A UK High Court judge has found that ED&F Man was the victim of a warehouse receipts fraud that ensnared multiple banks in 2017, and has awarded the commodities trading house US$282mn in damages.

The fraud, which became public in mid-2017, involved nickel stored at London Metals Exchange warehouses across Asia. It rattled a commodities financing market that was still digesting the giant Qingdao Port fraud of 2014, which also involved fake warehouse receipts being used to raise financing, but the full details of the case have not been publicly known until now.

Justice Neil Calver said in a written judgement handed down on February 16 that four companies – Straits Singapore, Come Harvest Holdings, Mega Wealth International Trading and Genesis Resources Inc – as well as Genesis’ chief executive, Steven Kai Shing Kao, must pay the damages, although the amounts payable by each entity are yet to be determined.

Come Harvest and Mega Wealth entered into a combined 28 repurchase, or “repo”, deals with ED&F Man Capital Markets between May and October 2016, presenting what they said were 92 original warehouse receipts for the nickel, according to the judgement.

In reality, the receipts were forgeries, the court found, made by someone who possessed colour-scanned copies of the genuine original receipts.

Come Harvest and Mega Wealth had procured colour-scanned warehouse receipt copies from Straits  – a division of Singapore’s CWT Group – under a separate series of repo deals. Straits retained the genuine originals, which were pledged to its own financiers.

The judgement says there was no flow of funds between Straits and the two companies for the nickel, merely a “netting off” and the payment to Straits of what effectively was a service fee for use of the warehouse receipt copies.

Judge Calver found that while Straits may not have known that the blank-endorsed copies were being used to forge receipts, the company did have “actual knowledge from possibly as early as January 2015 but certainly by February 2016 that Come Harvest, Mega Wealth and Genesis were engaged in a scheme to obtain finance fraudulently through the provision of [the colour-scanned copies]”.

Straits has suggested it may challenge the verdict. “We are disappointed and do not agree with the outcome of the decision,” the company says in a statement to GTR. “We are studying the grounds of the decision carefully and we are currently taking urgent legal advice, including as to appeal.”

ED&F Man’s chief executive Rafael Muguiro said last week the judgement is an “important victory” for the company. “We have always maintained that we have been the victim of a carefully constructed fraud, and that we would take all means possible to recover any losses.”

ED&F Man on-sold almost all the warehouse receipts it received from Come Harvest and Mega Wealth to Australian lender ANZ, which is pursuing its own ongoing litigation against the pair of companies in Hong Kong.

The judgement shows that ED&F Man paid the lender an undisclosed sum after reaching a confidential settlement in 2017. A spokesperson for ANZ declined to comment.

So far, ED&F Man has only been able to recover US$1.8mn from four other defendants who settled claims before the five-week trial in October and November last year.


Banks misled

The judgement describes a close relationship between Straits and Genesis’ Kao, who acted as an advisor and agent to Come Harvest and Mega Wealth and was the primary point of contact with Straits.

The two companies, which began dealing with Straits in late 2013, were controlled by Wai Kwok Wong, who the court heard had been imprisoned in China in the late 1990s for “the use of fraudulent letters of credit used for trading aluminium”.

Wong could not be reached for comment. Kao did not respond to a request for comment.

Straits argued in court that it supplied the copies to Come Harvest and Mega Wealth because it thought they may wish to purchase the nickel in the future. But Justice Calver found this was “a lie” prepared by Straits in case the fraud was exposed.

He dismissed Straits’ closing arguments in the trial that it was the victim of a scheme orchestrated solely by Kao.

Come Harvest and Mega Wealth had also entered into similar arrangements with other financial institutions including ING, Natixis and private equity firm Carlyle.

On several occasions financial institutions that mistakenly thought they owned the metals – by virtue of the forged warehouse receipt copies they had received from Come Harvest or Mega Wealth – asked to inspect the nickel at warehouses managed by warehousing and logistics firm Access World, but on each occasion the warehouse operator said Straits was listed as still having title over the goods.

Justice Calver found that on those occasions, representatives of Straits worked, sometimes in concert with Kao, to ensure that the banks did not uncover the truth, which was that the original receipts were still in its hands.

In two such cases, involving ING and Natixis, the judge found that Straits wrote “misleading” and “dishonest” emails to Access World. Both banks believed they were holding genuine warehouse receipt copies, and Straits worded its communications with the warehouse to avoid correcting the misapprehension, which would have exposed the banks’ receipts as fakes.

The judge said Kao and Sherraine He, Straits’ head of trade services, ultimately explained such episodes to Access World by saying that the financial institutions were interested in purchasing the nickel, and wanted to physically inspect it before doing so. However the judge rejected He’s evidence that she ever thought the financial institutions were potential buyers.

“Ms He had no reasonable explanation for the Natixis episode and in my judgement it demonstrates very clearly that Ms He… sought to mislead third party financiers into believing that Mr Kao’s companies held the [warehouse receipts] which enabled them to transfer title in metal to those financiers, when they knew that to be false; and that they did this to assist Mr Kao,” Justice Calver wrote.

Carlyle declined to comment. ING and Natixis did not respond to requests for comment.

The fraud unravelled in January 2017 after metals trader Marex, which was also providing finance to Come Harvest and believed it was in the possession of genuine warehouse receipts, began asking persistent questions about the receipts and eventually submitted one to Access World’s authentication process, which failed.

The check prompted frantic messages between Straits employees, reproduced in the judgement. “SHIT!!,” one wrote, “I dont know wat is marex doing again … Franky jus called me, say Marex sent 4 [warehouse receipts] frm Come Harvest for authenticity check”.

Over the course of January, ED&F Man and ANZ also submitted their receipts for authentication and discovered they were counterfeits.

Straits representatives fretted over whether the issue would be discovered by Macquarie, the bank to which the genuine receipts were pledged, messages reproduced in the judgement show.

Straits then attempted a rapid sale of the cargo to complicate any potential legal action by Marex: “Pls quickly let me know how much is the total Marex cargo value [and] no of lots [and] where it is being financed now,” He wrote. “If Macquarie we try to liquidate all first so that if Marex try to sue us all the cargoes already sold won’t be frozen or what.”

The company ultimately sold all the nickel between January and April 2017.


Red flags missed

The judgement shows that Lynda Goh, the chief financial officer of parent company CWT, questioned the nature of Straits’ trades with Come Harvest and Mega Wealth several times, noting that CWT’s “biggest concern” was if Kao was using the warehouse receipt copies to “double finance”. But ultimately the trades were allowed to continue.

Nicholas Riley, the main ED&F Man representative dealing with Come Harvest and Mega Wealth, told the trial that he only “glanced” at the companies’ financial statements, missing the fact that in 2015 Come Harvest only had assets of HK$1.78mn, which Justice Calver said begged the question of how the company could hold nickel worth so much more.

In November 2016, Kao explained Come Harvest and Mega Wealth’s business model at a meeting in London. Riley gave evidence at the trial “that he did not understand the explanation offered”, the judgement recounts.

ED&F Man’s Kevin Dyke told the court “there was too much reliance on – obviously with the benefit of hindsight – in ANZ checking these warehouse receipts and doing validation on them”.

ANZ, which paid ED&F Man a total of US$291mn for the nickel, typically paid ED&F Man the same day it received what it thought were the genuine receipt copies, sometimes in under an hour, according to the judgement. “So if any authenticity checks at all were carried out by ANZ they would have been minimal,” Justice Calver noted.

In communications reproduced in the judgement, ANZ indicated it preferred to have an original receipt rather than a copy, but did not insist on it.

The judgement shows that Commonwealth Bank of Australia, which did not respond to a request for comment from GTR, was interested in financing ED&F Man’s trades with Come Harvest and Mega Wealth but walked away when the companies refused to either hand over the original warehouse receipts or allow the warehouse to check the authenticity of the copies.

A Commonwealth banker wrote to Riley: “If your client insists that they want the same document back then I’d be interested to know why it is that it’s so necessary, or is the[re] something that we’re missing?”