How a Copper-Price Rigging Case Landed Barclays in Court, Again

Seven years ago when copper was scaling one all-time high after another, two of the industry’s best-known traders made a contrarian call and lost hundreds of millions of dollars.

But Michael Farmer and David Lilley, founders of the $2 billion metals hedge fund Red Kite, didn’t accept defeat then — and they aren’t about to now.

The pair is suing Barclays Plc in a London court for $850 million, alleging the bank they hired to execute trades shared details of Red Kite’s position to its own traders, who took opposite bets and then manipulated prices to their advantage. Barclays denied the allegations in court filings that came to light last week.

If successful, the lawsuit could lead to closer scrutiny of how prices are set on the London Metal Exchange, the global hub of industrial metals trading.

“It was an open secret at the time,” Robin Bhar, a London-based metals analyst at Societe Generale SA, said of Red Kite and Barclays being on different sides of the trade. “It looks like Red Kite thought that if it wasn’t for the involvement of Barcap traders, the trade would have been profitable.”

Depending on how it unfolds, the legal battle may mark another setback for Barclays as it tries to salvage a reputation tarnished by scandals including manipulating Libor, the benchmark for interest rates, and foreign exchange. Trying to turn things around, Barclays hired Jes Staley as chief executive officer in 2015.

The bank said that Red Kite’s legal claim is entirely without merit and it would be vigorously defending itself.

Contrarian Call

Red Kite’s allegations are set against the backdrop of copper’s rally from just over $6,000 to more than $9,000 a metric ton in a matter of months in 2010 as traders speculated a wave of buying from China would usher in another commodities super-cycle.

From their office situated meters from the Bank of England, Farmer — a prominent donor to Britain’s Conservative Party — and Lilley didn’t share that optimism. They argued investors misinterpreted China’s purchases as a sign of strong demand, when in fact it was just stockpiling the metal.

According to the lawsuit, Red Kite built a short position in copper spreads, betting the price of the metal for delivery in December 2010 would decline relative to contracts due three years later. When a commodity is scarce, buyers typically pay a premium for nearer contracts to ensure they can secure supplies.

By July, Red Kite built a position equal to more than 250,000 tons of copper, court documents show. Instead of narrowing, though, the spread more than tripled to above $1,000 a ton by December. The hedge fund lost $210 million across four funds listed in court documents.

While it wasn’t the first time Farmer and Lilley saw trading bets sour, they claim the 2010 losses were different because Barclays allowed its own proprietary commodities traders to see details of the hedge fund’s positions, enabling them to take opposite bets in the copper spread.

Barclays traders then “sought to manipulate the LME by ‘ramping’ prices,” the court papers allege. Red Kite claims Barclays repeatedly bid up copper just before the market close “in circumstances where, it is to be inferred, Barclays had no real desire to enter into transactions at the prices bid.” Bids then frequently “moved sharply lower” after the official close, the suit alleges.

Red Kite argues it was forced to close out its positions “at a time and in a manner profitable to Barclays.”

Barclays, in a separate filing, denied it allowed its traders to see Red Kite’s positions or that it ramped up LME prices “as alleged or at all.” The bank said it “makes no admissions as to whether the Red Kite funds were effectively forced to close out positions or, if so, whether that was profitable for Barclays.”

Red Kite took its allegations further, arguing Barclays showed its orders to some traders who weren’t directly employed with the bank, but working on its behalf.

“Red Kite’s claims go well beyond the norm of any acceptable business practice,” said former LME board member Mike Frawley, the chief executive officer at Newgate Asset Management. “Michael and David are very serious minded, careful individuals. Legal action of this nature is not pursued by these types of individuals unless they feel strongly about their position.”

Open Outcry

More broadly, the case draws attention to trading on the LME, the only place in Europe where people still shout and gesticulate at one another to set prices. Brokers are allowed to trade both for their clients and themselves in a so-called dual-capacity system that some argue leave it prone to conflicts of interest.

“This isn’t the first time that the LME market has faced this type of problem, and it probably won’t be the last,” said Bhar of SocGen. “Even today, it’s clear that you can still bully the close.”

The LME, for its part, said it has strict rules on market manipulation and abuse on the Ring trading floor. “We keep our Ring surveillance procedures under constant review, and have introduced a number of amendments to Ring regulations over the last few years to ensure that the Ring continues to meet global standards for transparency, integrity and governance,” it said by email.

Farmer and Lilley were eventually right that copper was overheating. In 2011, prices slid by a third from peaks above $10,000 and two of Red Kite’s main funds gained 29 percent and 68 percent.

The same year, two senior traders at Barclays, Iain MacRae and Christian Saunders, left as the lender suffered what it called a “challenging trading environment.” In 2012, the bank slashed a third of its commodities staff and quit the LME floor altogether.

The case is scheduled to go to trial not earlier than 2019, leaving time for a possible arbitration process.

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