 2000. All amounts are in US$ billions. (Columns do not add due to rounding and exclusion of separately stated figures for Bankers Trust prior to June 1999.) The largest relative and absolute increases are highlighted in bold.
Bank 12/98 3/99 6/99 9/99 12/99 3/00 6/00 Chase 24.1 23.7 20.5 22.6 22.1 31.5 35.0 Morgan 16.8 15.1 18.4 30.5 38.1 36.3 29.7 Citibank 6.7 7.3 7.2 10.7 11.8 11.8 11.4 Other 15.0 13.5 14.2 19.3 15.7 15.9 15.7 Total 68.3 65.1 61.4 83.3 87.6 95.5 92.1In the foregoing table, the figures for 9/99 are as of September 30, and thus reflect positions as of four trading days after announcement of the Washington Agreement. During these four days the gold price moved from about $ 265/ounce to over $ 300 (C. 58). The rally continued into October, with gold prices trading as high as $ 325 during the first two weeks, and then generally declining to just under $ 300 by the end of the month. For the rest of 1999 and into February 2000, gold traded in a $ 20 dollar band under $ 300. In the second week of February, a sharp rally took gold to over $ 315, but again the price was quickly brought under control, and it remained generally in the $ 280-290 range from the beginning of March through June, although falling into the low $ 270's in May.
Taking each line of the table, the following picture emerges: (1) Chase's gold derivatives remained flat until the first quarter of 2000, when they started to accelerate sharply; (2) Morgan's gold derivatives almost doubled in the third quarter of 1999, grew sharply in the fourth, leveled off in the first quarter of 2000 and declined in the second back to the September 1999 level; (3) Citibank's gold derivatives jumped sharply in the third quarter of 1999, then remained stable at this higher level over the next three quarters; and (4) the Other category of gold derivatives, which includes all banks not separately identified, also jumped sharply in the third quarter of 1999, but returned in the fourth to prior levels, where they have remained.
Morgan traditionally acts as the Fed's bank. See W. Greider, Secrets of the Temple (Simon & Schuster, 1989), p.269. Its sudden emergence in the third and fourth quarters of 1999 as a major font of gold derivatives is consistent with playing a major role in the Fed's efforts "to manage" and "to quell" the gold price as described by Mr. George, Governor of the Bank of England and a director of the BIS. Similarly, the growth of Chase's gold derivatives in the first two quarters of 2000 is consistent with being pressed into service as gold derivatives threatened to swamp Morgan, particularly as producers began to try to reduce or cover forward positions put in place prior to the Washington Agreement. The smaller notional amounts in Other suggest that these banks responded to client demands immediately following the Washington Agreement, and then quickly brought their gold derivatives back under relative control. Citibank, on the other hand, has never brought its gold derivatives back to pre-Washington Agreement levels, suggesting that it, like Morgan and Chase, is involved in helping the Fed to control gold prices.
Another important point is the relative size of these derivative positions. Total reported official gold reserves of the United States amount to not quite 8200 metric tonnes. At the 1999 year-end gold price of about $ 290/ounce, the total $ 87.6 billion notional amount of gold derivatives on the books of U.S. commercial banks equated to almost 9400 metric tonnes, of which more than two-thirds were held by two banks, Morgan and Chase. Similarly, the notional value of Deutsche Bank's 1999 year-end gold derivatives, which more than tripled during the year, equated to over 5000 tonnes at a $ 290 gold price, exceeding by nearly 50% Germany's official gold reserves of just under 3500 tonnes. Common sense says that positions of this size and concentration could not have been assumed without the knowledge and support of top officials in both the parent holding companies and the supervising central banks, most likely including some sort of government backing.
The published financial statements of the ESF indicate that it has participated along with the Fed in the gold price fixing scheme, probably through some form of participation in, or backing of, gold derivatives (C. 62). As detailed in the complaint (C. 63-64), discrepancies between relevant gold accounts in reports of the Fed and ESF strongly point to losses in connection with gold as the main cause for the ESF's generally poor trading results over the past several years (C. 65 and table). During this period, the ESF's profits generally coincided with periods of falling gold prices while its losses coincided with rising gold prices (C. 66).
Its third largest quarterly loss ever occurred in the last calendar quarter of 1999, coincident with the explosion in gold derivatives on the books of Morgan, Citibank and Deutsche Bank. However, the ESF achieved excellent trading results in the prior calendar quarter dominated by falling gold prices resulting from the May 1999 announcement of British gold sales. While the Asian financial crisis might explain the ESF's losses in 1997, the Clinton administration reported to Congress that it did not engage in any currency interventions from 1998 through March 2000.
4. Gold Swaps by the ESF. The DOJ's memorandum on behalf of the Secretary of the Treasury's motion to dismiss asserts (p. 3, n. 4) and re-emphasizes (p. 10, n. 7) the Secretary's contention "that in fact the ESF has no holdings of gold and has not traded in gold or gold derivatives since 1978." Mr. Greenspan wrote to Senator Lieberman (DOJ Ex. E): "The Federal Reserve does not, either on its own behalf or on behalf of others, including other government agencies, lend gold or silver, facilitate the lending of gold or silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver." None of these statements was made under oath. Read carefully, they do not exclude providing financial guarantees or other backing to bullion banks that do trade in gold and gold derivatives. Nor do these statements explain in any way the discrepancies between the relevant gold bullion accounts of the Fed and the ESF. Nor do they exclude -- perhaps quite by design -- the possibility that the ESF has engaged in gold swaps rather than conventional gold loans.
The plaintiff has recently discovered a highly relevant statement in the transcript of the Federal Open Market Committee's meeting on January 31, 1995, (www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf). Responding to a question by then Fed Governor Lawrence Lindsey about the ESF's legal authority to engage in a financial rescue package for Mexico, J. Virgil Mattingly, the Fed's general counsel, stated (P.A. 31; Ex. W, p. 69):
It's pretty clear that these ESF operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like ‘credit' -- it has covered things like the gold swaps -- and it confers broad authority. Counsel at the White House called the Treasury's General Counsel today and asked "Are you sure?" And the Treasury's General Counsel said "I am sure." Everyone is satisfied that a legal issue is not involved, if that helps. [Emphasis supplied.]
Ordinarily the term "gold swap" refers to the spot exchange of gold for cash or securities together with a promise that the transaction will be unwound at an agreed future date and price (P.A. 32). Gold swaps are sometimes used by central banks in the developing world to acquire needed foreign exchange, effectively offering gold as security for repayment. In recent years, however, gold swaps have also been used as an alternative to gold loans by certain central banks, which then earn interest on the cash or securities deposited with them while a bullion bank or other party has use of the gold. Another kind of gold swap is a "location swap" in which gold in one depositary or storage facility is temporarily swapped for that in another.
It is not clear whether Mr. Mattingly was speaking of ordinary gold swaps, location swaps, or some combination of the two. Nor is it clear whether he was referring to a program of gold swaps known to some or all participants in the meeting, or to one or more special transactions with respect to which he had issued an opinion, or to some other set of transactions. What is clear is that he was referring to gold swaps that, so far as the plaintiff is aware, have never been identified or disclosed in any other publicly available materials relating to the ESF or the Federal Reserve (see, e.g., P.A. Exs. K & V).
This reference to gold swaps was made only a few months after the Federal Reserve's decision to assume the two American seats on the BIS board. This decision, which was effectively hidden from the American people and all but a few members of Congress, coincided with the first incident of preemptive gold selling on the COMEX in excess of three standard deviations as set forth in the Mr. Bolser's statistical study (C. 48-50; P.A. Ex. Q). Mr. Speck's study dates the beginning of detectable anomalous selling pressures in COMEX gold just a few months earlier (P.A. Ex. T).
Far from limiting its role to providing financial guarantees or backing for gold derivatives as the plaintiff has alleged, Mr. Mattingly's statement suggests that the ESF has engaged -- almost certainly through the N.Y. Fed (P.A. Ex. V) -- in swapping out U.S. gold reserves to one or more bullion banks to facilitate the price manipulation scheme. Indeed, if the recent reclassification of the "Gold Bullion Reserve" held in the U.S. Mint at West Point to "Custodial Gold Bullion" reflects the combined total outstanding volume of these swaps (P.A. 29, Exs. U1 & U2), the ESF has covertly encumbered more than 20% of the total claimed official gold reserves of the United States.
5. Relationship of Gold Prices to BIS and FCX Gold Preferred Shares. The plaintiff purchased 1200 depositary shares of Gold-Denominated Preferred Stock, Series II, of Freeport-McMoran Copper & Gold, Inc., at various times from 1995 through 1999 (C. 14). By its terms, each depositary share pays a quarterly cash dividend equal to the value of 0.0008125 ounce of gold and will be redeemed in February 2006 for the cash value of 0.1 ounce of gold. The quarterly dividends are cumulative, but to date all payments have been timely made based on the arithmetic average of the London PM gold price over the relevant preceding five-day period.
Historically there was a high correlation between gold prices and market prices for BIS shares on the Swiss Exchange (C. 87; P.A. 4, Ex. E). This correlation, which continued to manifest itself in the wake of the Washington Agreement (P.A. 4), rested in part on the approximately 200 tonnes of physical gold that the BIS holds for its own account, which at the date of the freeze-out announcement represented approximately 12 ounces of gold per share, equal to around $ 3400/share at $ 280/ounce gold (C. 87).
Article 20 of the BIS's Statutes provides (P.A. 1(E); BIS.A. Exs. D & E): "The operations of the Bank for its own account shall only be carried out in currencies which in the opinion of the Board satisfy the practical requirements of the gold or gold exchange standard." Since its founding in 1930, the BIS has used the Swiss gold franc of that date as its unit of account, making conversions against various currencies at market or historic rates against gold as appropriate (C. 69). The gold franc is defined under Article 4 of its Statutes as 0.29032258 grams fine gold, and is indicated on its financial statements by a "GF" prefix. The BIS's profit and loss statements and its balance sheets are always published in gold francs. Because the gold price acts directly on the these accounts, it similarly affects any calculation of net asset value per BIS share (C. 69-70).
In 1999, as a condition of membership, the BIS issued 12,000 new shares to new central bank members, including the European Central Bank, at an issue price of GF 5020/share, payable in gold or an equivalent amount in a currency acceptable to the BIS based on the market price of gold at the date of payment (C. 68; P.A. 14). At US$ 280/ounce, GF 5020 equals $ 13,119, or almost $ 4000 more per share than the freeze-out price paid by the BIS to its private shareholders, but still less than the NAV of $ 19,099 assigned by Morgan (C. 70).
In setting the freeze-out price for its private shareholders in current Swiss francs rather than gold francs, the BIS departed from both its statutes and all prior practice, particularly with respect to transactions on capital account (C. 70). At the assigned freeze-out price, the compulsory withdrawal represented a total cost to the BIS of approximately US$ 700 million, equal to almost 80 metric tonnes of gold at $ 280/ounce. At Morgan's calculated net asset value per share, the total cost would have doubled to 160 tonnes, or 80% of the BIS's gold reserves held for its own account.
I. UNDER THE FIFTH AMENDMENT, DEFENDANTS GREENSPAN, McDONOUGH AND SUMMERS ARE LIABLE TO THE PLAINTIFF FOR DAMAGES ARISING FROM COMPULSORY WITHDRAWAL OF HIS BIS SHARES AT BELOW FAIR VALUE WITH INTENT TO TRANSFER THEM ULTIMATELY TO THE FEDERAL RESERVE. The due process clause of the Fifth Amendment provides: "No person shall ... be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation." Contrary to assertions in the DOJ's memoranda, the plaintiff does not assert a taking claim against the United States or the Secretary of the Treasury arising out of the freeze-out. Nor could he. As the DOJ correctly points out, a compensable taking under the Tucker Act (28 U.S.C. s. 1491(a)(1)) cannot exist absent authorization by Congress, express or implied, for the taking alleged. Tabb Lakes, Ltd. v. United States, 10 F.3d 796, 802 (Fed. Cir. 1993). "The claimant must concede the validity of the government action which is the basis [for his claim]." Id.
The plaintiff makes no such concession in this case. Quite to the contrary, the plaintiff contends that insofar as the United States is concerned, the freeze-out is a patently illegal and unconstitutional scheme designed to put the Federal Reserve in the same position that it would occupy were the United States a signatory to the original BIS treaty, which it is not. Since the date of the complaint, but while Mr. Summers was still in office, the BIS implemented the freeze-out of its private shareholders. At the same time, it provided for sale of the shares thus acquired "to central bank shareholders against payment of an amount equal to that of the compensation paid to the private shareholders" (P.A. Ex. N, Annex, Article 18(A) (Transitional)). Without a transfer of the American issue to the Fed, there will be no basis for its continued participation in the BIS.
The BIS asserts that the freeze-out is part of a plan to shed its unique original corporate structure and become a public international institution like the IMF or World Bank. Nevertheless, there is no indication that any effort has been made to obtain Senate consent to the United States joining the BIS, or that Congress has made an appropriation or given any other authorization for the purchase of BIS shares. What the plaintiff asserts, therefore, are claims under the Fifth Amendment for damages and injunctive relief based on interference with his property rights and deprivation of property without due process by federal officials, including Messrs. Summers, Greenspan and McDonough, acting outside their legal or constitutional authority.
In addition, by abusing their authority to effect the suppression of free market gold prices, these same officials caused: (1) a decrease in the gold franc value of the plaintiff's BIS shares as of the date of the freeze-out; and (2) decreases in the dividends previously paid to plaintiff on his FCX gold preferred shares as well as threatened decreases in both his future dividend payments and the redemption payment in 2006. These payments, which are directly calculated from the arithmetical average of the London PM gold price over a defined period, are the functional equivalent of a direct sale of gold bullion at this price.
A. Sovereign Immunity Does Not Bar Suits for Injunctive Relief and Damages Based on Violations of the Fifth Amendment by Federal Officials Acting outside the Scope of their Legal or Constitutional Authority.
Being fundamental to the American constitutional scheme, the Fifth Amendment supports a private right of action for damages or other appropriate injunctive or declaratory relief against federal officials who violate it while acting beyond or abusing their authority. Davis v. Passman, 442 U.S. 228, 241-245 (1979). Boyce v. United States, 523 F.Supp. 1012 (D.C.N.Y. 1981). See Gerena v. Puerto Rico Legal Services, Inc., 697 F.2d 447, 449 (CA1 1983).Federal officers cannot claim sovereign immunity in actions brought by citizens whose property rights they have invaded. Ickes v. Fox, 300 U.S. 82, 97 (1937). United States v. Lee, 106 U.S. 196, 217, 220-221 (1882). Elaborating on this bar to sovereign immunity in Larson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 687-688 (1949), the Court refused to allow a suit for injunctive relief against a federal officer acting in his official capacity, but stated (at 689) that sovereign immunity does not bar suits for specific relief against federal officers acting outside the scope of their authority or in an individual capacity. What is more, the Court also stated in Larson (at 690) that sovereign immunity will not bar suit against an official acting within the scope of his authority if the actions themselves or the statute on which they are based are unconstitutional. The Court reiterated these principles in Dugan v. Rank, 372 U.S. 609, 621-622 (1963), and Malone v. Bowdoin, 369 U.S. 643, 647 (1962). See American Policy Holders Insurance Co. v. Nyacol Products, Inc., 989 F.2d 1256, 1265 (CA1 1993).
In suits for damages, federal officials in the executive branch have a qualified immunity for actions taken in good faith with a reasonable belief that they are constitutional even though that belief ultimately proves mistaken. Hunter v. Bryant, 502 U.S. 224, 227 (1991). Mitchell v. Forsyth, 472 U.S. 511, 524 (1985). Reasonable error is tolerated; willful wrongdoing is not. Harlow v. Fitzgerald, 457 U.S. 800, 818-819 (1982). As the Court pointed out in Mitchell (at 524), allowing only qualified rather than absolute immunity does not impede normal and legitimate operations of government, but does give government officials "pause to consider whether a proposed course of action can be squared with the Constitution and laws of the United States."
Under the Administrative Procedure Act, the United States has waived sovereign immunity in actions in federal courts "seeking relief other than money damages and stating a claim that an agency or an officer or an employee thereof acted or failed to act in an official capacity or under color of legal authority." 5 U.S.C. s. 702. In appropriate cases, this section permits broad injunctive and declaratory relief. Cobell v. Norton, 240 F.3d 1081, 1107-1109 (CADC 2001) (breach of federal government's fiduciary duty regarding Indian trust funds).
With respect this case, Mr. McDonough is not sued as president of the N.Y. Fed or on account of its activities. He is sued as a director of the BIS, serving in that capacity as a federal official appointed by vote of the Federal Reserve Board (DOJ Ex. B) acting pursuant to authority received from both the Secretary of the Treasury and the Secretary of State (DOJ Ex. C) to assist in carrying out the President's foreign policy (DOJ Ex. D). Accordingly, he is subject to suit, inter alia, under 28 U.S.C. s. 1391(e)(3), which provides that federal officers or employees acting in an "official capacity or under color of legal authority" may be sued in the judicial district where the plaintiff resides.
B. Neither the Secretary of the Treasury nor Federal Reserve Officials Have Authority to Manipulate or Set Gold Prices, either Directly or Indirectly.
1. Congress Has Mandated a Free Gold Market. The monetary provisions of the Constitution grant to Congress sole and exclusive power to determine the gold value of the dollar. "The Congress shall have power ... To coin Money, regulate the Value thereof, and of foreign coin." U.S. Const., Art. 1, s. 8, cl. 5. "No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and Silver Coin a Tender in Payment of Debts." U.S. Const., Art. 1, s. 10, cl. 1. The Supreme Court has declined to rule on whether Congress may constitutionally sever the value of the dollar from a defined weight of gold, i.e., whether the U.S. monetary system in place since the closing of the gold window in 1971 meets constitutional requirements. See, e.g., Walter W. Fischer v. City of Dover, N.H., et al. No. 91-221 (Petition for Certiorari, copy at www.goldensextant.com/Resources/Copy of fischerweb.htm). But whatever the link between the dollar and gold, the Constitution vests in Congress -- not in the uncontrolled and covertly exercised discretion of executive branch officials -- the exclusive power to define it.
From 1792 to the closure of the gold window in August 1971, gold functioned in an official monetary role under the Constitution and laws of the Unites States. Gold's use in ordinary domestic coinage ended in 1934 with the monetary measures of the New Deal, including the devaluation of the dollar from $ 20.67/ounce to $ 35/ounce and a general prohibition on the ownership of gold by United States citizens. Under the Bretton Woods Agreements (59 Stat. 512 (1945)) adopted after World War II, gold remained at the center of the international monetary system and the United States committed itself to redeem dollars presented by official foreign monetary institutions at the legal standard of $ 35/ounce. When the United States unilaterally ceased redeeming dollars for gold in August 1971, the Bretton Woods system collapsed, and the international payments system moved to floating exchange rates with no currency convertible into gold at fixed parities.
These changes were formally recognized by the Second Amendment to the IMF's Articles of Agreement (IMF Resolution 31-4, approved Apr. 30, 1976, effective Apr. 1, 1978), which prohibits members from linking their currencies to gold (Art. IV, s. 2(b), as amended) and commits the IMF to "the objective of avoiding the management of the price, or the establishment of a fixed price, in the gold market." Art. IV, s. 12(a), as amended.
In 1972, Congress authorized and directed the Secretary of the Treasury to establish a new par value for the dollar of $ 38/ounce (Pub. L. 92-268, s. 2, 86 Stat. 116 (1972)), which it amended in 1973 to $ 42.22/ounce or 0.828948 IMF Special Drawing Right. Pub. L. 93-110, s. 1, 87 Stat. 352 (1973). Effective April 1, 1978, Congress repealed the 1973 par value act, leaving the dollar for the first time since 1792 statutorily undefined with reference to gold or silver. Pub. L. 94-564, s. 6, 90 Stat. 2661 (1976), repealing 31 U.S.C. s. 449. See 31 U.S.C. ss. 314, 821, repealed by Pub. L. 97-258, s. 5, 96 Stat. 877 (1982).
In 1974, Congress eliminated the restrictions adopted forty years earlier on private ownership of gold by American citizens, and soon afterwards trading of COMEX gold contracts resumed. In 1977, Congress repealed the prohibition on gold clauses in private contracts (31 U.S.C. s. 5118(d)(2)), enabling the issue of gold-linked securities, e.g., plaintiff's FCX gold preferred shares. Under the Gold Bullion Coin Act of 1985 (31 U.S.C. s. 5112, as amended by Pub. L. 99-185, 99 Stat. 1177), Congress authorized the United States to resume issuing gold coins with a legal tender face value but sold to the public at the market value of the bullion at time of sale plus costs of minting and distribution.
By its actions since 1971, Congress has effectively declared that for purposes of federal law, gold is no longer money but an ordinary commodity whose value against the dollar should be determined by free market forces. Trading of gold and gold derivatives, including futures and options, now takes place daily through private transactions, in over-the-counter financial markets and on public commodities exchanges, such as the COMEX, which are regulated under the authority of Congress precisely to assure that they function honestly and fairly for all participants. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 362-366 (1982).
2. Pre-1971 Statutes Do Not Permit Gold Market Intervention Today. The Federal Reserve and the ESF are the only instrumentalities of the federal government with broad statutory authority to "deal in gold." As enacted in the original Federal Reserve Act (Dec. 23, 1913, c. 6, s. 14(a), 38 Stat. 264) and unchanged since, 12 U.S.C. s. 354 provides in relevant part:
Every Federal reserve bank shall have power to deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security....
When this statute was enacted, the gold value of the dollar was officially set at $ 20.67/ounce, and the Federal Reserve had no authority to vary this price. This provision, which addresses only what the Federal Reserve can do for its own account, has nothing to do with buying, selling or otherwise dealing with the official gold reserves of the United States, which are under the control of the Secretary of the Treasury acting with the approval of the President. 31 U.S.C. ss. 5116-5118.
Originally created by the Gold Reserve Act of 1934 and funded with profits from the gold confiscation, the ESF is the only other arm of the federal government that "may deal in gold, foreign exchange, and other instruments of credit and securities." 31 U.S.C. s. 5302(b). "Subject to approval by the President, the fund is under the exclusive control of the Secretary [of the Treasury], and may not be used in a way that direct control and custody pass from the President and the Secretary." 31 U.S.C. s. 5302(a)(2). The statute further provides (31 U.S.C. s. 5302(a)(2)): "Decisions of the Secretary are final and may not be reviewed by another officer or employee of the Government."
The DOJ does not argue that this provision precludes judicial review. It does argue that action by the ESF while Mr. Summers was Secretary of the Treasury cannot be attributed to him personally. This argument misrepresents the nature of the ESF, which is a self-financing fund outside the appropriation power of Congress and under the exclusive personal control of the Secretary of the Treasury subject only to the approval of the President. Indeed, the ESF's self-funding nature may well violate the separation of powers. A. J. Schwartz, "From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund," 29 Journal of Money, Credit and Banking 135, 138 (Vol. 29, No. 2, May 1997).
At the same time that it established the ESF, Congress established $ 35/ounce as the new gold value of the dollar and generally prohibited gold ownership by American citizens. It did not confer on the Secretary of the Treasury any authority to modify or vary the gold value of the dollar, only to defend the value that Congress itself had set. By outlawing most private ownership of gold, Congress effectively foreclosed public trading of gold in the United States, leaving virtually no room for the ESF to come into conflict with American citizens lawfully dealing in gold.
Although Congress has left standing an anachronistic official gold price of $ 42.22/oz., no reasonable argument exists that this figure remains a legitimate target for official attempts to stabilize gold prices. By establishing a free market for gold, Congress foreclosed either the Secretary of the Treasury or Federal Reserve officials from setting any particular price or price level for gold, whether acting directly or through instrumentalities such as the BIS.
C. Defendants Summers, Greenspan and McDonough May Be Held Personally Liable in Damages Because They Knew or Should Have Known They Lack Authority to Manipulate Gold Prices.
Both the Secretary of the Treasury acting through the ESF and the Federal Reserve claim authority to intervene in the currency markets for the purpose of affecting the value of the dollar versus other currencies (P.A. Ex. V). They exercise this authority and regularly admit to exercising it, although sometimes not until well after the fact. But neither the ESF nor the Federal Reserve has ever claimed authority to intervene in the gold market for the purpose of affecting the gold value of the dollar. Nor does the DOJ argue in its memoranda that they have this authority. Rather, it suggests correctly that U.S. officials might affect gold prices incidentally as a result of legal sales from U.S. gold reserves. However, no legal sales of this nature have been reported since 1978.
In fact, both Mr. Greenspan directly and Mr. Summers indirectly have acknowledged their awareness that neither the Federal Reserve nor the Secretary of Treasury acting through the ESF has authority to manipulate dollar gold prices. In his letter to Senator Lieberman, Mr. Greenspan stated that transactions by the Federal Reserve "aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate" (C. 98; DOJ Ex. E). Similarly, officials who worked under Secretary Summers, although not Mr. Summers himself, denied any interventions in the gold market by the ESF (P.A. Ex. J). These statements are consistent with trying to cover up financial guarantees or other backing extended by the ESF or the Fed to bullion banks engaged in suppressing gold prices through the use of gold derivatives, not to mention gold swaps by the ESF most likely executed by the N.Y. Fed as its agent.
The complaint alleges, inter alia, that from 1997 through 2000 discrepancies between the gold accounts of the Federal Reserve and the ESF combined with trading losses by the ESF during periods of relatively buoyant gold prices "strongly point to losses on gold trading, probably incurred primarily through some form of participation in gold derivatives, as the reason for the ESF's recent poor trading results" (C. 65). Providing financial guarantees is consistent with ESF practice in other areas, as evidenced by those it gave to the BIS with respect to its Brazilian loans in 1998-1999 (P.A. Ex. K, note 7). What is more, the ESF's balance sheet contains areas where such guarantees or gold swaps, if not off-balance-sheet items, could be hidden, e.g., repurchase agreements with Deutsche Bank (note 2) or transactions involving IMF Special Drawing Rights (note 4), which have an official value of $ 35/ounce.
With total balance sheet assets of some $ 40 billion (P.A. Ex. K), the ESF has ample resources to engage in transactions of sufficient size to affect the gold market. The Federal Reserve has virtually unlimited dollar resources. Both, therefore, have the ability to extend financial guarantees or other support to bullion banks that would reduce their need for protective delta hedging in connection with trading gold derivatives. Done in connection with the writing of call options by bullion banks, this tactic could be very effective in bringing downward pressure on gold prices. The use of gold swaps would make it even more effective by supplying physical gold as well.
Nor can U.S. officials legitimately accomplish through the BIS what they cannot do under federal law. Literature by and about the BIS emphasizes the bedrock importance attached to Article 19 of its Statutes: "The operations of the Bank shall be in conformity with the monetary policy of the central banks of the countries concerned." As Henry H. Schloss wrote in The Bank for International Settlements (North-Holland Publishing Co., Amsterdam, 1958), p. 41: "This provision was important in allaying fears of those who objected to an international superpower which could destroy a country's sovereignty."
Thus, Messrs. Greenspan and McDonough were not only barred by U.S. law from manipulating gold prices, but also possessed a correlative right under Article 19 to require the BIS to respect the free gold market mandated by Congress. If Mr. Greenspan truly thought that U.S. policy prohibited any activities "aimed at manipulating the price of gold," he or Mr. McDonough should have made that point to the BIS under Article 19. Their letter of authority from Secretary of State Christopher expressed an expectation "that active participation of the Federal Reserve on the BIS board will serve U.S. foreign policy interests" (DOJ Ex. C).
Instead, taken as a whole, the evidence warrants a strong inference that the BIS served as a Trojan horse through which top U.S. officials, working with and through the defendant bullion banks, effectively suppressed gold prices. The secretive BIS cooperated because it needed a new mission to avoid, as Mr. Greenspan himself put it (P.A. Ex. I), "being effectively neutered" by the Treaty of Maastricht and the European Central Bank.
D. Defendants Summers, Greenspan and McDonough Knew or Should Have Known They Lack Authority to Arrange for U.S. Membership in the BIS by Purchasing Shares without Authorization and Appropriation by Congress.
The previously undisclosed documents attached to the DOJ's memorandum on behalf of Mr. Greenspan demonstrate at best authority for him and Mr. McDonough to assume seats on the BIS board as that organization was structured in 1994 with the American issue held privately. The DOJ has presented nothing to show that they or Mr. Summers had any authority whatsoever to commit the United States to join a restructured BIS functioning as a public international organization in the manner of the IMF or World Bank.
Withdrawal of the American issue from its private holders has placed Messrs. Greenspan and McDonough as BIS directors in a completely untenable legal and constitutional position. Without the American issue, there is no basis for them to continue to sit on the BIS board unless the Federal Reserve: (1) purchases for its own account the American issue; and (2) submits to the jurisdiction of the "Tribunal" referred to in Article 54 of the Statutes of the Bank (BIS.A. Ex. E). Neither action was authorized in 1994 or has been since.
There are well-established legal and constitutional requirements for U.S. membership in public international organizations. During the 1994-1996 period, Mr. Summers was undersecretary of the treasury for international affairs. He, along with Messrs. Greenspan and McDonough, had direct personal experience with the full panoply of constitutional procedures by which the United States joins international banks or funds, including appropriation of the required funds by Congress and consent by the Senate to any necessary treaty as well as to the appointment of the U.S. representatives to the organization.
The details of these procedures are demonstrated in the historical and statutory notes collected under the opening section of the International Organizations Immunities Act (22 U.S.C.A. s. 288) and nearby sections of Title 22 providing for U.S. membership in specific international organizations. Among the more than 75 international organizations of which the United States is a member are several international banks and funds, including the IMF and the International Bank for Reconstruction and Development (or World Bank). The United States joined the North American Development Bank (22 U.S.C. s. 290m et seq.) in 1994 and the Middle East Development Bank (22 U.S.C. s. 290o et seq.) in 1996.
Like earlier statutes authorizing U.S. membership in international organizations, the 1994 and 1996 acts generally provide: (1) express authorization for the President "to accept membership for the United States" (s. 290m(a); s. 290o); (2) provision for appointment of U.S. representatives by the President "with the advice and consent of the Senate" (s. 290o-1); (3) an appropriation for the subscription of stock by the Secretary of the Treasury (s. 290m(b); s, 290o-4); (4) a requirement that distributions of net income be paid into the Treasury (s. 290m(b)(4); s. 290o–4(d); and (5) provisions relating to jurisdiction of U.S. courts and the Securities and Exchange Commission (s. 290m(g)&(h); s. 290o-5&o-7). What is more, these statutes also make express provision for Federal Reserve Banks to serve as depositories (s. 290m(f); s. 290o-3).
The DOJ has presented nothing, and there is nothing in the public record, to show that Secretary Summers or Messrs. Greenspan or McDonough made any effort whatsoever to follow any of these procedures with respect to the proposal last year to restructure the BIS as a public international organization. Instead, recklessly and wilfully ignoring all relevant constitutional requirements, they proceeded to interfere with the property rights of U.S. holders of the American issue by instigating, approving and/or voting in favor of the freeze-out.
Absent compliance with the required constitutional procedures, there is no authority for the Secretary of the Treasury, the Federal Reserve System or the N.Y. Fed to purchase BIS shares or to submit the United States to the jurisdiction of the Tribunal under Article 54 of the Bank's Statutes. Accordingly, any further participation by the United States in the BIS, or any purchase of its shares by or on behalf of the United States, should be enjoined absent compliance with constitutional requirements. Indeed, injunctive relief is particularly appropriate here, where by requiring the United States to choose between not participating in the BIS or joining it by constitutional means, an injunction might also precipitate voluntary action to remedy the feeze-out's unconstitutional interference with the property rights of holders of the American issue.
E. Defendants Summers, Greenspan and McDonough Knew or Should Have Known that Suppressing Gold Prices through the BIS or Otherwise Is Contrary to U.S. Foreign Policy toward Sub-Saharan Africa.
In 1999, the IMF's proposed gold sales failed to secure approval by Congress as required under 22 U.S.C. s. 286c, which itself was revised to provide in relevant part (Pub.L. 106-113, div. B, s. 1000(a)(5) [title V, s. 504(d)(1)], 113 Stat. 1536, 1501A-317):
Unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the United States ... (g) approve any disposition of Fund gold, unless the Secretary certifies to the Congress that such disposition is necessary for the Fund to restitute gold to its members, or for the Fund to provide liquidity that will enable the Fund to meet member country claims on the Fund or to meet threats to the systemic stability of the international financial system.
At the same time, Congress enacted a new 22 U.S.C. s. 286nn (Pub.L. 106-113, div. B, s. 1000(a)(5) [title V, s. 503(a)], 113 Stat. 1536, 1501A-316) approving a substitute IMF plan to mobilize some of its gold for the purpose of aiding poor countries "without allowing [its] gold to reach the open market or otherwise adversely affecting the market price of gold."
Congress took these actions precisely because the potential economic harm to Africa's sub-Saharan gold producing countries threatened to more than offset any aid that might be generated from the proceeds of the IMF's proposed gold sales. Congressional Record, S7905 (6/30/99); H5339 (7/12/99); E1613 (7/21/99). See D. E. Sanger, "Clinton Aides Seek Alternatives To an I.M.F. Sale of Some Gold," The New York Times, July 23, 1999, p. C4. In a more general vein, there have been many official expressions of U.S. support for the new multiracial government in South Africa as well as for all the struggling democracies of the region. Against these considerations, any efforts after mid-1999 to suppress gold prices and thereby damage the economies of these nations can only be viewed as deliberate circumvention of declared U.S. policy.
The Logan Act, 18 U.S.C. s. 953, provides in relevant part:
Any citizen of the United States, ... who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States, shall be fined ... . [Emphasis supplied.]
Although generating few reported cases, the Logan Act has been asserted in a civil action to try to prevent judicial enforcement of a contract obtained in alleged violation thereof. Waldron v. British Petroleum Co., 231 F.Supp. 72, 88-89 & n. 30 (S.D.N.Y. 1964). Similarly, a federal official whose conduct contravenes the Logan Act should not be allowed to invoke sovereign immunity to defeat a private right of action for damages under the Fifth Amendment arising out of that same conduct, which is itself an affront to the sovereign.
The BIS's board consists mostly of central bank officials who are officers or agents of foreign governments. Unauthorized cooperation with these people, specifically including the Governor of the Bank England, to suppress gold prices is conduct calculated to defeat clearly stated U.S. foreign policy measures. First, it undermines Congress's support for stronger gold prices as reflected in its 1999 enactments relating to IMF gold. Second, it causes serious damage to the economies of gold producing nations in sub-Saharan Africa contrary to U.S. intent. And third, it makes a mockery of the free market principles which the United States advocates worldwide.
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