The mid 1990s saw a criminal investigation in the London Metal Exchange surrounding a certain Mr. 5 percent, indicating his total shares in the global copper market. The investigations revealed the usual line of fraud in hoarding the supplies and artificially increasing the demand and the price. The investigations ensued only when Yasuo Harnanaka, the lead trader of the Japanese Sumitomo Corp piled up $2.6 billion in unsanctioned losses putting the entire copper market in a pressure cooker situation. The LME plunged into an immediate crisis which led to the inquiries. However, there were no criminal charges in the UK. There was only a probe by Alan Whiting, former treasury official in 1997 that overhauled the rulebooks of the biggest metal market in the world. There were soon new limitations on the positions of the traders.
Although there were important lessons from the incident, yet apparently they have not been sufficient. Reviews of the Whiting report and other similar reports in the last 17 years show that much is left to do to prevent controversial transactions. Recently, US manufacturers filed a lawsuit that asserted the LME rules to be inadequate in controlling rampant warehousing by banks and leading traders. This has been leading to increased prices over metal transactions. However, the accused traders and the banks were quick to deny the allegations as baseless.
In the Whiting report, there were strong concerns on the regulations of about 700 metal warehouses owned and operated by the LME across the world. The report indicated controversial relationships between the members of the LME and the warehouse companies and identified this as a major threat to a stable and transparent transaction system. The report states that the warehouses constantly encourage long-term storage by offering incentives and imposing hefty fees on the extraction of stocks. Also, the warehouses have been gaining a notorious unprofessional reputation of delaying deliveries consistently without substantial reasons.
Presently, the LME finds itself embroiled in a net of high profile accusations and lawsuits. The exchange itself was sold last year to the Hong Kong Stock exchange operator, indicating that the authorities were trying to wash off their hands from a complicated predicament. The LME is actually a defendant in the different lawsuits that accuse Goldman Sachs, Glencore Xstrata, and JP Morgan of manipulating the aluminum market and breaching anti-trust laws. The lawsuits directly accuse the traders and the banks to set up a collusion in stockpiling huge metal quantities in warehouses and delivering them at the minimum possible pace.
This strategy escalated the costs of soft drink cans to that of aircrafts. The Plaintiffs accuse the LME of devising rules that allowed them to ignore any call for change in the current system. The exchange however states that the rules were written through independent sources. These current lawsuits are also in line with an ongoing probe by the US Justice Department on metal warehousing, and physical assets ownerships by the Wall Street banks. Market experts warn that without strict punitive measures against such top level disconnections can see the global metal market crashing, leading to another major financial crisis.