In 1996, one of the biggest financial scandals in history rocked the copper market. Yasuo Hamanaka, a trader for Sumitomo Corporation, was accused of single-handedly manipulating the copper market and causing losses of over $2.6 billion for his company. The scandal sent shockwaves throughout the financial world and raised questions about the integrity of the commodities market.
Hamanaka, who was known as “Mr. Copper” for his expertise in the market, had been with Sumitomo for over 20 years. He was responsible for trading copper futures and options, and had built up a significant position in the market. However, it was soon discovered that Hamanaka had been engaging in illegal trading practices, including cornering the market and manipulating prices. When the market turned against him, he was unable to cover his losses and the scandal was exposed.
Background of Sumitomo Corporation
Sumitomo Corporation is a Japanese trading company that was established in 1919. The company has a diverse business portfolio that includes metal products, transportation and construction systems, infrastructure, media, and consumer goods. It is one of Japan’s largest trading companies and has a global presence with offices in more than 66 countries.
Sumitomo Corporation has a long history of trading in metals, with copper being one of its key commodities. The company has been involved in the copper market since the early 17th century, when it began trading copper from the Besshi mine in Japan. Over the years, Sumitomo has expanded its copper trading activities and has become one of the world’s largest copper traders.
In the 1990s, Sumitomo Corporation’s copper trading division was headed by Yasuo Hamanaka, who was known as “Mr. Copper” for his expertise in the copper market. Hamanaka had been with Sumitomo for more than 20 years and had built a reputation as a skilled trader who was able to generate large profits for the company. However, in 1996, Hamanaka’s trading activities came under scrutiny when it was discovered that he had been involved in a massive copper trading scandal.
Profile of Yasuo Hamanaka
Yasuo Hamanaka was a Japanese trader who worked for Sumitomo Corporation, one of the largest trading companies in Japan. He joined the company in 1968 and worked in the copper department for most of his career.
Hamanaka was known for his expertise in the copper market and was responsible for managing Sumitomo’s copper trading activities. He was also known for his aggressive trading strategies and his ability to move the market with his trades.
Hamanaka’s trading activities came under scrutiny in 1996 when it was discovered that he had been engaging in unauthorized trades and hiding losses for over a decade. The scandal resulted in losses of over $2.6 billion for Sumitomo and led to Hamanaka’s arrest and imprisonment.
Hamanaka was known for his extravagant lifestyle and was often seen driving expensive cars and wearing designer clothes. He was also known for his love of golf and was a member of several exclusive golf clubs.
Despite his involvement in the scandal, Hamanaka remained a respected figure in the copper industry and was even referred to as “Mr. Copper” by some of his peers. However, his actions had a significant impact on Sumitomo and the copper market as a whole.
The Copper Trading Market Before the Scandal
Before the Sumitomo copper scandal in 1996, the copper trading market was a highly competitive and lucrative industry. Copper was in high demand due to its various industrial applications, such as electrical wiring and plumbing. The price of copper fluctuated based on supply and demand, as well as other factors such as political instability and economic conditions.
The copper trading market was dominated by a few large players, including Sumitomo Corporation. Yasuo Hamanaka, a veteran copper trader, was the head of Sumitomo’s copper trading division and had a reputation for being one of the most successful and influential traders in the industry.
Hamanaka’s trading strategies were known for their complexity and risk-taking. He often used a technique called “hoarding,” where he would buy large amounts of copper and hold onto it, creating an artificial shortage in the market and driving up prices. This strategy was successful for many years and helped Sumitomo become one of the largest copper traders in the world.
Overall, the copper trading market before the scandal was a highly competitive and complex industry, with large players like Sumitomo dominating the market. The market was subject to price fluctuations and influenced by a variety of factors, including political instability and economic conditions.
Mechanism of the Fraud
Futures Contracts and Market Manipulation
The Sumitomo copper scandal of 1996 was primarily caused by Yasuo Hamanaka’s manipulation of the copper futures market. Hamanaka was able to accumulate a significant position in the copper market through the use of futures contracts. These contracts allowed him to purchase copper at a predetermined price, with the intention of selling it later at a higher price.
Hamanaka’s strategy involved buying large quantities of copper futures contracts, which drove up the price of copper. He would then sell these contracts to other traders at a profit, causing the price of copper to drop. Hamanaka would then buy back the contracts at a lower price, making a profit on the difference.
This cycle of buying and selling futures contracts allowed Hamanaka to manipulate the copper market and profit from the fluctuations in price. However, his actions eventually caught the attention of regulators and led to the exposure of his fraudulent activities.
Hamanaka’s Trading Strategies
Hamanaka’s trading strategies were complex and involved a high degree of risk. He would often take large positions in the copper market, using borrowed funds to increase his buying power. This allowed him to make larger profits, but also increased the risk of significant losses.
Hamanaka was also known for his aggressive trading tactics, which involved buying and selling large quantities of copper futures contracts at a rapid pace. This allowed him to take advantage of small price movements in the market, but also increased the risk of market manipulation.
Overall, the Sumitomo copper scandal was a result of Hamanaka’s fraudulent activities, which involved the manipulation of the copper futures market through the use of complex trading strategies and large positions.
Discovery and Exposure
Internal Investigations
In 1995, the Sumitomo Corporation began conducting internal investigations into the trading activities of Yasuo Hamanaka, one of its top copper traders. These investigations were prompted by concerns over the large losses incurred by Hamanaka’s department, which had been responsible for more than 90% of Sumitomo’s copper trading profits.
The investigations revealed that Hamanaka had been engaging in unauthorized trades and concealing losses for more than a decade. He had also been manipulating the copper market by using his position to influence prices and cornering the market on certain copper contracts.
External Audit Findings
In June 1996, Sumitomo announced the results of its external audit of Hamanaka’s trading activities. The audit found that Hamanaka had caused losses of $1.8 billion, making it the largest financial scandal in Japanese history at the time.
The audit also revealed that Sumitomo’s internal controls had been inadequate in detecting Hamanaka’s fraudulent activities. As a result, Sumitomo was forced to implement significant changes to its risk management and compliance procedures.
In the aftermath of the scandal, Hamanaka was arrested and sentenced to eight years in prison. Sumitomo was also fined $200 million by the Japanese government for its role in the scandal.
Consequences of the Scandal
Financial Impact on Sumitomo
The Sumitomo copper scandal of 1996 had severe financial consequences for the company. The losses incurred by Yasuo Hamanaka’s unauthorized trading activities amounted to approximately $2.6 billion. As a result, Sumitomo was forced to pay a hefty fine of $150 million to the regulatory authorities. The company also suffered a significant blow to its reputation, which resulted in a sharp decline in its stock price.
Effects on the Global Copper Market
The Sumitomo copper scandal had a ripple effect on the global copper market. The market witnessed a sharp increase in copper prices due to the sudden reduction in supply caused by Sumitomo’s withdrawal from the market. The scandal also led to a loss of confidence in the copper market, which resulted in reduced trading volumes.
Legal Repercussions for Hamanaka
Yasuo Hamanaka, the mastermind behind the Sumitomo copper scandal, was arrested and charged with fraud, forgery, and breach of trust. He was sentenced to eight years in prison and ordered to pay restitution to Sumitomo. The scandal also resulted in increased regulatory scrutiny of the commodities market, with authorities implementing stricter regulations to prevent similar incidents from occurring in the future.
Regulatory Response and Market Reforms
Following the Sumitomo copper scandal in 1996, regulators around the world responded with increased scrutiny of commodity trading and market manipulation. In the United States, the Commodity Futures Trading Commission (CFTC) launched an investigation into Sumitomo’s activities, which ultimately led to a $150 million settlement with the company.
In addition to regulatory action, the scandal also prompted market reforms aimed at increasing transparency and reducing the risk of manipulation. For example, the London Metal Exchange (LME) implemented new rules requiring traders to disclose their positions in the market. The LME also introduced daily price limits to prevent excessive price movements.
Other exchanges and regulators also implemented new rules and guidelines in response to the Sumitomo scandal. The International Organization of Securities Commissions (IOSCO) issued a report on market manipulation, which provided guidance on detecting and preventing manipulation in commodity markets.
Overall, the Sumitomo copper scandal had a significant impact on the commodity trading industry, leading to increased regulation and reforms aimed at improving market integrity and transparency.
Long-term Implications for Commodity Trading
The Sumitomo copper scandal of 1996 had significant long-term implications for commodity trading. The scandal exposed the risks associated with concentrated positions and lack of transparency in commodity trading.
One of the main implications was the increased focus on risk management practices in commodity trading. Companies began to implement stricter risk management policies and procedures, including more frequent monitoring of trading activities and better risk assessment tools.
Another implication was the increased regulatory scrutiny of commodity trading. Regulators began to pay closer attention to the activities of commodity traders and implemented new rules and regulations to ensure greater transparency and accountability in the industry.
The Sumitomo scandal also highlighted the importance of diversification in commodity trading. Companies began to diversify their trading portfolios to reduce their exposure to individual commodities and markets.
Overall, the Sumitomo copper scandal of 1996 had a lasting impact on the commodity trading industry. It led to increased focus on risk management practices, greater regulatory scrutiny, and a renewed emphasis on diversification.