This article was originally published in Maclean's Magazine on July 1, 1996
Executives are nervously punching new numbers into their calculators at the headquarters of Gibraltar Mines Ltd. in Williams Lake, B.C. The company plans to begin construction of a massive $320-million copper mine in Chile next month, but even their best estimates of just how much money they will make have been snarled by Yasuo Hamanaka - the chief copper trader at Tokyo's Sumitomo Corp. On June 13, Sumitomo officials suddenly fired Hamanaka - who is also known as "Mr. Five Per Cent" for the share of the world copper market he once controlled - claiming he had illegally manipulated the copper market for 10 years, losing $2.4 billion in the largest trading debacle in history. As the scandal spread last week, copper prices tumbled on global markets and regulators around the world began investigating Hamanaka's links to other firms. Gibraltar president Bill Myckatyn was not optimistic about the outcome. "There is a lot of speculation," he said. "I don't think you can get to the bottom of it."
Hamanaka was a legend in trading circles even before he self-destructed. The quiet 48-year-old, wearing his trademark brown suits as he worked with 20 other brokers behind plain metal desks, would buy to drive prices up, sell to bring them down, forcing competitors to follow his lead. He was also, it turns out, cooking the books. For nearly a decade, Hamanaka falsified company records to cover his losses, which when the counting is done could top $4 billion, insiders say. His scheme unravelled when sales records, which were normally diverted to him, somehow reached the rather surprised people in accounting. Hamanaka promptly confessed, leaving it to Sumitomo Corp. president Tomiichi Akiyama to take the heat. "I deeply apologize for having caused this trouble," said Akiyama, as he bowed abjectly at a news conference in Tokyo. "I am overwhelmed with shame." International regulators believe the trading scandal goes beyond Hamanaka. In Washington last week, officials with the U.S. Commodities Futures Trading Commission said they would explore "any and all relationships" Sumitomo had with other firms dealing in copper. In London, Britain's Serious Fraud Office, which probes complex financial crimes, announced it was investigating the Sumitomo matter after discussions with regulators at the London Metals Exchange, home to 94 per cent of the world's copper trading. In addition, Britain's top regulatory agency, the Securities and Investment Board, will examine every aspect of the exchange's operation. LME chief executive David King vowed to co-operate: "We will hang them high and publicly."
In Canada, which supplies about 10 per cent of the world's copper, the long-term effect of the collapsing prices was still uncertain. Bruce Reid, an analyst with Yorkton Securities Inc., notes that a number of new copper mines around the world were scheduled to open over the next two years, and the increased production would have forced copper prices down even without the Hamanaka affair. Most Canadian companies had already built those declining prices into their budgets and profit forecasts; some New York City commodities analysts encouraged clients to sell any shares they have in copper-producing companies well before the Japanese scandal. Share prices of two of Canada's leading nickel producers, Rio Algom Ltd. and Falconbridge Ltd., both of Toronto, have been dropping since reaching their 1996 highs in late May, although prices last week in both firms remained steady.
There is no doubt that Hamanaka's deception will have a direct impact on Gibraltar's new copper mine in Chile. Construction will still begin next month, but Gibraltar chief financial officer Paul Sweeney said the current crisis is troubling. "The copper price has made our bankers a little more nervous," said Sweeney. "There had been an expectation that market prices would ultimately fall. But nobody expected it to happen in such a way."
Rogue trading, of course, is nothing new. In December, 1994, Orange County, Calif., declared bankruptcy after revealing that it had lost $2.2 billion in bonds and derivatives that its treasurer had purchased. In July, 1995, Japan's Daiwa bank disclosed that Toshihide Iguchi, a bond trader at its New York operation, lost $1.5 billion over 11 years selling U.S. government securities. And in perhaps the most sensational loss of all, Nicholas Leeson, a Singapore-based bond trader with the British bank Barings PLC, lost $1.8 billion, plunging the venerable firm into bankruptcy.
In all the cases, regulators were left trying to answer one simple question: how did the wheeler-dealers get away with it for so long? While there is no definitive answer, there is a common thread running through - none of the top executives at the corporations seemed to have safeguards to ensure that they knew exactly what their employees were doing. And as long as there were healthy profits, no one seemed to care. In fact, Hamanaka was so respected at Sumitomo that many young traders wanted to work with him. And when Akiyama became president of the firm in 1990, he immediately asked to see him. "I felt relieved," recalled Akiyama, "since he was a sincere man contrary to my expectation."
In reality, Mr. Five Per Cent was sincerely crooked. According to Akiyama, Hamanaka kept a private set of books carefully detailing his illegal trades. But for the moment, the details remain murky. In his latest scam, industry observers speculate that, at a time when influential commodity-fund traders were dumping copper, Hamanaka may have been buying massive amounts of the metal to prop up prices artificially.
Akiyama, who says his firm may yet ask police to charge Hamanaka with fraud, blamed the whole debacle on the actions of a single individual, and not company-wide negligence. "Hamanaka abused the name of Sumitomo Corp.," he said. "He carried through the trades entirely on his own initiative." Commentators in Japan, however, were not buying Akiyama's lone-wolf theory. Could the illegal actions of such an influential trader really go undetected at Sumitomo, a 400-year-old company that was considered one of the most conservative and well run in the country? Even the chief cabinet secretary of the government, Seiroku Kajiyama, complained that the scandal was an indication of declining corporate morals. Numerous editorials also said the incident had damaged Japan's reputation abroad. "Giant corporations represent the country," stated an editorial in the Tokyo daily newspaper Yomiuri Shimbun. "The eye-boggling losses and lax management will all adversely affect international trust in Japanese corporations."
People who have worked closely with Hamanaka, however, say officials at LME have to shoulder some of the blame because they were warned about his shady deals almost five years ago. In 1991, David Threlkeld, a copper trader who was then based in London, told authorities that Hamanaka had asked him to falsify trading records. Hamanaka was subsequently investigated in what became known as the Coppergate affair, but no evidence was found. Two years later, the LME probed his trading again but took no action.
Hamanaka's power was never in question. Earlier this year, rumors that he had left Sumitomo drove prices down on international markets. And after his confession, the price of copper tumbled 11 per cent to 92.9 cents (U.S.) a pound last week. Many commodities brokers now believe that it could decline further because Hamanaka had amassed a store of 400,000 tonnes of copper at Sumitomo. If the firm decides to sell off its massive holdings, traders fear prices will slide again. Akiyama tried to calm the markets by assuring traders that the company had "no immediate plans" to dump its hoard. But in the suddenly volatile world of copper trading, no one was taking anything for granted.
Maclean's July 1, 1996