Unauthorized Trades Produce Huge Loss For Sumitomo Giant Commodities Distributor Discloses $1.8 Billion Loss In Copper Deals

For the second time in less than a year, a top Japanese company found itself “overwhelmed with shame” Friday over $1.8 billion in losses caused by a rogue trader.

Sumitomo Corp., one of the world’s biggest distributors of basic commodities such as metals and grains, said copper trader Yasuo Hamanaka lost the money over 10 years in off-the-books deals.

It was just eight months ago that Daiwa Bank disclosed a strikingly similar case: a single employee in New York lost $1.1 billion over 11 years in unauthorized bond trades.

“Once again, the lax risk management of Japanese companies has been exposed,” commented Japan’s largest newspaper, the Yomiuri Shimbun.

Sumitomo Corp.’s president, Tomiichi Akiyama, faced the cameras and microphones Friday to offer apologies - and assurances to a nervous market that Sumitomo’s strong financial position would allow it to “easily absorb” the copper losses.

Copper prices fell on the London Metal Exchange although the losses narrowed in the afternoon. The contract for delivery in three months dropped as low as $1,860 a metric ton, down from $2,145 at the close of trading Thursday. It later recovered, and was quoted late in the day at $2,045.

Martin Squires, metals analyst at Rudolf Wolff in London, said the market bounced back strongly as traders were heartened by continued Chinese buying. But he added the market could come under further pressure if big funds sell.

Akiyama said Sumitomo would cooperate with copper regulators in New York and London to stabilize trading. In London, the Serious Fraud Office, which probes complex financial crimes, said it was opening an investigation of the Sumitomo matter after discussions with Britian’s main financial markets regulator, the Securities and Investment Board.

Ceinwen Jones, a spokeswoman at the Serious Fraud Office, declined to provide further details or say if Hamanaka was a target of the probe.

“I deeply apologize for having caused this trouble,” Akiyama said, bowing. “I am overwhelmed with shame.”

Japanese corporate leaders customarily take symbolic responsibility for scandals, but Akiyama left no doubt where he thought the real blame lay.

“Hamanaka abused the name of Sumitomo Corp. He carried through the trades entirely on his own initiative,” he said, adding that he had believed Hamanaka to be a highly skilled trader.

Sumitomo’s losses exceed not only the Daiwa loss, but also the nearly $1.4 billion lost last year by Nicholas Leeson, a former Singapore-based trader for now-defunct Barings PLC.

Sumitomo was known as a top player on copper commodity exchanges in New York and London, where title to own copper is traded. Recently the price has plunged because of oversupply.

The Tokyo Stock Exchange suspended trading in Sumitomo Corp. shares, but the market reacted calmly, with overall stock prices broadly higher.

As in the Daiwa scandal, the basic question was simple: If, as Sumitomo claims, Hamanaka acted on his own, how could he continue the deception for so long?

“It wasn’t discovered for 10 years because of a highly skilled cover-up operation,” said Akiyama, without giving details.

Sumitomo officials said the trading was conducted “off the books,” but they didn’t explain where Hamanaka got the financing to cover his snowballing losses and why that wasn’t uncovered by company audits.

If Hamanaka hadn’t slipped in early May by registering one of his off-the-book deals through the regular channels of company accounting, the deception might still be going on, officials said