Manipulation on Trial.

• Author: Webb, Samuel C.

Did the Hunt brothers (Bunker, Herbert and Lamar) and associates really manipulate the silver market during the 1979-80 price spike period? The jury verdict in the 1988 trial of Minpeco v. Hunt said, "Yes." But would a jury composed of efficient market economists come to the same conclusion? Perhaps not, based upon the fascinating account by an expert witness economist for the defense, Jeffrey Williams of Stanford University.

Williams identifies four kinds of manipulation: (I) A "corner" or "squeeze" whereby a player in the futures market holds so much stock of a given commodity that other players must pay exorbitant prices to fulfill their "short" contract commitments; (2) a "rumor" of impending shortages of a commodity or related futures contract that is started by an established market player that is believed by other market participants long enough to allow the player to liquidate his position at top prices; (3) a statement by the manipulator professing broad "investor interest" to hold the commodity that allows the manipulator time to sell out at a high price; and (4) a type unknown in commodity law prior to the Hunt case:

A "price-effect" manipulation, in which a trader holding an opinion about the commodity's long-run value buys (or sells) it in sufficient quantity to influence the current price, knowing that such an effect on price will occur [p. 7].

Williams was dismayed to learn that, ex post, the Hunts were found guilty of type (4) manipulation which had never been identified previously in commodity law as being illegal. "Thus comes the main lesson from the Hunt silver case: Law involving such complex subjects is, in effect, created retroactively" [p. 212].

The plaintiff's lawyers' mind set was that if their client suffered damages, then somebody must have caused it, and it must have been done with malicious intent (which makes the behavior illegal). Is it possible that the Hunts had innocently (with no ill will toward any other person) played in an impersonal market, one that depends upon participants trading contracts they all hope will be profitable? Williams wonders if the Hunts' only misbehavior was that the size of their positions were too large and they appeared uncooperative to regulators [p. 212]?

Williams's frustrations as an expert witness are revealed by a theme he develops in all his essays that economic experts for both sides "based their analysis on unarticulated assumptions . . . about the nature of manipulation...