Patrick Donovan in London
The mysterious Yasuo Hamanaka, the disgraced chief copper dealer at Japan’s Sumitomo Corporation, has found himself cast in the sinister role of “Mr Big” in what appears to have been a worldwide attempt to rig the global commodities markets.
For more than 10 years, he has apparently carried out more than $20-billion worth of unauthorised trades, which came to light only this month when the market finally turned against him. Sumitomo was forced to announce that it was confronted with losses of at least $1,8-billion.
This has resulted in the wholly misleading perception that the market manipulations which have bedevilled the price of copper for at least the last decade have all been masterminded by a single “rogue trader”.
This misconception is due in part to the press’s enthusiasm for simplifying the saga by demonising Hamanaka as a kind of James Bond villain, holding the international commodity markets to ransom from a dealing desk.
But the confusion has also been caused by the complexity of events which now appear to involve virtually every participant of any substance in the global metal markets.
The reality is that Hamanaka is only one major player in a series of at least three different scams, all of Byzantine complexity, which have allowed copper dealers to exploit the woefully under-policed commodity markets for more than 10 years.
The underlying explanation for all this is that commodity dealings are far more lightly regulated than trading in stock exchange-listed shares. Such are the loopholes that markets like the London Metal Exchange (LME) — the world’s largest non-ferrous commodity floor — have tended to attract more than their share of those with a flexible interpretation of ethical business practice.
The result is that there is no simple “Sumitomo affair”. There are at least three different theatres of fraud being examined by police and specialist investigators.
l Taking events chronologically, the first is the Codelco scandal, in which the Chilean state-owned producer discovered three years ago that it had spawned its own “rogue trader”, who had lost the company at least $170-million, lining his pocket with bribes in return for agreeing to strike hugely attractive deals.
With the threat of a life sentence in a Chilean jail, the “rogue dealer”, one Juan Davila, is said to have become enormously co-operative, “singing his heart out” to the authorities, according to reports in Santiago.
The Chilean government, meanwhile, has already taken out writs against two major European trading companies, accusing them of irregular trades with Davila.
It remains uncertain whether there are any links between this affair and the Sumitomo fraud, or whether Davila had any business dealings with Sumitomo. Codelco said it has no hard evidence of any such connections.
Certainly, there is widespread suspicion that other parties may have been involved in the scams. And the Chileans have hired lawyers to try to trace money lost through London.
l The second theatre of investigation is Sumitomo and the role of Hamanaka within the company. This has come under the spotlight over the last few days because of the visit by Britain’s Serious Fraud Office and other London regulators to liaise with their Japanese counterparts.
Known as “Mr Copper”, Hamanaka had huge personal sway within the market. Such was the mythology surrounding him that where he led, the rest of the market followed. This was not as illogical as it sounds: he represented a company that was not only the largest player in the copper market but had powerful financial resources.
It is here that the mystery deepens. Highly unusually for an employee of a large Japanese corporation, Hamanaka enjoyed autonomy in the running of his trading positions. Not only did he have the freedom to run his own trading book, which was not subject to the regular scrutiny of his auditors, but he also routinely logged trades through third parties — again contrary to market practice. On these counts alone, it looks highly likely that he enjoyed the tacit complicity of his superiors.
But what was actually happening? The nub of this part of the affair is that Hamanaka was trading on such a scale that he was rapidly moving into the position of being able to control prices on the entire market.
The best explanation lies in the small print of a United States law suit being brought against Sumitomo by a Wall Street trader, Vincent Zuccarelli. Put simply, Zuccarelli’s lawyers are accusing Sumitomo of distorting the copper markets “by accumulating, in an uneconomic fashion, holdings of substantial stocks of physical copper”. These stocks, the lawyers say, far exceeded Sumitomo’s needs. The result was an artificial level in the price of copper for immediate delivery.
Having taken effective control over the copper price, Sumitomo was then in a position to reap massive profits by making deals on the futures market; an effectively risk-free venture, as Hamanaka could manipulate the direction in which the market was heading.
But the scam depended on Sumitomo keeping up the copper price by buying ever larger quantities of metal stocks. The market called his bluff and started selling, larger and ever larger amounts.
For a while, Hamanaka managed to keep his head above water. But by the middle of last month, the market got wind of plans by Sumitomo to move Hamanaka to a new position.
Whether the reshuffle was prompted by Sumitimo hearing of the fraud remains a matter of conjecture — as does the suggestion that the company may have tried to unwind its positions before making public the extent of its losses on the world copper market.
l But Hamanaka was not acting alone — bringing us to the third theatre of investigation. His trades involved dealings with the Chinese government and he was closely linked with a number of Western metal broking concerns. In the case of New York-based Global Minerals and Metals Corporation, which is now being investigated by the regulatory authorities, the relationship was such that he even gave power of attorney to the company over at least one of Sumitomo’s London bank accounts at Merrill Lynch.
But how many companies were utilising Hamanaka’s deals for their own use? And how involved were they in liaising over the trades? Anybody with advance warning of how he was going to trade could very profitably use the anticipated price movement to pitch in their own deal before Sumitomo’s transaction was made public.
This is where the “Guernsey link” fits in, the suspicion that money could in some way have been siphoned off from irregular Hamanaka-related deals in the LME markets. A raid was made last month by police in connection with the investigation, but no public announcement has until now been made.
Hamanaka, far from being the master-mind behind this whole affair, may have been merely the agent of a price-fixing scam orchestrated from one of the Western commodity markets. This is what the Serious Fraud Office now has to unravel.
The real victims are the third world producers, the lowly paid day-rate miners in Chile, Zambia and China whose livelihood has been threatened by the greed of global speculators who play the commodity markets like an outsized casino.