Metals Financing Fraud Lawsuits Reveal Risks of Relying on Paper Receipts

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When the man running one of London’s biggest metals brokerages found a new client who wanted to finance large volumes of nickel held in warehouses in Asia, he thought the deal promised major rewards. Less than a year later, he worried that the disastrous decision to go ahead with the trade would cost him his job.

Simon van den Born, global head of metals at Marex Spectron, expressed his concerns about Hong Kong-based Come Harvest Holdings on a call with colleagues in January 2017, after it emerged that some of the documents underpinning more than $30 million worth of financing deals with the company were fake, according to court disclosures in London last week.

“It might look kosher, but it ain’t f–king kosher,” van den Born told two colleagues who had been involved in the deal, documents filed by Marex’s insurer show. “It might cost me my job.”

The case lays bare the risks of relying on paper receipts, still prevalent in the global metals industry, even after a massive warehousing scam was uncovered in the Chinese port of Qingdao in 2014 that left banks and trading houses facing billions of dollars in losses. The warehouse documents are relied upon to prove every pound of metal involved in a transaction actually exists and who owns it.

Marex and representatives for CHH discussed doing deals totaling nearly $600 million over 2016 and 2017, and the brokerage approached French bank Natixis SA to finance the transactions. By the time the fraud was uncovered, Natixis had lent more than $30 million to Marex, which it had in turn passed on to CHH. To date, Marex’s efforts to recover the funds from CHH have proven largely unsuccessful, and Natixis is suing Marex to recoup its losses.

Marex and Natixis aren’t the only companies to be caught up. In a separate case in London, commodities brokerage ED&F Man has said it’s also out of pocket.

The link is the little-known Hong Kong-based CHH. In both cases, CHH provided the warehouse receipts that later turned out to be forgeries. ED&F is claiming damages of nearly $300 million from CHH and an associated company known as Mega Wealth International, based out of the same address.

There is “significant overlap” in the background of the two cases, lawyers for CHH said in a letter addressed to the trial judge, which was read out in court Jan. 22.

Natixis and other parties to the suit claim that Marex officials had concerns about dealing with CHH and its associate Steven Kao, but signed the contracts anyway. With CHH threatening to pull out unless the deal was concluded quickly, Kevin Nutt, chief operating officer of Marex’s metals business, told a colleague in a phone call in late 2016: “It just scares the sh-t out of me that they’re putting us under so much pressure for this.”

Marex’s Nutt said: “These guys — Steven Kao is sitting in that room saying ‘We’re dealing in billions of dollars every day.’ Y’know, he’s desperate for $5 million — really?”

CHH “honestly and reasonably believed” the documents to be genuine, according to its court documents filed in the ED&F Case. CHH Principal Wai Kwok Wong told Marex it was willing to undo the contracts, but didn’t have “liquid funds” available. Marex has so far recovered just $1 million.

“Our introduction to Come Harvest had come through very strong channels,” Nutt said in court. “We had also been told that Mr. Wong was a very wealthy Chinese businessman with properties in China which we wouldn’t expect to see necessarily in the financial statements of Come Harvest.”

In its filing, Marex said it “simply would not have undertaken the transactions at all if had entertained any material concerns as to the authenticity of the relevant warehouse receipts.”

Representatives for Marex and Natixis declined to comment. Simon Bushell, a lawyer for Come Harvest Holdings and Mega Wealth International Trading, said: “ED&F Man’s claims against Come Harvest and Mega Wealth are being vigorously defended.”

A lawyer for Steven Kao declined to comment.

The scandal has also embroiled a Glencore Plc-owned warehousing company that was storing the metal, with Marex alleging that it was involved in the conspiracy.

Access World said that the digital copies of receipts underpinning Marex’s initial deals appeared genuine, and in later transactions the brokerage flew a courier to Singapore to have documents physically authenticated. Access World confirmed that they were genuine, but when Natixis later took the documents to be tested again after the fraud had come to light, they failed Access World’s authentication checks.

If Access World’s “conduct were not to be fraudulent, there would have to have been a staggering coincidence,” Marex’s lawyer Alain Choo-Choy said, because Access World was authenticating receipts “at the same time as CHH was committing a fraud using those 16 receipts,” Choo-Choy said.

A representative for Access World declined to comment.

At around the same time, Access World uncovered a similar but unrelated fraud involving receipts held by Australia and New Zealand Banking Group Ltd. and ED&F Man, setting in motion their efforts to pursue CHH and Mega Wealth for damages in courts in the U.S., Asia and London.

“There is a sophisticated program going on here and it’s likely we’re caught up,” Marex’s van den Born told colleagues when details of the fraud emerged. “We could have a $30 million problem.”