In another global trading scandal, the huge Japanese trading firm Sumitomo Corp. announced Thursday it has discovered “significant unreported losses"--estimated at $1.8 billion--from 10 years of unauthorized trading by its former head of copper trading.
The Sumitomo fiasco appeared to be the biggest case yet in a string of losses by rogue traders, exceeding in size two similar scandals that erupted last year at Japan’s Daiwa Bank and Britain’s Barings.
But the financial fallout will be far less because of Sumitomo’s enormous size and healthy financial condition. Sumitomo immediately assured U.S. regulators that it will stand behind the $1.8-billion loss.
“It means they [Sumitomo] have lousy traders. That’s about it,” said Ron Bevacqua, Tokyo-based economist for Merrill Lynch. “I don’t think this is anything like Daiwa. But it’s a lot of money.”
Sumitomo issued a statement first in New York after the close of commodities trading, saying it first discovered evidence of unauthorized trading on June 5, and immediately undertook an inquiry that led to the Tokyo-based trader, Yasuo Hamanaka. Hamanaka has been relieved of his trading duties, the company said.
Hamanaka apparently bought huge quantities of copper at prices above current market levels, trying to support the market over the past year as rising copper-mine production and weak demand threatened to push prices down from a six-year high of $1.475 a pound reached a year ago.
“Upon confirmation of the unauthorized transactions, [Sumitomo] immediately and voluntarily notified regulatory authorities in the United States and the United Kingdom, as well as authorities in Japan, and has provided them with the conclusions of its preliminary investigation,” the company said.
Sumitomo, which deals globally in basic commodities such as metals and grain, plus a wide variety of industrial products and consumer goods, emphasized that its financial position “remains strong.”
It has assets of about $50 billion and had sales of $152 billion in the fiscal year ended March 31. It is part of the Sumitomo Group, a vast network of businesses connected by cross-ownership.
“Our assessment at the moment is that Sumitomo Corp. will be able to cover their losses,” said an analyst at a large Japanese investment banking firm. Sumitomo “is in relatively healthy shape compared to banks and other institutions that have suffered this kind of loss in the past. There may be some impact on the copper companies, because this trader had a significant command on the copper markets,” the analyst said.
Still, in the sheer size of the loss, the Sumitomo debacle exceeds the 1995 cases of a bond trader in the New York branch of Daiwa Bank, who lost $1.1 billion in unauthorized trades over a period of 11 years, and the failure of Barings, a 233-year-old British bank, after an employee in its Singapore office lost $1.4 billion in unauthorized trades.
Ironically, Sumitomo Bank, a separate company affiliated with Sumitomo Corp., bought out Daiwa Bank’s U.S. operations in February, when Daiwa was forced to leave the United States as punishment for violating U.S. banking regulations. One of those violations was failure to promptly notify U.S. authorities after it discovered the loss.
Against this background, Sumitomo Corp. took pains Thursday to stress that it was cooperating quickly and fully with regulators.
“Sumitomo is committed to around-the-clock cooperation with all regulatory authorities in the United States, the United Kingdom, Japan and elsewhere,” Sumitomo President Tomiichi Akiyama said. “We deeply regret--and are profoundly embarrassed by--these severe violations of our company’s business policies.
As of this time, we are aware of only two employees who have been identified as having caused or known of this problem,” Akiyama said.
Discovery of the losses came amid inquiries launched by the U.S. Commodities Futures Trading Commission and the British Securities and Investment Board into unusually heavy copper trading--and steep losses--on world commodity markets, especially the London Metals Exchange.
Hamanaka, whose employment has now been terminated, was initially removed from his trading post and assigned to cooperate with the investigation, Sumitomo said.
Sumitomo said it will issue a revised statement of its financial position after fully determining the extent of its losses.
Times staff writer Hilary E. MacGregor in Tokyo contributed to this report.