UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of : CFTC Docket No.
SUMITOMO CORPORATION, : ORDER INSTITUTING
: PROCEEDINGS PURSUANT TO
Respondent. : SECTIONS 6(c) AND 6(d)
: OF THE COMMODITY EXCHANGE
: ACT AND FINDINGS AND
: ORDER IMPOSING
________________________________________: REMEDIAL SANCTIONS
The Commodity Futures Trading Commission ("Commission") has reason to believe that Sumitomo Corporation ("Sumitomo"), through the acts of one or more of its employees and agents, has violated Sections 6(c), 6(d) and 9(a)(2) of the Commodity Exchange Act, as amended ("Act"). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted in order to determine whether Sumitomo engaged in the violations set forth herein and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of these administrative proceedings, Sumitomo has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Without admitting or denying the findings herein, Sumitomo acknowledges service of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act and Findings Imposing Remedial Sanctions ("Order"). Sumitomo, solely by virtue of its Offer and for purposes of settling this proceeding, before argument or adjudication of any issue of fact or law, consents to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party. Sumitomo does not consent to the use of the Offer or this Order as the sole basis for any other proceeding brought by the Commission, or to the use of the Offer or this Order against it in any other proceeding by any other party. The findings contained in this Order are not binding on any other
person or entity named as a defendant or respondent in any other proceeding.
The Commission finds the following:
As described in more detail below, in the wake of accumulating large losses from speculative trading, the principal copper trader for Sumitomo engaged in a scheme, in conjunction with an entity operating in the United States, with the intent of manipulating the price of copper. In particular, during 1995 and 1996, Sumitomo, acting through its agent or agents, established and maintained large and dominating futures positions in copper metal on the London Metals Exchange ("LME"). In the fall of 1995, Sumitomo stood for delivery on a significant percentage of its maturing futures contracts. It thereby acquired a dominant and controlling cash and futures market position, which directly and predictably caused copper prices, including prices on the United States cash and futures markets, to reach artificially high levels. Sumitomo's agent or agents took these actions expressly for the purpose of creating artificially high absolute prices and an artificially high premium of nearby prices over futures prices. Sumitomo intentionally exploited these artificially high prices in order to profit on the liquidation of its large portfolio of futures contracts and holdings of LME warrants. Through these actions, Sumitomo manipulated upward the price of copper and copper futures in violation of Sections 6(c), 6(d) and 9(a)(2) of the Act.
Sumitomo contends that its copper trader’s actions described below were unauthorized and hidden from other company officials. The Commission makes no findings with regard to those contentions. It believes that, without regard to those contentions, Sumitomo is properly found to have violated the manipulation provisions of the Act.
Sumitomo is a Japanese corporation with its principal place of business in Tokyo, Japan. During the relevant period, Sumitomo was engaged, among other things, in the marketing of copper cathode to customers throughout the world. As part of its business of marketing copper, Sumitomo engaged in futures and option transactions on world markets, including the Comex Division of the New York Mercantile Exchange ("Comex") and the LME, primarily for the purpose of "hedging" the price risks associated with the purchase and sale of copper. These copper marketing and trading functions were primarily carried out by the Copper Metals Section of Sumitomo's Non-Ferrous Metals Department.
1. Sumitomo's Copper Trading
Sumitomo, which was incorporated in 1919, has, together with its historical predecessors, been involved in the marketing of copper metal for hundreds of years. During the period at issue in this matter, Sumitomo's copper metals business was conducted by the Copper Metals Section of the Non-Ferrous Metals Department. The primary business of the Copper Metals Section, or Copper Team as it was also known within Sumitomo, was supplying copper cathode to customers (primarily in Asia), such as cable fabricators and rod mills. In addition to sales to customers, the business also included the extensive use of the futures markets to hedge the price risks occasioned by the volatility of copper prices. Both the purchase and sale of physical copper and hedging with futures, known within Sumitomo as "dealing," were carried out by the Copper Metals Section.
In April 1970, Sumitomo first employed an individual who, in April 1973, was assigned to the Copper Metals Section. By 1975, that individual had become involved in the physical purchase and sale of copper and in dealing, under the overall supervision of the head of the Non-Ferrous Metals Department. In August 1987, he was made head of the Copper Team. From that time until at least his reassignment on May 8, 1996, he had primary responsibility for both the actual physical purchase and sale of copper and dealing in copper metal for Sumitomo. (This individual will be referred to throughout this Order as "Sumitomo's copper trader".)
In the period immediately prior to Sumitomo's copper trader's appointment as head of the Copper Team and in subsequent years, the Copper Team incurred significant losses. The losses were the result both of the actual physical purchase and sale of copper and also of speculative futures transactions initiated, together with another Sumitomo employee at the time, in an unsuccessful attempt to compensate for losses on the actual purchase and sale of copper.
Sumitomo's copper trader did not enter the unauthorized speculative trades in Sumitomo’s normal bookkeeping system. Instead, he kept a record of the transactions in a series of personal notebooks.
2. Sumitomo's Copper Trader's Arrangements with a U.S. Copper Merchant
Beginning in late 1993, Sumitomo's copper trader entered into a series of agreements with a newly-formed U.S. copper merchant firm located in New York City, whereby Sumitomo agreed to purchase copper from the American firm on a monthly basis for the years 1994 through 1997. The agreements were embodied in a series of supply contracts that contained unusual minimum price and price participation provisions. Under the minimum price provision, Sumitomo was obligated to purchase copper at the higher of the market price (LME settlement price) at the time of shipment of the monthly quota or the minimum price set by Sumitomo during a specified time period. The contracts also required the U.S. copper merchant firm to pay Sumitomo, as price participation, thirty percent of any positive difference between the market price at the time of shipment and the minimum price on futures contracts established to hedge the supply contracts. Thus, as copper prices rose above the pre-established minimum price, the U.S firm and Sumitomo would share in the price appreciation, giving both firms a financial interest in higher prices.
By June 15, 1994, Sumitomo’s copper trader and the U.S. copper merchant had entered into six such minimum price contracts providing for the delivery of 834,000 metric tons of copper, on a schedule of roughly 10,000 metric tons per month in 1994 and 30,000 metric tons per month in 1995 and 1996. On December 1, 1994, they entered into another, similar contract for delivery of 30,000 metric tons per month in 1997. The terms of these contracts were essentially identical and in sum called for the delivery of a total of 1,194,000 metric tons of copper from 1994 through 1997. In 1995 and 1996, these contracts were used by Sumitomo’s copper trader and the U.S. copper merchant to provide a justification for Sumitomo’s purported need for copper to sell to customers. However, fully half of the 1995 and 1996 contractual copper was immediately resold to the U.S. copper merchant’s supplier and was never actually delivered to Sumitomo.
As early as February 1994, Sumitomo's copper trader and personnel at the U.S. copper merchant firm communicated about ways they could act in concert through market operations to cause copper prices to increase.
In order to effect and synchronize their joint market operations, Sumitomo's copper trader and the U.S. copper merchant established several highly unusual accounts, called the "B" accounts, at a number of brokerage houses. Under the "B" account arrangements, Sumitomo’s copper trader authorized personnel at the U.S. firm to effectuate LME futures trades and other copper business in Sumitomo's name and using Sumitomo's credit. Sumitomo’s copper trader gave the U.S. copper merchant power of attorney over the trading in these "B" accounts pursuant to documentation on which he forged the signatures of his superiors. Concerted market actions between the two firms took place in the ensuing years in large part through use of the various "B" accounts.
During this same period, Sumitomo's copper trader and personnel at the U.S. copper merchant were in daily communication concerning the coordination of their market activities with a view toward increasing LME copper prices. Sumitomo's copper trader and the U.S. copper merchant agreed that they should strive, through their purchases of physical metal in LME warehouses and elsewhere as well as their purchases of futures and options contracts, to inflate artificially the market price of copper to a level that would enable Sumitomo and the U.S. copper merchant to liquidate their large futures market position and holdings of LME warrants at a substantial profit.
3. Efforts to Manipulate Copper Prices in 1995-96
During the summer of 1995 and through the fourth quarter of 1995, Sumitomo's copper trader and the U.S. copper merchant plotted and executed their scheme to push copper prices to an artificially high level and then exit the joint operation by liquidating their massive long futures positions and holdings of LME warrants. The focus of these efforts ultimately was the acquisition of all of the stocks of deliverable copper in LME warehouses. Sumitomo’s and the U.S. copper merchant’s positions and actions during this period bore little relationship to their legitimate merchandising needs, but rather were specifically designed to cause artificial prices and price relationships.
In the fall of 1995, Sumitomo's copper trader authorized the acquisition of 100% of LME warehouse stocks by Sumitomo, with the U.S. copper merchant, and set out detailed instructions for the management of Sumitomo's large portfolio of futures positions. As Sumitomo's copper trader knew, the concentration of ownership of all, or essentially all, of the LME warehouse stocks in the hands of cooperating market participants and the withholding of such stocks from the market would have the effect of increasing the price of copper and also creating a large backwardation. These developments allowed Sumitomo’s copper trader to liquidate, lend or roll forward Sumitomo’s large market holdings at the higher price or price differential and thereby earn significant profits for Sumitomo.
Pursuant to the plan, beginning in late October 1995, Sumitomo, through its copper trader, rapidly increased its ownership and control of LME deliverable warehouse stocks. By November 24, 1995, Sumitomo owned 93% of all LME warehouse stocks through one brokerage house alone. Combined with holdings at other brokerage houses, Sumitomo, together with the U.S. copper merchant, owned and controlled up to 100% of LME stocks (including in the LME warehouse in Long Beach, California) at various times in the fourth quarter of 1995. Sumitomo also maintained large and controlling LME futures positions during the fourth quarter, which Sumitomo and personnel at the U.S. copper merchant managed in a manner that bore little legitimate relationship to the marketing of physical copper to Sumitomo's customers, but rather were specifically designed to cause artificial prices and price relationships.
At the same time, cash copper prices increased sharply as did the backwardation of cash to three-month forward prices. Once these artificial prices and price relationships were attained, Sumitomo reaped substantial profits by a combination of lending forward and outright sales of positions.
Sumitomo's dominance and control of physical stocks as well as its maintenance of large futures market positions persisted into spring 1996. Beginning with the announcement of the reassignment of Sumitomo’s copper trader in May 1996, Sumitomo’s market dominance began to decline. Thereafter, copper prices dropped from highs of around $2,800 per metric ton to below $2,000 per metric ton after the announcement of his dismissal. These price levels persisted for several months thereafter.
4. Impact on Prices and Markets in the United States
The impact on prices and markets in the United States from Sumitomo's conduct was direct and flowed from the well-established and well-known pricing relationships that exist between the LME and the U.S. cash and futures markets. First, the trading on Comex was directly affected. This was particularly true once the LME established its warehouse in Long Beach, California. During those periods of time when the LME price was manipulated into a premium over the Comex price, stocks in the United States were drawn away from Comex-designated warehouses (principally in Arizona) to LME warehouses (principally in Long Beach, California). Most importantly, the artificial prices and backwardation of prices on the LME also caused prices on the Comex to become similarly distorted and artificial as arbitrage trading between the LME and the Comex brought Comex prices higher than they otherwise would have been. Moreover, because copper contracts are generally priced by reference to the LME price or the Comex price, Sumitomo's conduct caused distorted and artificial pricing of copper, including throughout the United States cash market.
D. VIOLATIONS OF SECTIONS 6(c), 6(d) AND 9(a)(2) OF THE ACT
Sumitomo, like any company or entity, acts through its employees or other agents. In this instance, Sumitomo contends that the actions that were taken by Sumitomo’s copper trader were taken without authorization or knowledge of his superiors. As noted earlier, the Commission makes no findings with regard to that contention. Nevertheless, the Commission is satisfied that pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. § 4, the "act[s], omission[s] or failure[s]" of Sumitomo’s copper trader and any other agents or employees of Sumitomo in connection with the events described in this order are properly deemed those of Sumitomo. Thus, as discussed in more detail below, in pursuing the course of action set forth above, Sumitomo attempted to manipulate and did manipulate upward the price of copper in interstate commerce and for future delivery on or subject to the rules of a contract market, in violation of Sections 6(c), 6(d) and 9(a)(2) of the Act, 7 U.S.C. § 9, 13(b)and 13(a)(2).
As the United States Court of Appeals for the Eighth Circuit stated,
We think the test for manipulation must largely be a
practical one if the purposes of the Commodity Exchange
Act are to be accomplished. The methods and techniques
of manipulation are limited only by the ingenuity of man.
The aim must be therefore to discover whether conduct has
been intentionally engaged in which has resulted in a price
which does not reflect basic forces of supply and demand.
Cargill, Inc. v. Hardin, 452 F. 2d 1154, 1163 (8th Cir. 1971).
The Commission has set forth the following elements of manipulation:
(1) that the [respondent] had the ability to influence
(2) that [the respondent] specifically intended to do so;
(3) that artificial prices existed; and
(4) that the [respondent] caused an artificial price.
In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)
& 23,786, at 34,061 (CFTC July 15, 1987).
First, Sumitomo certainly had the ability to influence market prices. Sumitomo held massive futures positions and ultimately acquired virtually total ownership of LME warrants. Sumitomo strategically withheld these physical holdings from the marketplace until prices rose to levels that were consistent with Sumitomo's trading objectives. Copper prices rose to artificial levels to attract new supplies not already controlled by Sumitomo to satisfy Sumitomo's continued demand for copper.
Second, the Commission has long recognized that the intent to create an artificial or distorted price is the sine qua non of manipulation. In the Matter of Indiana Farm Bureau Cooperative Association, Inc.,[1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) &21,796, at 27,282 (CFTC December 17, 1982). In the words of the Fifth Circuit, "there must be a purpose to create prices not responsive to the forces of supply and demand; the conduct must be calculated to produce a price distortion." Volkart Brothers, Inc. v. Freeman, 311 F. 2d 52, 58 (5th Cir. 1962). Manipulation is, at bottom, "the creation of an artificial price by planned action, whether by one man or a group of men." General Foods Corp. v. Brannan, 170 F. 2d 220, 231 (7th Cir. 1948), cited with approval in Indiana Farm, ¶21,796 at 27,281.
It is clear that Sumitomo, through its agent or agents, intentionally acquired and maintained a dominant and controlling position in both the physical supply of deliverable LME warehouse stocks and in maturing LME futures positions. At various times within the period in question, Sumitomo owned virtually all deliverable LME copper stocks. These positions were not intended to meet Sumitomo's legitimate commercial needs. The intent motivating the acquisition and control of both the cash market positions and the futures market positions was expressly to create artificially high absolute prices and artificially high and distorted premium of nearby prices over futures prices. Sumitomo deliberately exploited its market dominance in order to profit when market prices became artificially high, as Sumitomo had foreseen and planned.
Third, artificial prices existed. Sharp price and backwardation increases resulted from Sumitomo's acquisition of dominant cash and futures positions which were not related to their legitimate commercial needs. As the Commission has observed, when a price is affected by a factor which is not legitimate, the resulting price is necessarily artificial. See Indiana Farm,&21,796, at 27,282 n.2.
Finally, it is clear that Sumitomo's conduct was at least a substantial cause of these artificial prices. As Sumitomo's acquisition of stocks increased, LME prices increased sharply and went into a steep backwardation which rose to over three hundred dollars. As a result, copper moved from Comex warehouses in Arizona to the LME warehouse in California. Moreover, by virtue of arbitrage trading and other factors linking the trading of copper on the Comex with that on the LME, Sumitomo's activity caused the upward manipulation of copper futures prices on the Comex. Because copper contracts are generally priced based on the LME price or the Comex price, Sumitomo's actions manipulated the prices in the cash markets, including in the United States cash market. As noted earlier, these manipulative effects on prices in interstate commerce were direct, and any knowledgeable participant in copper trading would know they would result from Sumitomo’s conduct, since they flowed from the well-established and well-known pricing relationships between the LME and the U.S. markets. These effects were certainly readily foreseeable and apparent, and Sumitomo knew, through its agent or agents, that this conduct would cause injury in those markets.
Sumitomo’s conduct, therefore, satisfies all of the requisite elements of the offense of price manipulation.
In the course of the Commission's investigation of this matter, Sumitomo’s management has provided substantial cooperation to the Commission in important respects. The company fully informed and cooperated with the Commission and other international regulatory authorities, including Japanese authorities, in connection with Sumitomo’s public revelation in June 1996 of its large positions and related losses in the copper market. At the Commission staff’s request, the company announced its intention to stand behind contracts that were traded by the U.S. copper merchant, and the company ultimately reported a significant cost associated with the unwinding of those contracts. The company also provided the Commission voluntarily with certain important information during the course of the investigation. It might have been difficult, if not impossible, for the Commission otherwise to obtain at least some of this information, particularly taking into account that Sumitomo is a foreign corporation.
The Commission also recognizes that the company has suffered significant losses in the wake of the collapse of the scheme underlying this action and that it faces continued exposure in private litigation. It has reported losses of $2.6 billion as a result of the matters discussed in this Order. Finally, Sumitomo's copper trader has stated that he took certain steps to hide aspects of his conduct from other company officials and the Commission notes that there have been indications that he may have personally profited from his conduct. Sumitomo has sued him in Japan for purportedly transferring millions of dollars that properly belonged to the company.
On the other hand, the conduct described above imposed enormous costs on traders, manufacturers, retailers and consumers of copper. The Commission believes that the conduct described in this Order was part of a course of conduct that extended over a much longer period of time.
Even acknowledging Sumitomo's copper trader's acts of deception, the Commission agrees with the Japanese court that stated, in the course of sentencing Sumitomo's copper trader to an eight year term of imprisonment, that Sumitomo's internal monitoring systems were inadequate, that "the company developed no effective system for controlling the action of the dealing team," and that "such system was one cause for this case." Company officials overlooked signs of the copper trader’s misconduct. Various warnings from information in the marketplace and from Sumitomo's copper trader's actions of which company officials were aware provided Sumitomo with the opportunity to address Sumitomo's copper trader's actions. It did not heed those warnings or address those actions. As the Japanese court put it, "Sumitomo just considered the amount of profit that [Sumitomo's copper trader] showed, and trusted [Sumitomo's copper trader] too much, and left an insufficient monitoring system, and allowed [Sumitomo's copper trader] to be in his position for a long time, and thus it can be said that Sumitomo just sought profit too single-mindedly, and did not take care of the control for [sic] risk management. Sumitomo's responsibility is not small."
The Commission has taken all of these factors into account in its decision to accept Sumitomo’s Offer of Settlement, which it believes strikes an appropriate balance among these considerations. The civil monetary penalty imposed on Sumitomo approximates the extent of Sumitomo's gains as a result of the manipulative scheme. Considering the breadth and impact of the conduct in question, that is appropriate. At the same time, the civil monetary penalty is significantly less than what the statute would provide if the matter were litigated to a successful conclusion. See 7 U.S.C. §§ 9, 13(b) (providing for a civil monetary penalty of not more than the higher of $100,000 per violation or triple the monetary gain from the violation). The mitigating factors as well as the benefits to the Commission of resolving this matter prior to filing and the lengthy proceeding that would thereafter ensue justify this result.
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Sumitomo violated Sections 6(c), 6(d) and 9(a)(2) of the Act, as amended, 7 U.S.C. § 9, 13(b) and 13(a)(2).
OFFER OF SETTLEMENT
Sumitomo has submitted an Offer of Settlement in which, without admitting or denying the allegations or the findings herein, it: acknowledges service of the Order; admits jurisdiction of the Commission with respect to the matters set forth in this Order and for any action or proceeding brought or authorized by the Commission based upon violations or for enforcement of the Order; waives service of a complaint and notice of hearing, a hearing, all post-hearing procedures, judicial review by any court, any objection to the staff’s participation in the Commission’s consideration of the Offer, any claim of double jeopardy based on the institution of this proceeding or the entry of any order imposing a civil monetary penalty or other relief, and all claims which it may possess under the Equal Access to Justice Act, 5 U.S.C. §504 (1994) and 28 U.S.C. §2412 (1994), as amended by Pub. L. No. 104-21, §§231-32, 110 Stat. 847, and Part 148 of the Commission’s Regulations, 17 C.F.R. §§148.1 et seq., relating to, or arising from, this action; stipulates that the record basis on which this Order is entered consists solely of this Order, including the findings in this Order; and consents to the Commission’s issuance of this Order, in which the Commission makes findings, including findings that Sumitomo violated §§6(c), 6(d), and 9(a)(2) of the Act, and orders that Sumitomo cease and desist from violating the provisions of the Act it has been found to have violated, that it pay a civil monetary penalty of one hundred twenty-five million dollars ($125,000,000) within twenty (20) business days of the entry of this Order, that it pay an additional twenty-five million dollars ($25,000,000) into escrow within twenty (20) business days of entry of this Order, to be paid either as restitution of damages proximately caused by virtue of the conduct underlying the violations found in the Order, in the manner set forth in this Order, or as part of the civil monetary penalty, also in the manner set forth in this Order, and that it comply with its undertakings.
Accordingly, IT IS HEREBY ORDERED THAT:
1. Sumitomo shall cease and desist from violating §§ 6(c), 6(d) and 9(a)(2) of the Act;
2. Sumitomo shall pay of a total amount of One Hundred Fifty Million Dollars ($150,000,000USD), consisting of:
3. Sumitomo shall deposit the civil monetary penalty of One Hundred Twenty-Five Million Dollars ($125,000,000USD) by electronic funds transfer to the account of the Commission at the United States Department of the Treasury within twenty (20) business days of entry of this Order. Such payment shall be made in a manner authorized by the Commission and in accordance with United States Treasury regulations and shall be accompanied by a letter that identifies Sumitomo and the name of this proceeding. A copy of the cover letter and proof of payment to the United States Treasury shall be simultaneously transmitted to the Director of the Division of Enforcement (the "Division") of the Commission (the "Director").
4. Sumitomo shall deposit the remaining Twenty-Five Million Dollars ($25,000,000USD) (together with any interest thereon, the "Escrow Funds"), within twenty (20) business days of the entry of the Order, into an insured escrow account (the "Escrow Account") established at Citibank, N.A. ("the Escrow Agent"), which shall serve as escrow agent over the Escrow Funds, and which may appoint the law firm of Shutts & Bowen, LLP, Miami, Florida, shall serve as administrator thereof (the "Administrator") to fulfill the obligations of paragraph 4b, and they which shall follow the instructions set forth below:
a. The Escrow Funds shall be invested in the CitiFunds U.S. Treasury Reserves Money Market Account, which is a fund fully backed by short-term U.S. Treasury obligations.
b. The Administrator shall take all necessary steps to enable the Escrow Funds to be a taxable "settlement fund," within the meaning of Internal Revenue Code §468B and regulations thereunder, including the filing of the elections and statements contemplated by those provisions. The Administrator shall file all necessary federal, state and local tax returns for the Escrow Funds and shall pay any appropriate taxes as a "qualified settlement fund," within the meaning of Treasury Regulations 1.468B-12, et seq., 26 C.F.R. 1.468B-12 et seq., from the Escrow Funds.
c. As used in this Order:
(1) a "Covered Action" is a lawsuit against Sumitomo and/or its officers, directors, employees or subsidiaries (collectively, the "Sumitomo Defendants") by one or more private claimants in the courts of the United States or of any state of the United States that seeks recovery from the Sumitomo Defendants for losses or injuries that the claimant(s) allege were caused in whole or in part by activities of the Sumitomo Defendants or their agents during a period which includes some or all of the period from June 1, 1995 to May 31, 1996, that affected (a) the price of copper in (i) a cash market, (ii) a futures market, (iii) an options market; and/or (b) the price of any product containing copper. Without limiting the foregoing, each of the following pending actions is deemed a Covered Action for the purposes of this Offer: (1) In re Sumitomo Copper Litigation, 96 Civ. 4584 (MP), and Polansky v. Sumitomo Corporation of America, et al., 97 Civ. 5372 (MP), pending in the United States District Court for the Southern District of New York; and (2) Heliotrope General, Inc. v. Sumitomo Corporation, et al., Case No. 007011679, and R.W. Strang Mechanical v. Sumitomo Corporation, et al., Case No. 007011680, pending in the Superior Court of the State of California for the County of San Diego (together referred to as the "Pending Class Actions").
(2) The "Effective Period" shall be the period that ends four (4) years from the date of entry of the Order, provided, however, that such period shall be tolled for a Covered Action, as defined below, during the period after that a Settlement Agreement in that Covered Action has been executed and before the entry of a final, non-appealable order disapproving, overturning, setting aside or otherwise nullifying a Settlement Agreementis in effect;
(3) A "Settlement Agreement" is an agreement, including in the form of an agreed-to proposed order or stipulation, in a Covered Action that (1) resolves (or, if approved by a court, will resolve) some or all claims against one or more of the Sumitomo Defendants; and (2) if court approval of the agreement, proposed order or stipulation is required by Fed. R. Civ. P. 23(e) or any analogous state statute, provides that any amounts paid to a Covered Action Fund (as defined below) from the Escrow Account shall revert to the Escrow Account if and when a final, non-appealable judgment or order is entered disapproving, overturning, setting aside or otherwise nullifying the settlement agreement.
(4) A "Covered Action Fund" is an escrow or court-administered fund established for the benefit of the private claimants pursuant to a Settlement Agreement.
(5) A "Final Disposition" is a final, non-appealable judgment or order that finally disposes of a Covered Action with respect to one or more Sumitomo Defendants.
d. The Escrow Agent shall make, at Sumitomo’s written request, a payment for the purposes specified in Section 2b, above, required to be made by Sumitomo pursuant to a Settlement Agreement or Final Disposition made or entered within the Effective Period, no later than ten (10) days after satisfaction of all of the following conditions, to the persons, entities or accounts set forth in the Settlement Agreement or Final Disposition, in an amount equal to the lesser of (i) the amount requested by Sumitomo; or (ii) the remaining Escrow Funds (after payment of all fees to the Escrow Agent and Administrator pursuant to paragraph 4h below, and taxes or reserves therefor, as specified in paragraph 4b above):
(1) the private action is a Covered Action;
(2) if the action is not one of the Pending Class Actions, a copy of the pleadings has been provided to the Escrow Agent;
(3) if the payment is pursuant to a Final Disposition, the judgment with proof of entry by the court has been provided to the Escrow Agent;
(4) if the payment is to a Covered Action Fund pursuant to a Settlement Agreement in a class action (including, but not limited to, the Pending Class Actions), the Settlement Agreement (and a copy of the relevant escrow agreement, if applicable) in connection with the Covered Action Fund has been provided to the Escrow Agent. Upon the entry of a Final Disposition in such matter, Sumitomo shall advise the Escrow Agent of the Final Disposition in such matter and shall provide a copy of such Final Disposition and proof of entry to the Escrow Agent; and
(5) the payment has been approved by the Commission as consistent with the terms of its Order, and the Commission has informed the Escrow Agent in writing of its approval.
e. Sumitomo shall submit to the Division a copy of any request to make any payment from the Escrow Funds (other than a payment pursuant to paragraph 4h) along with any supporting documentation, on or before the date Sumitomo submits such request and documentation to the Escrow Agent. Sumitomo shall provide additional information reasonably requested by the Division as needed for the Commission to determine if it should approve the payment as consistent with the terms of the Order. The Escrow Agent shall not make any requested payment until it receives the Commission’s written approval. If the requested payment is consistent with the terms of the Order, the Commission shall, within thirty (30) days of the request, give its written approval to the Escrow Agent or state in writing its denial of approval and the reasons for its denial.
f. In no event shall any funds paid pursuant to the Order be paid to, directly or indirectly, any current or former officer, director or employee of Sumitomo or any other defendant in any Covered Action.
g. The Escrow Funds shall be applied only to pay damages to private claimants but shall not be applied for the payment of attorneys’ fees or expenses or any other costs incurred in connection with any aspect of a Covered Action other than as provided in paragraph 4h. To the extent that the amount of the judgment or settlement of a relevant action is used as the basis of setting attorneys’ fees or expenses in a Covered Action, that amount shall not include any part of the Escrow Funds. The court with jurisdiction over the Covered Action shall be expressly informed by Sumitomo of the requirements of this paragraph prior to the court’s consideration of any application for attorneys’ fees or expenses or payment of any other costs for which Covered Action Funds are to be used.
h. The Escrow Agent and Administrator shall be entitled to payment from the Escrow Funds for all reasonable fees and expenses in connection with establishment, maintenance and termination of the Escrow Account. Such payments shall have priority over payments to claimants pursuant to paragraph 4d, above.
i. The Escrow Agent shall provide monthly reports to the Commission and Respondent which: set forth details of the disbursement of any funds from the Escrow Account; itemize the amount of interest accrued on the account; and itemize allowable expenses paid to the Escrow Agent in connection with the account.
j. Any Escrow Funds not distributed in accordance with the terms of paragraphs 4b, 4d and 4h, above, upon the expiration of the Effective Period, and any funds refunded to the Escrow Account after the expiration of the Effective Period, shall be deemed a civil monetary penalty pursuant to §6(c) of the Act and shall be paid immediately by the Escrow Agent to the United States Treasury. Such payments shall be made in the manner described in paragraph 3, above.
k. The Escrow Account shall remain open until all of the Escrow Funds have been paid pursuant to paragraphs 4b, 4d, 4h and 4j, and, in the event that a payment has been made to a Covered Action Account Fund, there shall have been a Final Disposition. At such time, the Escrow Agent shall terminate the Escrow Fund and shall make a final report pursuant to paragraph 4i.
l. Insofar as any part of this paragraph 4 calls for signed and/or written notification(s), authorization(s) or communication(s), a fax transmission shall be a satisfactory means of providing such notification(s), authorization(s) or communication(s).
5. Sumitomo shall comply with the following undertakings:
a. To cooperate fully with the Commission and its staff in any investigation, civil litigation or administrative proceeding related to this proceeding, by, among other things, upon the Commission’s reasonable request and subject to any legally cognizable privileges, (1) providing the Commission’s staff with access, for inspection and copying, to documents within the possession, custody or control of Sumitomo or any of its subsidiaries; and (b) actively seeking the cooperation of any Sumitomo officer, director or employee for interviews, depositions or testimony. Any such request will be made upon Sumitomo’s counsel, Martin London and Bruce Birenboim of the law firm of Paul, Weiss, Rifkind, Wharton and Garrison. Should Sumitomo seek to change the designated person to receive such requests, notice shall be given to the Commission of such intention 14 days before it occurs. Any person designated to receive such requests shall be located in the United States.
b. Not to take any action or make any public statement denying, directly or indirectly, any statement in this Order or creating, or tending to create, the impression that the Order is without a factual basis; provided, however, that nothing in this provision affects Sumitomo’s testimonial obligations, or its right to take factual or legal positions relating to any proceeding to which the Commission is not a party. Sumitomo will undertake all steps necessary to assure that all of its agents, attorneys and employees understand and comply with this agreement.
By the Commission.
Jean A. Webb
Secretary to the Commodity
Futures Trading Commisson