UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)|
|GLOBAL MINERALS & METALS CORP.,||)||CFTC Docket No. 99-11|
|R. DAVID CAMPBELL, CARL ALM,||)|
|MERRILL LYNCH & CO., INC.,||)|
|MERRILL LYNCH, PIERCE, FENNER &||)|
|SMITH(BROKERS & DEALERS), and||)|
|MERRILL LYNCH INTERNATIONAL, INC.,||)|
The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges that:
1. Between October and December 1995, the respondents Global Minerals and Metals Corporation, Inc. ("Global"), R. David Campbell ("Campbell") and Carl Alm ("Alm"), together with Sumitomo Corporation ("Sumitomo"), manipulated upward the worldwide price of copper and copper futures contracts in violation of Sections 6(c), 6(d) and 9(a) of the Commodity Exchange Act, as amended, 7 U.S.C. §§ 9, 15 and 13. The manipulation of prices during that period was the culmination of a long and deliberate scheme by Sumitomo, through its chief copper trader, Yasuo Hamanaka ("Hamanaka"), and respondents Global, Campbell and Alm to acquire large market positions and liquidate them at distorted and artificially high prices and spreads. The conspirator respondents were aided and abetted in their unlawful scheme to manipulate worldwide copper prices by respondents Merrill Lynch & Co., Inc., Merrill Lynch International, Inc. and Merrill Lynch Pierce Fenner & Smith (Brokers & Dealers) (collectively, "Merrill Lynch") during the period between October and December 1995 ("the period of the manipulation").
2. Sumitomo and Respondents Global, Campbell and Alm ("the conspirators") accomplished their manipulation of prices by means of a wide variety of acts and practices that were intended to and did influence market prices of copper. These acts and practices included but were not limited to the following:
(a) acquiring and maintaining a dominant and controlling position in London Metal Exchange ("LME") warehouse stocks of copper and thereafter keeping off the market a large percentage of this copper and making available the remainder at artificially high prices. These actions created an artificial shortage of the copper which was available for delivery against copper futures contracts, which thereby caused the price of copper, copper futures prices and copper spread price differentials to reach artificially high levels;
(b) purchasing and holding massive and unneeded long copper futures contract positions, which were intended to and did inject significant artificial demand and buying pressure into the pricing mechanism for copper futures contracts and for cash or physical copper; and
(c) engaging in an elaborate scheme of deception and false statements which was intended to and did have the effect of misleading other market participants, in furtherance of their manipulative scheme.
3. As a result of the conspirators' conduct during the period of manipulation, the prices of copper futures contracts, copper spread price differentials and the prices of cash or physical copper, both in the United States and abroad, reached artificially high levels.
4. The Merrill Lynch respondents aided and abetted the conspirators in carrying out their unlawful scheme in a variety of ways including, but not limited to:
(a) knowingly and intentionally providing the large sums of credit and finance with which the conspirators cornered the deliverable supply of LME warehouse stocks of copper;
(b) knowingly and intentionally providing the trading facilities, accounts and trading capacity through which the conspirators acquired their cornering position in warehouse stocks, maintained their massive and overhanging futures contract positions, and made available a small portion of their holdings to the market at artificially high prices and spread price differentials; and
(c) knowingly and intentionally advising, counseling and assisting the conspirators on the manner in which they could manage, trade and withhold their hoard of copper from the market for the purpose of increasing prices and spread price differentials to artificial levels.
5. Merrill Lynch benefited from the manipulation through, among other things, its own contemporaneous profitable proprietary trading, which was conducted based upon knowledge of the conspirators' manipulative actions.
6. Global Minerals and Metals Corp. is a Delaware corporation with offices in New York City. Global has never been registered with the Commission in any capacity.
7. R. David Campbell is a natural person residing in New York, New York. Campbell has been a principal of proposed respondent Global since 1993. Campbell has never been registered with the Commission in any capacity.
8. Carl D. Alm is a natural person residing in Massapequa, New York. Alm served as Global's chief copper trader during all times relevant to this matter. Alm has never been registered with the Commission in any capacity.
9. Merrill Lynch & Co., Inc. is a holding company organized under the laws of the State of Delaware, with offices in the State of New York. It has never been registered with the Commission in any capacity.
10. Merrill Lynch Pierce Fenner & Smith (Brokers & Dealers), Limited ("Merrill Lynch (Brokers & Dealers)") is a British corporation with its principal place of business in London, England, and is a wholly-owned subsidiary of Merrill Lynch & Co. It has never been registered with the Commission in any capacity.
11. Merrill Lynch International, Inc., is a corporation which maintains offices in New York City and London and is a wholly owned subsidiary of Merrill Lynch & Co. It has never been registered with the Commission in any capacity but was approved as an exempt foreign firm pursuant to Commission Regulation 30.5, 17 C.F.R. § 30.5 (1988) effective September 9, 1998.
A. EVENTS LEADING UP TO THE 1995 MANIPULATION
Early Efforts and Plans to Manipulate the Copper Market
12. The copper market price manipulation alleged herein represents the culmination of various efforts over a period of years by Hamanaka to earn back the losses that Sumitomo had accumulated from his copper trading. As the result of those large losses, Hamanaka engaged, from time to time, in operations which primarily were designed to inflate the price of copper on world markets to artificially high levels.
13. Between 1989 and 1992, Hamanaka and Campbell discussed ways in which they could manipulate the price of copper upward to their mutual advantage. On those occasions, the copper merchant firm for which Campbell worked at the time declined to become involved in the proposals.
14. In the spring of 1993, Campbell and others formed their own copper merchant company, respondent Global. As a principal of Global, Campbell was involved in virtually every aspect of the manipulation and attempted manipulation engaged in by Sumitomo and Global. As Global's chief copper trader, Carl Alm knowingly and intentionally performed acts designed to artificially inflate copper prices and copper spread price differentials ("spreads") in support of the manipulation.
Sumitomo and Global Enter a Series of Highly Unusual Copper Supply Contracts Which Provide Them With an Interest in Higher Copper Prices
15. In September 1993, Campbell and Hamanaka entered into an agreement in principle for a series of copper supply contracts pursuant to which Global would sell and Sumitomo would buy physical copper in large quantities during 1994 and beyond. These contracts allowed the conspirators falsely to claim that they had a legitimate and genuine commercial need to obtain physical copper and to establish excessive copper forward positions to "hedge" this purported commercial need. In fact, the conspirators did not have a commercial need for physical copper in the amounts represented by the supply contracts. Instead, the conspirators acquired excessive copper forward positions for the purpose of increasing copper prices and copper spreads to artificial levels.
16. The copper supply contracts ("MP contracts") eventually entered into by Sumitomo and Global contained highly unusual minimum price and price participation features. This minimum price feature of the MP contracts provided a "floor" price which Sumitomo was obligated to pay to Global equal to the higher of the market price (the LME settlement price) at the time of shipment of the monthly quota (plus a premium) or a certain minimum price. Sumitomo had the right, within a limited window of time, to fix the minimum price which it would be obligated to pay for the entire delivery contract. The price of each monthly quota was fixed by Sumitomo using the LME settlement price on the monthly day of fixation.
17. The MP contracts also contained "price participation" features by which Sumitomo and Global shared in profits generated by Global in the purported "hedging" of the MP contracts. Under the "price participation" provisions of the supply contracts, Global was obligated to pay to Sumitomo, as price participation, thirty percent of any positive difference between the monthly quota price and the minimum price. As copper prices rose above the pre-established minimum price, therefore, Global and Sumitomo shared in the price appreciation on a seventy/thirty basis. The net effect of these contracts was to provide both Sumitomo and Global with a strong interest in higher copper prices.
18. Eventually, Sumitomo and Global entered a total of seven MP contracts which on their face called for the delivery of a total of 1,194,000 metric tons of copper from 1994 through 1997.
Sumitomo and Global Establish Extraordinarily Large Long Copper Warrant and Forward Positions
19. Global, as a thinly capitalized "start-up" copper merchant firm, was unable to establish credit lines in its own name with LME brokers in sufficient size to accommodate the extremely large purported "hedge" positions which the conspirators planned to assume in furtherance of their manipulative scheme. To solve this problem, in or about April 1994, a Managing Director of Merrill Lynch (Brokers & Dealers) devised a plan whereby Sumitomo and Global opened an account in the name of Sumitomo, denominated the "B" account, in which Global would have trading authority, but which was backed by Sumitomo's credit.
20. In the spring of 1994, pursuant to Campbell and Hamanaka's plan, Global, through Alm, began to purchase long LME forward positions primarily in the "B" account at Merrill Lynch. By the end of September 1994, Global's position in the "B" account totaled approximately 780,000 metric tons. Together with Sumitomo's long positions at Merrill and other brokers, Sumitomo and Global held 1.3 million metric tons of LME forward contracts.
21. The cash price of copper on the LME rose from approximately $1900 per metric ton when Sumitomo and Global began their substantial LME buying in or about June 1994, to approximately $2500 by the end of September 1994. Campbell and Hamanaka sold approximately 600,000 metric tons in October 1994 to lock in profits on a portion of their joint position and rolled the balance of the position forward into the coming year.
22. In December 1994, Campbell and Hamanaka entered into an arrangement with a Zambian copper producer by which they effectively cancelled one-half of the physical copper deliveries called for under the MP contract for 1995. Through a series of circular paper transactions, the Zambian firm would "sell" the physical copper to Global, which would, in turn, "sell" the same physical copper to Sumitomo, and Sumitomo would then "sell" the same amount back to the Zambian firm. In fact, none of the physical copper involved in these circular transactions ever was shipped between or among any of the three participants. In this way, Campbell and Hamanaka falsely portrayed the physical "book" of commercial copper business between Global and Sumitomo, providing Global and Sumitomo with a false commercial justification to purchase LME forward contracts, purportedly to "hedge" that non-existent delivery obligation. They subsequently divided profits resulting from these purported "hedging" positions.
The Merrill Lynch Global Commodities Group
23. In or about the summer of 1994, Merrill Lynch & Co., Inc., consolidated its commodities business, including capital, operations and employees into an unincorporated entity named the "Global Commodities Group." Merrill Lynch & Co., Inc. placed the Global Commodities Group under the supervision of Flavio Bartmann ("Bartmann"), an officer of Merrill Lynch International. Bartmann installed Paul Kaju ("Kaju"), an officer of Merrill Lynch (Brokers & Dealers) as the Managing Director for the Global Commodities Group's base metals desk, which included Merrill Lynch's copper trading business.
24. As a result of a meeting in Tokyo in September 1994, among Bartmann, another Merrill Lynch employee, Hamanaka, and his superior at Sumitomo, Bartmann understood that Hamanaka was not only hedging Sumitomo's physical copper business, but was also engaged in speculative trading in copper futures contracts.
Campbell and Hamanaka Plan an Exit Strategy
25. In the spring of 1995, Hamanaka and Campbell had amassed an aggregate long position in LME forward copper contracts on behalf of Sumitomo and Global of approximately two million metric tons. In addition, Sumitomo owned approximately one-half of all LME warehouse copper warrants. These positions were well in excess of any legitimate commercial need which Sumitomo or Global had for physical copper or for the hedging of any legitimate commercial or other business. Rather, these positions were intended by Campbell and Hamanaka to and did inject artificial demand into the pricing equation for copper and thus create high and artificial prices and spreads.
26. During the summer of 1995, Campbell and Hamanaka agreed that they should try to increase the market price of copper so that they could liquidate their position at an average price of approximately $3200 per metric ton. Specifically, Campbell proposed to Hamanaka in late summer that they take delivery on some of their long copper forward position in order to drive prices higher. Campbell and Hamanaka aimed to foster the false impression in the marketplace that Sumitomo had a huge need for additional physical copper in the fourth quarter of 1995 in order to create the necessary "panic" which would raise prices and enable them to unwind their enormous position at a profit.
27. Campbell and Hamanaka devised a false cover story which was intended to deceive the marketplace and market regulators into believing that the taking of delivery of additional copper warrants by Sumitomo and Global was driven by legitimate commercial considerations. Pursuant to this plan, Campbell falsely informed Global's brokers that Global intended to "sift" warrants for the purpose of finding premium grade and location material for the purpose of delivering it to Sumitomo pursuant to the MP contracts. In fact, however, Sumitomo and Global had no legitimate need for additional copper warrants, and the story which they concocted was designed to obscure their real motivation, which was to control the deliverable supply of LME warrants in order to drive prices and spreads upward.
Merrill Lynch Provides Financing to Sumitomo and Global
28. To enable Sumitomo and Global to acquire additional LME warrants, Campbell obtained additional lines of credit for Global from LME brokers, including Merrill Lynch. In addition, Merrill Lynch agreed to begin financing the acquisition of LME stocks in the Sumitomo accounts at Merrill through a financing arrangement known as the "buy-sell back" line of finance. Under the "buy-sell back" arrangement, Sumitomo and Global positions coming to prompt, on which they intended to take delivery, were purchased by Merrill from Sumitomo and Global and simultaneously sold back to Sumitomo and Global in a position prompting on the following day. The price differential on such spread trades paid by Global was $.70 per metric ton. Merrill then paid the London Clearing House for the warrants and thus became owner of the copper until it reverted back to Global and Sumitomo the next day on the sale leg of the spread. Officers of the Merrill Lynch respondents were aware of the buy-sell back financing and Merrill Lynch & Co., Inc. provided the funds to Merrill Lynch (Brokers & Dealers) via Merrill Lynch International. Sumitomo and Global eventually acquired control of virtually all LME warehouse stocks through financing provided by Merrill Lynch.
29. Merrill also agreed to provide additional financing to Global in the form of a $100 million Commodity Inventory Purchase Obligation ("CIPO") credit line. Through the CIPO credit line, Global purportedly was to finance the acquisition of premium grade and location copper to be shipped to Sumitomo pursuant to the MP contracts. The CIPO credit line was reviewed and approved by officers of Merrill Lynch & Co., Inc., among others. However, as Merrill Lynch knew, the CIPO line of credit was never used and copper was not shipped to Sumitomo pursuant to the sifting plan described to Merrill Lynch by Campbell.
30. In the aggregate, Merrill Lynch provided well over one-half billion dollars in financing to the conspirators.
31. During the period that Merrill Lynch agreed to provide, and provided, this financing to the conspirators, Merrill Lynch personnel, including in particular Kaju, had correctly concluded that Global and Sumitomo's warrant-taking operation was motivated by their intention to manipulate prices and spreads, not by any genuine commercial need, and that Global and Sumitomo were attempting to manipulate and were successfully manipulating the world's copper market.
Global and Sumitomo Begin to Take Delivery of LME Warrants
32. On or about October 17, 1995, Global and Sumitomo began to take delivery of LME warrants into the B account at Merrill Lynch with financing from Merrill Lynch pursuant to the "buy-sell back" arrangement. From on or about October 17 until at least the middle of December 1995, Global and Sumitomo obtained and maintained a dominant and controlling position in LME deliverable supplies which, at times, amounted to ownership of all LME warehouse stocks.
33. As part of their scheme to manipulate copper prices and copper spreads, Global and Sumitomo withheld from the market the vast majority of copper thus acquired and sold or loaned it to other market participants only at high and artificial prices and spreads. Respondent Alm was primarily responsible, on a day-to-day basis, for executing the trades by which Global acquired and withheld its store of LME copper from the market. On numerous occasions throughout the period of the manipulation, Alm discussed strategies with Martyn Phillips ("Phillips"), an employee of Merrill Lynch (Brokers & Dealers), designed to withhold the vast majority of this position from the market and thereby drive market prices to artificially high levels. Among these strategies, Alm placed scale price orders with Phillips to liquidate and/or roll Global's position at artificial prices. Alm and Phillips frequently executed trading strategies designed to tighten supply and increase price. During the period that Alm was involved in executing Global's copper trades that contributed to the manipulation, Alm knew of Campbell and Hamanaka's plan to manipulate the copper market and of Global's and Sumitomo's copper positions.
Effect of Sumitomo's and Global's Acts on the United States Copper Market
34. Withholding such copper from the market greatly reduced the supply of copper available to short position holders and caused LME copper prices and spreads to increase dramatically between October and December 1995. These price increases directly affected the prices paid for copper in all world markets, including the United States, and the price of copper futures contracts on United States contract markets, because of the well-established and well-known pricing relationships that exist between the LME and the United States cash and futures markets. Among other things, arbitrage trading between the LME and the Comex Division of the New York Mercantile Exchange ("Comex"), a futures exchange located in New York City, brought Comex prices higher than they otherwise would have been to the detriment of copper traders. In addition, because physical copper contracts are generally priced by reference to the LME price or the Comex price, the manipulation caused distorted and artificial pricing in the copper cash market to the detriment of dealers in and consumers of physical copper. Moreover, as a result of such price increases, copper supplies were moved in interstate commerce from copper delivery points in the United States designated by the Comex and other United States locations to copper delivery points in the United States designated by the LME. These pricing and supply effects were known to and reasonably foreseeable to the Respondents.
C. MERRILL LYNCH'S INVOLVEMENT IN THE MANIPULATION
35. During the period of the manipulation, Merrill Lynch knew that copper acquired and withheld from the marketplace by Sumitomo and Global artificially increased the prices of copper, copper futures contracts and copper spreads.
36. During the period of the manipulation, Merrill Lynch knew that the Global respondents and Sumitomo had no bona fide commercial need for the copper stocks thus acquired and that Global and Sumitomo maintained ownership and control over this copper in order to hold it off the market, thus reducing the amount of copper available to the legitimate market and raising prices to artificial levels.
37. During the period of the manipulation, Merrill Lynch knew that the Global respondents and Sumitomo had the ability to influence copper prices, that they intended to create artificial prices, and that they succeeded in doing so.
38. During the period of the manipulation, Merrill Lynch knowingly and intentionally provided financing, trading capacity and strategic advice to the conspirators all of which the conspirators used to further the manipulation alleged herein.
39. Merrill Lynch participated in the manipulation as something it wished to bring about because Merrill Lynch earned money as copper prices rose. Merrill Lynch exploited the price manipulation which they were financing by "skimming" essentially riskless profits through lending warrants at the artificially high backwardation created by the conspirators' market corner. In addition, Merrill's proprietary options positions were structured in a way that would profit if copper prices increased and would lose money if they decreased.
IV. VIOLATIONS OF SECTIONS 6(c), 6(d) AND 9(a)(2) OF THE ACT
40. Paragraphs 1 through 38 are realleged and incorporated herein.
41. Sections 6(c) and 6(d) of the Act makes it illegal for any person to manipulate or attempt to manipulate the market price of any commodity, in interstate commerce, or for future delivery on or subject to the rules of any contract market.
42. Section 9(a)(2) of the Act makes it illegal for any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any contract market, or to corner or attempt to corner any such commodity.
43. Global, Campbell and Alm violated Sections 6(c), 6(d) and 9(a) (2) of the Act, in that they manipulated and attempted to manipulate the price of copper, a commodity in interstate commerce, and of copper futures, a commodity for future delivery subject to the rules of a contract market, and they cornered and attempted to corner copper.
44. Merrill Lynch & Co., Inc., Merrill Lynch International, Inc. and Merrill Lynch Pierce Fenner & Smith (Brokers & Dealers) violated Sections 6(c), 6(d) and 9(a)(2) of the Act pursuant to Section 13(a) of the Act in that they knowingly aided and abetted the Global respondents and Sumitomo in the manipulation, attempted manipulation, cornering and attempted cornering of the copper market, as alleged herein.
By reason of the foregoing allegations by the Division, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute administrative proceedings to determine whether the allegations set forth in Parts I-IV are true and, if so, whether orders should be entered in accordance with Sections 6(c) and 6(d) of the Act, 7 U.S.C. §§ 9 and 13b (1994).
Section 6(c) of the Act allows the Commission to (1) prohibit a respondent from trading on or subject to the rules of any contract market and require all contract markets to refuse such person all trading privileges thereon for such period as may be specified in the Commission's Order, (2) assess against a respondent a civil monetary penalty of not more than the higher of $100,000 or triple the monetary gain to the respondent for each violation, and (3) require restitution to customers of damages proximately caused by the violations of the respondent.
Section 6(d) of the Act allows the Commission to enter an Order directing that the respondent cease and desist from violating the provisions of the Act and Regulations found to have been violated.
WHEREAS, IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence and hearing argument on the allegations set forth in Parts I-IV above be held before an Administrative Law Judge, in accordance with the Rules of Practice under the Act, 17 C.F.R. §§ 10.1 et seq. (1998), at a time and place to be fixed as provided by Section 10.61 of the Rules, and that all posthearing procedures shall be conducted pursuant to Sections 10.81 through 10.107 of the Rules of Practice, 17 C.F.R. §§ 10.81 through 10.107 (1998).
IT IS FURTHER ORDERED that each Respondent shall file an Answer to the allegations against said Respondent in the Complaint within twenty (20) days after service, pursuant to Section 10.23 of the Rules of Practice, 17 C.F.R. § 10.23, and pursuant to Section 10.12(a) of the rules of Practice, 17 C.F.R. § 10.12(a), shall serve two copies of such Answer and of any document filed in this proceeding upon Lawrence Norton, Associate Director or Dennis O'Keefe, Assistant Director, Division of Enforcement, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st St., NW., Washington, DC 20581 or upon such other counsel as designated by the Division. If any Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, such Respondent shall be deemed in default, and the proceeding may be determined against such Respondent upon consideration of the Complaint, the allegations of which shall be deemed to be true.
IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served on each Respondent personally or by registered or certified mail forthwith pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. § 10.22 (1998).
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of the investigative or prosecutorial functions in this or any factually related proceeding will be permitted to participate or advise in the decision upon this matter except as witness or counsel in proceedings held pursuant to notice.
By the Commission.
|Jean A. Webb|
|Secretary to the Commission|
|Commodity Futures Trading Commission|
|Dated: May 20, 1999||--------------------------------------------------------|