LONDON/NEW YORK – Nov 15 (Reuters) – In the mid-1990s the London Metal Exchange was embroiled in a criminal investigation after the discovery that a trader – nicknamed Mr 5 Percent for the share of the world’s copper he reputedly controlled – had spent years manipulating its systems to hoard copper and boost the price.
The episode, when Japanese trade house Sumitomo Corp’s head trader Yasuo Hamanaka racked up $2.6 billion in unauthorised losses trying to corner the copper market, plunged the LME into crisis and led to an investigation by the British government.
No criminal charges were ever brought in the UK, but a 1997 probe by former Treasury official Alan Whiting triggered an overhaul of the rule book of the world’s biggest metals market and introduced limits on traders’ positions.
While lessons were learned from the incident, a review of the Whiting report and other LME reports spanning 17 years suggests opportunities may have been missed to prevent a more recent controversy.
Lawsuits filed by manufacturers in the United States in recent months assert that, enabled by LME rules, banks and traders hoarded metal in warehouses they owned, raising prices. The firms and the LME say the claims are baseless.
In his report Whiting flagged potential conflicts of interest in the LME’s global metal warehouse system – the some 700 warehouses certified by the LME to hold metals that meet its specifications.
Whiting highlighted the relationship between warehouse companies and members of the exchange and identified several threats to a well-functioning market – the practice of long-term storage, incentives offered by warehouses to encourage storage, the charges levied by warehouse companies to extract stocks and delays in delivery.
Fast forward to 2013.
The LME, which was sold last year by its member owners to the operator of the Hong Kong stock exchange, is a defendant in the lawsuits accusing Goldman Sachs, JPMorgan and Glencore-Xstrata of rigging the aluminium market and violating anti-trust laws.
The lawsuits accuse the banks and traders of stockpiling metal in warehouses, delivering it out at the minimum pace and driving up the prices of industrial products from soft-drink cans to aircraft. Plaintiffs argue the LME abetted the scheme by writing rules that made it possible and ignoring calls to change. The LME says its rules were made independently.
The lawsuits coincide with a probe by the U.S. Department of Justice into the metals warehousing industry and the ownership of physical assets by Wall Street banks.
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