* No basis for enforcement action regarding silver -CFTC
* Decision highlights hurdles faced by regulators
* CFTC's Commissioner Chilton disappointed at outcome
* Investors more at ease on silver after probe - traders
(Adds trader's comment, background, paragraphs 10, 18-20, 27)
By Frank Tang and Douwe Miedema
NEW YORK/WASHINGTON, Sept 25 U.S. regulators on
Wednesday closed a five-year investigation into alleged
manipulation of the silver market, saying 7,000 staff hours of
investigation produced no evidence of wrongdoing.
The decision by the Commodity Futures Trading Commission was
a defeat for silver commentators and investors who urged the
probe, saying big banks were using futures and options to hold
prices down. Big traders had dismissed the investigation as a
waste of time and the charges as a conspiracy theory.
The CFTC formally closed the probe six months after a U.S.
District Court dismissed a class action lawsuit making similar
claims against JPMorgan Chase & Co..
"Based upon the law and evidence as they exist at this time,
there is not a viable basis to bring an enforcement action with
respect to any firm or its employees related to our
investigation of silver markets," the CFTC said.
The CFTC typically does not comment on ongoing inquiries,
but made the silver case public in 2008 after receiving
complaints alleging manipulation of the silver futures contracts
traded on the Commodity Exchange Inc (COMEX). The agency
launches dozens of such investigations each year, many of which
do not result in formal charges or action.
The probe gathered urgency in 2011, as silver prices
doubled to a record of nearly $50 an ounce, then collapsed
nearly 30 percent in five days. That roller-coaster ride brought
back memories of the Hunt Brothers silver short squeeze in 1980.
The CFTC said the allegations "asserted that because the
prices for retail silver products, such as coins and bullion,
had increased, the price of silver futures contracts should have
also experienced an increase."
The complainants, who were not named, also cited public
regulatory data on futures traders to support claims that
several large short positions were depressing prices, it said.
The decision may highlight the high hurdles that U.S.
regulators face in proving a case of "market manipulation", even
after the CFTC was given greater powers to crack down on trading
malfeasance after the 2010 Dodd-Frank financial reforms.
In the past, the CFTC has levied heavy fines for trading
rule violations. Yet only once in its 36-year history has it
successfully concluded a manipulation prosecution: a 1998 case
concerning electricity futures prices.
U.S. REGULATORS VS WALL ST
Closing of the probe was a rare bright spot for Wall Street
commodities players during a year in which the U.S. power market
regulator has leveled record fines against two big banks, and
the Federal Reserve is considering whether to rein in Wall
Street's ability to operate in physical markets.
But Democrat commissioner Bart Chilton, who had championed
the silver inquiry, said he was disappointed.
"For me, there's not been a more frustrating nor
disappointing non-policy-related matter at the CFTC," he said in
a statement after the agency's announcement.
The Gold Anti-Trust Action Committee, an advocacy group that
believes the Federal Reserve and banks are colluding to keep
gold and silver prices artificially low, said it was not
surprised by the CFTC decision.
"We believe that the U.S. government is part of the trading
operation. In essence, you are not going to have the CFTC turns
against its own government," GATA Chairman Bill Murphy said.
"We are not even slightly surprised and had expected this."
A JPMorgan spokesperson declined to comment.
Commodities traders said it makes no sense for banks to
distort precious metals prices, since they generally earn more
from trading on behalf of clients in an orderly market.
"The fact that the CFTC couldn't prove any illicit
activities in the silver market is enough to let people feel
more at east trading there," said Miguel Perez-Santalla, a
veteran precious metals trader for more than 20 years and now
vice president of online precious metals market BullionVault.
"The silver market is much greater than the sum of the
players," he said.
NO STRANGER TO SCANDAL
Although silver is most visibly used in jewelry, it has wide
industrial uses, including in electrical switches, circuit
breakers and solar panels. The metal has also featured
prominently in modern commodity market scandals.
In the most memorable case, the Hunt brothers of Texas
hoarded the precious metal, aiming to corner the market and
control global prices starting in the late 1970s.
But the silver market collapsed in 1980 and the Hunt
brothers declared bankruptcy. Their losses grew and in 1989 they
were convicted of conspiring to manipulate the market.
In 2004, the CFTC had published an open letter to silver
investors telling them that the existence of a long-term
manipulation was not plausible and that an analysis of activity
in the silver futures market at that time did not support the
conclusion that the market was being manipulated.
In October 2010, JPMorgan and HSBC, two of the world's
largest banks participating in precious metals derivative
contracts, were hit with lawsuits accusing them of conspiring to
drive down silver prices by amassing huge silver shorts, a
trading position designed to profit from a fall in prices.
HSBC was later dropped from the complaints, which had
alleged the firms reaped up to hundreds of millions of dollars
of illegal profits, and a judge dismissed the consolidated
lawsuit in March.
The District Court judge said that while the investors
showed that JPMorgan had the ability to influence prices, a fact
the bank did not dispute, they failed to show that the bank
"intended to cause artificial prices to exist" and acted
(Reporting by Frank Tang and Karey Van Hall; Editing by Gerald
E. McCormick and Leslie Adler)