May 21, 1999
CFTC Charges Merrill Lynch
In Sumitomo Copper Scandal
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
The Commodity Futures Trading Commission, capping a three-year
inquiry, filed a civil administrative charge against Merrill Lynch & Co.
involving the big securities firm's role in the 1996 Sumitomo Corp.
The complaint alleges that Merrill officials
"knowingly and intentionally aided, abetted
and assisted the world-wide manipulation and
the attempted manipulation of copper prices"
by providing credit and finance to Japan's
Sumitomo and to another company, Global
Minerals & Metals Corp., New York.
"Merrill Lynch participated in the manipulation
as something it wished to bring about because
Merrill Lynch earned money as copper prices
rose," the complaint says.
The action against Merrill is a major
development in the investigation of the $2.6
billion Sumitomo scandal, which rocked
world-wide copper markets. The CFTC
complaint alleges "that the manipulation of
copper prices was the culmination of a long
and deliberate scheme" by a top official at
Global Minerals and Sumitomo's former chief
copper trader, Yasuo Hamanaka, to acquire
large market positions and liquidate them at distorted and artificially high
prices. Mr. Hamanaka was found guilty in Tokyo of fraud and forgery
charges and sent to prison.
The CFTC also filed an administrative complaint against Global Minerals,
the company's president and chief executive officer, R. David Campbell,
and its chief copper trader Carl Alm, alleging that they manipulated and
cornered the copper market in late 1995.
"The filing of this proceeding today culminates a three-year investigation
which the division uncovered what I believe is one of the most serious
world-wide manipulations of a commodities market encountered in the
25-year history of the commission," said Geoffrey Aronow, director of the
CFTC's enforcement division.
The Copper Debacle
Major events in the Sumitomo Corp. copper-trading case:
June 1996: Amid tumult in the copper market, Sumitomo Corp.
stuns global traders with disclosure that it had lost $1.8 billion
(quickly amended to $2.6 billion) in allegedly unauthorized trades by
head copper trader Yasuo Hamanaka.
October 1996: Japanese authorities arrest Mr. Hamanaka on
charges he forged documents involving trades with Merrill Lynch
and other metals-trading firms.
May 1998: Sumitomo consents to pay $125 million to settle case
with Commodity Futures Trading Commission.
Thursday: CFTC files civil administrative charges against Merrill
Lynch, accusing it of aiding the copper debacle.
Merrill denied wrongdoing. In a statement, the securities firm said the
allegations are "without merit and the company intends to defend itself in
this matter." The statement also said Merrill "had no knowledge that the
conduct of Sumitomo, one of the world's largest companies, was unlawful
and Merrill Lynch had no intention to render assistance to any conduct that
Peter Haveles, a lawyer for Global Minerals, said in a statement that the
complaint "is based on an Alice in Wonderland view of the facts." He
added that the company is "confident that the administrative law judge will
conclude that the complaint against [Global] and two of its officers is
without merit and that none of them violated the Commodity Exchange
Act." Mr. Campbell couldn't be reached for comment Thursday, and Mr.
Alm declined to comment, referring calls to Mr. Haveles.
In its complaint, the CFTC alleged an unnamed Merrill managing director
devised a plan "whereby Sumitomo and Global opened an account in the
name of Sumitomo," in which Global would have trading authority, but
which was backed by Sumitomo's credit.
In the spring of 1994, the complaint said, Mr. Alm, Global's chief copper
trader, began to purchase "long" forward copper positions on the London
Metal Exchange (betting that copper prices would rise), primarily through
a Merrill account. Martyn Phillips, a former Merrill Lynch trader,
discussed strategies with Mr. Alm, the complaint said, designed to "drive
market prices to artificially high levels." Mr. Phillips couldn't be reached for
comment, but a Merrill spokesman said no Merrill employee was aware of
or participated in the alleged manipulation.
Together with Sumitomo's long positions at Merrill, and also at other
brokers, Sumitomo and Global held 1.35 million metric tons of London
Metal Exchange forward copper contracts, the CFTC said.
In September 1994, two Merrill officials, including Flavio Bartmann, then
head of the firm's Global Commodities Group, met with Mr. Hamanaka
and his supervisor from Sumitomo, according to the complaint. Mr.
Bartmann wasn't named in the complaint, but the CFTC alleges that Mr.
Bartmann understood that Mr. Hamanaka was speculating -- not only
hedging -- in the copper-futures markets. Mr. Bartmann had no comment,
but his spokesman said that his client had "no knowledge that the conduct
of Sumitomo was unlawful and neither he nor anyone else at Merrill had
any intention to aid any conduct that was improper."
The CFTC complaint goes on to say that Sumitomo and Global were able
to acquire additional London Metal Exchange warrants by obtaining
additional lines of credit through Merrill, and other brokers. "In aggregate,
Merrill Lynch provided well over one-half billion dollars in financing to the
conspirators," the complaint said. It said officials at Merrill, including Paul
Kaju, then the managing director of Merrill's base-metals desk, "had
correctly concluded that Global and Sumitomo's warrant-taking operation
was motivated by their intention to manipulate prices and spread, not by
genuine commercial need, and that Global and Sumitomo were attempting
to manipulate, and were successfully manipulating the world's copper
Mr. Kaju, who is no longer with Merrill Lynch, wasn't named in the action.
In a statement, his lawyer Charles Stillman said: "It is noteworthy that Mr.
Kaju is not charged with any wrongdoing. Every step Paul Kaju took
dealing with [Sumitomo] and the others was designed to protect against
any improper activities. Mr. Kaju at all times conducted himself
professionally and properly."
While Merrill's role in the CFTC inquiry is new, last year the agency issued
an order against Sumitomo, which consented without admitting or denying
wrongdoing, to pay a total of $150 million to settle the matter.
The CFTC, which oversees U.S. futures markets, began its investigation
Sumitomo after the company revealed in June 1996 that Mr. Hamanaka,
its star trader, lost nearly $3 billion in unauthorized copper trades.
Some analysts said the charges against Merrill appear somewhat similar
those waged against the securities firm for its role in selling securities to
Orange County, Calif., in its 1994 derivatives debacle. Merrill eventually
paid over $400 million as part of a civil settlement with Orange County,
$30 million to resolve a criminal investigation and $2 million to resolve an
inquiry launched by the U.S. Securities and Exchange Commission.
Possible sanctions in the CFTC matter include directing respondents to
cease and desist from violating the Commodity Exchange Act, and civil
monetary penalties of no higher than $100,000 or triple the monetary gain
for each violation, which could cost the firm millions of dollars, people
close to the inquiry say. Merrill may also be forced to pay restitution to
market players damaged by the alleged violations, the CFTC said.
The CFTC said it would hold a public hearing on the charges; a hearing
date hasn't been set.