https://financetrain.

com/risk-management-case-study-sumitomo-derivatives-
losses/
https://funfin.wordpress.com/2009/07/27/largetderivativedisasters/
https://www.thecasecentre.org/main/products/view?id=19409
https://www.ukessays.com/essays/finance/sumitomo-corporation-and-yasuo-
hamanakas-copper-scandal-finance-essay.php
https://www.ukessays.com/essays/finance/sumitomo-corporation-and-yasuo-
hamanakas-copper-scandal-finance-essay.php

Sumitomo Corporation

Background of Case
Yasuo Hamanaka was believed to be an expert in Risk Management and was one of
the key and truested employee of Sumitomo. He had a star trader status and was
vested with executive decision-making powers by the firm.
Sumitomo owned large amounts of copper that was warehoused and
stored in factories as well as numerous futures contracts.
From his perch at the head of Sumitomo's metal-trading division,
Hamanaka controlled 5% of the world's copper supply. This sounds like a
small amount, since 95% was being held in other hands. Copper, however,
is an illiquid commodity that cannot be easily transferred around the world
to meet shortages. For example, a rise in copper prices due to a shortage
in the U.S. will not be immediately canceled out by shipments from
countries with an excess of copper. This is because moving copper from
storage to delivery to storage costs money, and those costs can cancel out
the price differences. The challenges in shuffling copper around the world
and the fact that even the biggest players only hold a small percentage of
the market made Hamanaka's 5% very significant.

Sumitomo also benefitted from the commissions on the other copper

transactions that were handled by the company. Commissions were
handled by the percentage of the value of the commodity being sold and
delivered.

The financial world had been confronted heavily by trading scandals in 1995, with
Japan’s Daiwa Bank and the rouge trader, Nick Leeson. When it seemed the scandals
couldn’t get much worse, the Sumitomo Copper Scandal emerged. This was the biggest
scandal in the history of commodities trading and ranked in the top five trading losses in
financial history up until the late 1990’s. Sumitomo Corporation is a Japanese trading
house, which is currently one of the largest worldwide trading companies headquartered
in Tokyo, Japan. In the 1990’s Sumitomo owned large amounts of both physical copper,
which was stored in warehouses and factories, as well as numerous futures contracts.
Copper was a relatively small market compared to other metals, such as aluminum.

The Setup
Sumitomo owned large amounts of physical copper, copper sitting in
warehouses and factories, as well as holding numerous futures contracts.
Hamanaka used Sumitomo's size and large cash reserves to both corner
and squeeze the market via the London Metal Exchange (LME). As the
world's biggest metal exchange, the LME copper price essentially dictated
the world copper price. Hamanaka kept this price artificially high for nearly
a decade leading up to 1995, thus getting premium profits on the sale of
Sumitomo's physical assets.
Beyond the sale of its copper, Sumitomo benefited in the form
of commission on other copper transactions it handled, because the
commissions are calculated as a percentage of the value of the commodity
being sold, delivered, etc. The artificially high price netted the company
larger commissions on all of its copper transactions.

What Happened? – Sumitomo Copper Derivatives trades

Sumitomo Corporation lost around USD 2.5 billion in the copper derivatives. This is a classic
case of – ‘Running on the top of tiger not knowing how to get off without being eaten.’
Yasuno Hamanaka the head trader of Sumitomo Corporation manipulated the world copper
prices through his operations on the LME (London Metal Exchange) copper futures market over
the period of 1991-95. This artificial increase in copper price resulted in increased profits for
Sumitomo Corporation from selling copper. Whenever any hedge fund or speculator who was
aware of manipulation tried to take short position, Hamanaka invested more money into his
positions thus sustaining the high price.
During late 1995 due to increased copper production facilities particularly in China copper
prices started declining. That was ominous for Sumitomo as they had long positions in the
futures market. Hamanaka failed to get rid his positions. Later when LME started investigating
on the alleged manipulation of copper prices Hamanaka was taken off from his position of
head trader. This brought the short traders and hedge funds into the act causing the Copper
prices to fall further on LME. In September 1996 Sumitomo Corporation the figure of USD 2.6
billion as the loss on derivatives trading which was about 10% of Sumitomo’s annual sales.
For ten years, Yasuo Hamanaka had successfully managed to control the world’s price of
copper. He eventually came to control five percent of the entire supply of copper, which
may not seem like much considering ninety-five percent was in other trader’s hands
(Beattle). However, due to the fact the abundant and cumbersome challenges that exist in
the copper market (in movement, delivery, etc.) and the fact that even the largest traders
in the market owned an even smaller percentage, Hamanaka’s five percent was indeed
very significant.

During the ten years of his manipulation he was able to use Sumitomo’s size and large
cash reserves to corner and squeeze the market through the London Metal Exchange. The
London Metal Exchange is the world’s biggest metal exchange. Furthermore, the London
Metal Exchange’s copper price essentially dictated the world’s copper price at the time
(Beattle). Although the London Metal Exchange was large in size, it was fairly poor in
terms of regulation. In fact, this exchange had little to no regulation at the time of
Hamanaka’s rampant market manipulation. The Sumitomo Copper Scandal lasted for
about a decade due to these negligent and almost nonexistent regulations on behalf of this
particular exchange.

To put the entire crisis into laymen’s terms, one must first understand that Hamanaka was
taking a long futures position on copper and simultaneously buying up a substantial
amount of physical copper as well. This caused any one trader who took a short futures
position to have to buy long positions in order to cancel out their short positions. Due to
the fact that Hamanaka had a large number of long positions, those people looking to buy
them had to pay increasingly higher prices. These skyrocketing futures prices are what
Hamanaka was able to control; the more the prices rose, the more money he made. This is
because those with short positions were still paying this higher price in order to liquidate
those positions. Another way that Hamanaka was making money was that while these
prices continued to rise, some people holding short positions thought that instead of
paying a high price for a long position they would buy the physical copper and deliver it
to the holder of the long positions. So, because Hamanaka also owned 5% of the physical
copper he could charge a very high price to those with short positions because they didn’t
want to keep paying money to liquidate their short positions. Essentially, he was making
money by owning long futures as well as physical copper.

How it happened?/ Causes of the loss

This disaster was the result of successful manipulation of the copper prices due to lack of
transparency in the reporting positions of large clients at LME. CFTC (Commodities Futures
Trading Commission) which regulated US futures market required regular reporting from the
large client on all US exchanges which was not the case with SIB (Securities and Investments
Board) which oversees regulation of all London Financial markets. Financial Services Act under
which the financial markets of Britain are governed also failed to provide any explicit
provisions in case of price manipulation. Thus it was difficult for the regulators to identify the
potential manipulating position.

There were some losses that Sumitomo had incurred just when
Hamanaka had taken charge. He tried to recover the losses by taking
huge positions in copper commodity futures on the London Metal
Exchange. He tried to use the firm’s large cash reserves to both corner
and squeeze the market and kept the price artificially high for the entire
decade leading up to 1995 and garnished premium profits on the sale of
Sumitomo’s physical assets.

This of course attracted the attention of the exchange and it gave a

warning to Hamanaka who then struck a deal via Merrill Lynch for USD
150 million, which enabled him to trade at LME. He borrowed money
from several banks without any authorization from his seniors. He used
the funds either to buy copper or pay for the collateral he was required
to deposit at the LME to cover loss making positions. By 1990 he was
reporting huge trading profits to the top management by showing
invoices of the fictitious options trades which he had created through
some nexus with some brokers. Whenever anyone attempted to short
the market he would pour more cash into positions thereby sustaining
the price and outlasting the shorts, simply because he had more cash.
The long cash positions forced anyone shorting copper to deliver the
goods or close out their position at a premium.

Unlike the US, the LME had no mandatory position reporting and no
statistics showing open interest. Basically traders knew the price was
too high, but they did not have the exact figures of how much
Hamanaka controlled and how much money he had in reserve. In the
end most cut their losses and had Hamanaka have his way. Nearly a
decade after this market manipulation took place in 1995 due to the
resurgence of the mining in China the price of copper started to revive
which further inflated the prices. Sumitomo was exposed to losses
because the market was headed for a big drop and shorting the
positions then would result in an even bigger loss at a faster rate.

Analysts felt that the debacle was a result of Sumitomo’s poor

managerial, financial and operational control systems, which enabled
Hamanaka to carry out unauthorized trading activities undetected by the
top management. There was a lack of effective monitoring and
supervision of his trading activities.

The sorts of risks that cause this loss are market risk, operational risk –
supervision and fraud – market manipulation.

On taking charge of the copper trading team, Hamanaka tried to recover the losses by taking
huge positions in copper commodity futures on the London Metal Exchange.

The huge volume of trading attracted the attention of the exchange and it gave a warning to
Hamanaka. Hamanaka then struck a deal with Merrill Lynch for US $150 mn, which enabled him
to trade via Merrill at LME.

Hamanaka borrowed money from several banks without any authorization from his seniors. He
used the funds either to buy copper or pay for the collateral that he was required to deposit at the
LME to cover loss-making positions. By 1990, Hamanaka was reporting huge trading profits to
the top management by showing invoices of fictitious option trades, which he had created through
a nexus with some brokers...

WHY:
There are no assured reasons as to why Hamanaka engaged in such illegal trades. Perhaps
he felt pressured to maintain the consistent levels of annual revenue for Sumitomo’s
traditional copper business-about ten billion dollars. He would therefore maintain his
reputation as a phenomenal copper trader as well as his firm’s dominance in the
commodities market.

It is also important to note that individuals such as Hamanaka, do attempt to corner the
market in order to create an unfair advantage by purchasing a significant amount of
shares. This eventually increases the price of shares, making them appear to have a
greater value. As the price of the shares continues to rise, more buyers become attracted,
and then demand further increases the price of the shares. This causes short sellers to be
driven out of the market through a short squeeze. In the article Short Squeeze, it explains
that a short squeeze is a situation in which an increase in the price of the stock triggers a
rush of buying activity among short sellers. Therefore, it is necessary for the short sellers
to buy stock in order to close out their short positions to minimize their losses, causing a
further increase in stock prices. Overtime, this causes one to sell their holdings at an
artificially inflated price and then leave their investment or opt to sell their shares with
the knowledge that the price will decrease once normal supply and demand forces return
(Investing Answers).

Analysts felt that the debacle was the result of Sumitomo's poor managerial, financial and
operational control systems. Due to this, Hamanaka was able to carry on unauthorized trading
activities undetected by the top management.

The vesting of excessive decision power on

a single employee and failure to implement
the job rotation policy were the other
reasons cited.

LACK OF SUPERVISION/INVOLVEMENT
OF SENIOR MANAGEMENT

There was a lack of effective monitoring and

supervision of Hamanaka's trading
activities. Hamanaka was believed to be an
expert in risk management and had a star
trader status at Sumitomo. By entering into
fictitious trades and manipulating accounts,
Hamanaka successfully misled the
management to believe that he was making
huge profits...

Smashing the Shorts

Hamanaka's manipulation was common knowledge among many
speculators and hedge funds, along with the fact that he was long in both
physical holdings and futures in copper. Whenever someone tried
to short Hamanaka, however, he kept pouring cash into his positions,
outlasting the shorts simply by having deeper pockets. Hamanaka's long
cash positions forced anyone shorting copper to deliver the goods or close
out their position at a premium.

He was helped greatly by the fact that, unlike the U.S., the LME had no
mandatory position reporting and no statistics showing open interest.
Basically, traders knew the price was too high, but they had no exact
figures on how much Hamanaka controlled and how much money he had
in reserve. In the end, most cut their losses and let Hamanaka have his
way.

Mr. Copper's Fall

The market conditions changed in 1995, in no small part thanks to the
resurgence of mining in China..

Denial
Sumitomo responded to the probe by "transferring" Hamanaka out of his
trading post. The removal of Mr. Copper was enough to bring the shorts on
in earnest. Copper plunged, and Sumitomo announced that it had lost over
$1.8 billion, and the losses could go as high as $5 billion, as the long
positions were settled in a poor market. They also claimed Hamanaka was
a rogue trader and his actions were completely unknown to management.
Hamanaka was charged with forging his supervisor's signatures on a form
and was convicted.

Sumitomo's reputation was tarnished, because many people believed that

the company couldn't have been ignorant of Hamanaka's hold on the
copper market, especially as it profited from it for years. Traders argued
that Sumitomo must have known, as it funneled more money to Hamanaka
every time speculators tried to shake his price.

Fallout

Responsible parties
.

When Sumitomo Corporation’s reputation began to tarnish from individuals outside the
company, they responded to the allegations by stating that Merrill Lynch and JPMorgan
Chase were the two banks responsible. In the article The Copper King: An Empire Built
On Manipulation, author Andrew Beattle explains that Sumitomo Corporation claimed
that Merrill Lynch and JPMorgan Chase granted the loans to Hamanaka via future
derivatives; hence the two banks kept the scheme going. Consequently, both banks were
found guilty to some extent (Beattle).
The Aftermath
The disclosure of huge trading losses by Sumitomo, believed to be one of the most conservative

and well-managed Japanese companies shook financial markets the world over.

Learning

Manipulation Today
Since the copper-market manipulation, new protocols have been added to
the LME to prevent a similar cornering of the market. It is nearly impossible
for long-term manipulation like Hamanaka's to occur in today's market, as
there are more players and much more volatility with longs and shorts
facing off daily with real-time price quotes flashing across the battleground.
In fact, the commodities market faces the opposite problem - short-term
price spikes brought about by speculators with deep pockets. The bizarre
two-day spike in the price of cotton in March 2008 is an example of this
problem.

As the kinks are being worked out of the new electronic commodities
exchange, Intercontinental Exchange (ICE), many loopholes have been
opened up. The use of swaps and synthetic derivatives by hedge
funds and institutional buyers wanting to exceed CFTC and exchange
limits has made spotting commodities manipulation harder. Unfortunately,
this means that futures have lost some of their value as a hedge for
merchants against market risk and price fluctuation. Investors and
merchants can only hope that the ICE will continue to improve and make
market manipulation in the commodities truly a thing of the past.

Did the Company know about it?

Traders argued that Sumitomo must have known of
Hamanaka’s wrongdoing because the company threw more money at
Hamanaka every time speculators tried to shake his price. Sumitomo
responded by implicating JPMorgan Chase and Merrill Lynch as funders
of the scheme, revealing that the banks had granted loans structured as
future derivatives. Sumitomo, JPMorgan Chase and Merrill Lynch all
were found guilty to some extent. As a result, JPMorgan Chase’s case
on a similar charge, related to the Enron scandal and Mahonia Energy,
was hurt. Meanwhile, Hamanaka served his sentence without comment.
Since the copper market manipulation, new protocols have been added
to the LME to make a repeat less likely.

RIPPLE EFFECTS ON THE MARKET:

Historically, there has been a close correlation in the behavior of metal prices. When one
metal falls, the others tend to follow. However, the Sumitomo announcement did not
harm other metals despite the recent dramatic drop in copper prices. Copper is a
relatively small market compared to other metals, such as aluminum and gold. The price
of the metal was above $1.25 a pound in New York in early May of 1996, but it fell to
$1.04 on June 13, just before Sumitomo announced its loss. Following the announcement,
copper was trading at about 89 cents (Wall). The decline in prices of copper before the
Sumitomo scandal was believed to have risen from people being concerned about the
number of new copper mines that were planned and the potential supply problems that it
could bring about (Wall). Copper prices fell ten percent in the weeks following
Hamanaka’s removal (Fletcher), however, prices had been falling for a while, and the
scandal only exacerbated the trend (Uchitelle).

The main effect of Sumitomo’s losses was the decline in public confidence in financial
institutions. Americans wondered how well their local financial institutions were
handling oversight of management. They also were concerned about a temporary decline
in stock prices as well as higher interest rates for money to seek to borrow from banks
(Uchitelle).

The dollar is driven by people’s perception of commodity price movements, and although
the dollar had weakened before news of the Sumitomo scandal, the fall in copper prices
has contributed to the dollar’s softness (Wall). The Sumitomo affair concerned the United
States about the openness of Japan’s financial system and the implications for interest
rates. These worries as well as the copper crisis had contributed to the decline of the yen.
The collapse in copper prices also hurt the Australian dollar.

RISK MANAGEMENT ERRORS:

In the Sumitomo copper scandal, the financial debacle originates from the failures of
proper risk management. By entering into fictitious trades for over ten years and
manipulating several accounts, Hamanaka successfully misled his management into
believing that he was making huge profits. Hamanaka had been trading on the London
Metal Exchange forward market for copper. Sumitomo was the largest participant in the
physical market for copper-he handled twice the volume as his competitors. Hamanaka
was known in the copper markets as “Mr. Five Percent” because Sumitomo’s copper
trading team traded approximately 500,000 metric tons of copper a year, which was five
percent of the total world demand for copper (Weston).
In regards to risk management, whenever any hedge fund or speculator who was aware of
manipulation tried to take short positions, Hamanaka invested more money into his
positions, thus sustaining a higher price because he dominated the market. However,
despite these illegal practices no action was taken against Hamanaka because of the
profits he generated for the company (Weston).

There are several reasons from a management perspective as to why the scandal carried
on as long as it did. The middle office may have bypassed early warning signals perhaps
because Hamanaka was perceived as an experienced senior trader. Hamanaka was chief
of the trading office and intentionally had an incentive to maximize profit opportunities
through illegal ways. Employees within the firm may have allowed the fraud to occur by
turning the other way. This is a case of decentralization (Tschoegl).

The Sumitomo scandal has provided valuable insight and enables one to appreciate and
understand the importance of internal and external controls. If there had been any
controls, it is believed that the scandal would have been detected much earlier and before
a loss of $1.8 billion.

WAS IT PREVENTABLE? IF SO, HOW?

The Sumitomo Copper Crisis was, at its core, a very preventable crisis-almost
embarrassingly so. The huge financial swings that the copper market saw in the late
1980s and early 1990s as a result of Hamanaka’s indiscretions were exactly that: the
result of one man’s greed and indiscretions. Hamanaka initiated and participated in the
illegal trade of copper-like making off the book deals in order to recover unrealized
losses-and incited a wave of regulatory laws by the London Metal Exchange and the
Commodity Futures Trading Commission (CFTC).

Hamanaka exploited various agents and partnerships in his ten-year long market-
manipulating extravaganza. He was able to do this due to serious misgivings and
loopholes in the commodity futures markets, as well as taking advantage of gaps in the
chain of command and knowledge. Hamanaka maintained two different sets of trading
books: one that recorded fabricated profits for the Sumitomo Corporation and another
real record of all the off-the-book and under-the-table deals that were made to maintain
control of the market. This long-term interference and domination of the copper market
was nonetheless very hard to maintain due to one key fact: in order to corner a
commodities market, the company must actually hold the assets, which presents an
additional strain on resources and funds. This very requirement may be the answer to
preventing scandals like this in the future (Wall).

As aforementioned, the Sumitomo Copper Crisis was largely unavoidable simply because
one man’s poor decisions affected the rest of the affiliated market. “The essence of the
problem was unauthorized trading that the culprit undertook to enhance his firm’s
profitability and then his own career and pay,” Adrian Tschoegl mentioned in The Key to
Risk Management. However, the true debacle is a result of a lack of internal and external
controls. The Sumitomo Corporation, which was divided into essentially three separate
“offices” (front, back and middle), simply did not harbor or even encourage
communication between departments and sectors (Tschoegl). The middle office (which is
responsible for one of the most key business functions: risk management) can easily be
said to have failed most spectacularly in this scandal. The lack of risk awareness and
management led to a loss of $1,800 million dollars and a stain on the Sumitomo name, all
because of a decentralized, non-communicative corporate structure (Tschoegl).

The most effective approach to avoiding something like this in the future is basically
three-pronged: more and better management-level controls, independent transaction
monitoring, and more stringent regulation (of the London Metal Exchange, by the
government, and of corporations e.g. “corporate social responsibility”) (Tschoegl). The
management-level controls should consist of a conscious effort at centralizing every part
of the company, as well as maintaining strict inter-company discipline and training.
Independent transaction making should be monitored so no “two-book” accounting
systems are permissible; that is to say, that there is a system of checks and balances
within the corporation to ensure above-board transactions. In terms of regulation on
behalf of various agencies and governments, it’s only necessary to say that more of it is
probably needed to avoid price manipulation. Perhaps a system of rigorous reporting and
accounting policies could be implemented, which would strengthen the market’s
effectiveness anyways.

https://en.wikipedia.org/wiki/Sumitomo_copper_affair

Sumitomo Copper Affair

The affair was a major scandal which is at times compared in magnitude to the Silver
Thursday scandal, involving the Hunt family's attempt to corner the world's silver markets. It
currently ranks in the top 10 trading losses in financial history.

Hanamaka's decade of unauthorized trading[edit]

.[1] Hamanaka would state later at his trial in 1997 that his motivation for the scheme was to
cover earlier losses, both before and during his promotion to Sumitomo's head Copper
trader, and not for personal gain. Shimizu supports his account of this motivation. [2]
[3]
 Whatever his motivations, Hamanaka hid his losses by keeping a secret book of
unauthorized trading, and by destroying documents, lying to his supervisors, forging trading
data, and forging signatures. These tactics successfully hid his actvities and Sumitomo
promoted him to head Copper trader in 1986.[4]

Different schemes to recoup losses[edit]

To recoup his earlier trading losses, Hamanaka embarks on a variety of schemes to
profitably trade Copper by cornering the market. Depending on the context, prosecutors
usually focus on just one or two of the schemes depending on their interest and jurisdiction.
Hamanaka's dealings with David Campbell began in 1989 with a discussion about his
intentions of driving up the Copper price by cornering the world market. Campbell was then
president of the private metals trading firm RST Resources, inc. (RST). From 1989 to 1992,
Hamanaka conducted significant amounts of business with RST, and became the firm's
biggest client. In 1993, Campbell resigned from RST and founded Global Minerals and
Mining Corp (Global), and Hamanaka switched to doing business with Global. [5]
Hamanaka entered into a string of monthly purchasing agreements with Global from 1994 to
1997. Hamanaka would purchase physical copper warrants, or claims on physical copper
stored in warehouses, from Global, which purchased them from a Zambian copper producer.
Hamanaka would then sell the warrants back to the Zambian producer to repeat the cycle.
These transactions allowed Hamanaka to establish the appearance of a real copper
business, and to allow him to claim commercial hedging justification to establish large futures
positions to supposedly hedge the illusory transactions. [6]
With the false commercial justification established, Hamanaka established a massive long
Copper futures contract position on the LME through an account established at Merrill
Lynch for Global and through other small brokers. By September 1995, Sumitomo
possessed two million metric tons of Copper in the form of futures contracts, and nearly one
half of LME Copper warrants. At this point, Hamanaka began to take delivery of copper
warrants from expiring LME Copper contracts, which consolidated his control over the
Copper cash market. By November 24, 1995, Hamanaka controlled 93% of LME Copper
warrants, and a dominant position in the LME Copper futures contract market. This forced
traders who were short LME Copper futures, and who could not deliver physical copper, to
purchase LME Copper futures from Hamanaka at high prices near the expiry of the contract
to offset their position.[7]
Hamanaka's dealings with David Threlkeld resulted in two attempts to warn the LME on
Hamanaka's trading practices. Threlkeld's company, DLT Inc, traded copper for Hamanaka,
and Paul Scully, a DLT employee, warned Threlkeld about problems in Hamanaka's trading
practices in 1991. Scully would die in a July 1991 fire, which raised suspicions in 1996 after
Hamanaka's fraudulent trading became public; however, two investigations ruled the fire was
accidental.[8][9] Threlkeld had separately received faxes from Hamanaka requesting to
document $500 million of non-existent trades on DLT letterhead. Threlkeld refused, and
complained to the LME. The LME discussed the letter with the Securities and Investments
Board and Sumitomo managemnet. Ultimately the LME decided it did not have jurisdiction to
bring enforcement action against Hamanaka, but the LME did pressure Sumitomo to release
Hamanaka's letter to the public, which did not result in any repercussions to Hamanaka at
the time. Threlkeld separately confronted two of his employees in the DLT London office,
Charles Vincent and Ashley Levett. Threlkeld subsequently fired Vincent, and Levett quit
DLT. The two traders founded Winchester Commodities Group afterwards. [10]
Role of the LME[edit]
Hamanaka traded on the LME directly, and also traded indirectly with other parties with
indirectly relationships with LME through Over-the-Counter transactions. Contracts on the
LME held as forward contracts, which allowed Hamanaka to maintain positions through
credit without covering daily mark-to-market margin payments with cash.[14] By mid-1993,
Hamanaka had more than a dozen credit lines with different LME brokers of $150 million
USD each to maintain his Copper positions.[15] The LME also had relatively lighter reporting
and supervisory requirements relative to the COMEX (now Chicago Mercantile Exchange)
Copper futures market.[16]
As Hamanaka's actions began to raise the price of LME Copper contracts, LME Copper
futures contracts began to trade at a premium over COMEX Copper futures contracts, and
began to attract physical copper supplies to move from COMEX warehouses into LME
warehouses, in particular LME's new Long Beach warehouse opened in 1994. [17] At this point
Copper prices entered into a state of backwardation, when Copper spot prices became
higher than Copper futures prices. Market participants and regulators began to observe that
Copper stocks in COMEX warehouses began to decrease as expected in this environment,
since merchants earn more selling Copper stocks immediately than selling it later, whereas
LME Copper stocks continued to increase despite a discount on forward selling prices. This
warehouse behaviour led US regulators to more closely investigate Sumitomo. [18]
r.[21]

Aftermath[edit]

https://lawaspect.com/distribution/ - Intro, Background of the

company, case, lesson learnt

https://www.nytimes.com/1996/09/20/business/sumitomo-
increases-size-of-copper-trade-loss-to-2.6-billion.html

http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.521.3237&rep=rep1&type=pdf

On June 13, 1996, Sumitomo Corporation (Sumitomo)3 - one of the largest trading companies in
Japan, reported a loss of $1.8 billion (bn) in copper trading on the London Metal Exchange
(LME).4

The loss was the result of

trading operations in
commodity derivatives by
Yasuo Hamanaka
(Hamanaka), Sumitomo's
former chief copper trader.
Elaborating on the reasons
for the loss incurred by the
company, Tomiichi Akiyama
(Akiyama), the then president
of Sumitomo said, "These
transactions were made
solely by Yasuo Hamanaka
himself. Hamanaka abused
Sumitomo's name, and
continued on with such
unauthorized
trading."5 Sumitomo was the
largest participant in the
physical market6 for copper,
its volume being twice that of
the second largest
participant.
This financial debacle occurred at a time when the world's financial markets were yet to recover
from two major financial debacles - the collapse of UK's 233-year-old Barings Bank, which lost $
1.4 bn in February 1995 due to Nick Leeson's unauthorized trading activities in the Singapore
futures market and the Japanese bank Daiwa which lost $1.1 bn in America's Treasury bond
market in September 1995 due to the unauthorized trading activities of Toshihide Iguchi, a New
York based trader.

All the three debacles happened within a short span of 16 months. Industry analysts and the
media were quick to comment that the trading in commodities and financial instruments was not
being properly monitored by the government regulatory agencies and by the companies
undertaking these transactions. Ota Rie of ING Barings in Tokyo said, "What Sumitomo did with
this man was very unusual. It is rare to see a middle-level manager get so much power." 7 Experts
said that the situation demanded tighter internal supervision and control procedures by trading
firms and financial institutions the world over. Kenichi Yoshida, an analyst at Nikko Research
Centre said, "Hamanaka was famous because of the business he brought in... He was given a
great deal of responsibility by the company, and his only regulators were overseas, far from
Tokyo."8

In September 1996, Sumitomo disclosed that the company's financial losses resulting from
copper trading were much higher than $1.8 bn. The revised loss figure of $2.6 bn represented
about ten per cent of Sumitomo's annual sales. In order to control mounting losses, Sumitomo
began aggressive liquidation of its uncovered positions in the copper physical and futures market
under its new president Kenji Miyahara.

Sumitomo also cancelled its plans to buyback 20 mn of its shares and award Yen 120 mn ($1.1
mn) of bonuses to its senior managers. However, analysts believed that these measures would
hardly make up for the damage that had already been done.