Four Metal Traders Are Accused
In $600 Million Fraud Scheme
By PETER A. MCKAY, JATHON SAPSFORD and CARRICK MOLLENKAMP
Staff Reporters of THE WALL STREET JOURNAL
An unusually wide-ranging metals-trading scam may have bilked more than $600 million from some of the world's largest banks, authorities said, raising new questions about internal controls at some major financial houses.
Operating out of modest homes and offices in New Jersey, the traders ran what prosecutors say was a scam of "astonishing scope," including faked documents and the recruitment of hundreds of people world-wide -- some in remote areas reachable only by rickshaw -- to pose as businessmen in trades that never took place.
In the process, the sham companies managed to convince J.P. Morgan Chase & Co., FleetBoston Financial Corp. and PNC Financial Services Group Inc., among others, to lend them millions of dollars for metals deals that never materialized. Money borrowed from one bank would be used to repay loans from another, convincing the financial institutions that the trading was legitimate. The two-year-old scam finally unraveled when J.P. Morgan officials became suspicious of a fax, which was supposed to come from a trading company that investigators discovered was nonexistent.
Prosecutors said they confirmed $600 million in losses through the alleged scam, although the list of corporate victims and tally of bogus trades is still growing and could top $1 billion. Already, PNC has taken a $50 million write-down due to the trades, while officials from J.P. Morgan said the bank had losses of about $2.7 million, and Fleet estimated losses of $70 million. Prosecutors estimated those banks' losses were even higher -- $4 million for J.P. Morgan and $132 million for Fleet.
Other banks identified as victims of the fraud include KBC Bank Deustchland AG, Hypo Vereins Bank, Dresdner Bank Lateinamerika AG, China Trust Bank and General Bank. Officials of those banks couldn't be reached and the scope of their losses wasn't clear.
Early Tuesday morning, FBI agents arrested Narendra Kumar Rastogi, Anil Anand, Manoj Nijhawan and Udhay Shankar at their homes. The four men -- all executives of the Piscataway, N.J., trading firms Allied Deals Inc., Hampton Lane Inc. and SAI Commodity Inc. -- were charged with conspiracy, mail fraud and wire fraud in U.S. District Court in Manhattan. Mr. Rastogi's brother, Virendra, was also arrested by London police on May 3 for trying to destroy documents related to the trading firms' business.
For the banks, the metals scam comes as yet another in a string of recent trading debacles. Earlier this year, Allied Irish Banks PLC said a rogue trader in Baltimore had cost the bank $691 million in losses, while a stockbroker at Lehman Brothers was found to have inflated client-account statements by as much as $300 million.
Bank officials, as well as federal investigators, say the New Jersey trading scheme was unusually complex -- explaining in part why some of the banks may have been fooled. "It's a scam as old as the Ponzi scheme, but with an incredible level of intricacy," said U.S. Attorney James B. Comey.
Seth T. Taube, a former U.S. Securities and Exchange Commission attorney and now a partner with law firm McCarter & English, said the common thread between the latest scam and previous large-scale cases of fraud -- including the rogue traders at Allied Irish and Barings Bank PLC -- is that they involved transactions that crossed borders.
Still, Mr. Taube, who isn't involved in the New Jersey case, predicted the latest scam will cause some of the banks to rethink their controls. "I'm sure the relevant institution will do a review of internal controls," he said. "But at the end of the day, the most complex frauds can almost never be stopped. When people have evil intentions they can bypass even the best procedure."
The scrutiny likely to fall on banking safeguards following Tuesday's arrests will harken back to earlier scams such as Japan's copper-trading debacle involving Sumitomo Corp. and the Martin Armstrong gold scandal.
According to the criminal complaint against Messrs. Rastogi, Anand, Nijhawan and Shankar, the scam started in May 2000. Investigators say the men acted as brokers between buyers and sellers that didn't exist, then obtained loans from banks to finance the deals, usually in chunks of at least $1 million.
In the process of trying to prove to the banks that the trades took place, Mr. Comey said the men went to unusual lengths to set up shell companies, falsify documents such as shipping bills, and arrange for people to pose as counterparties to fake trades in major trading cities around the world.
Mr. Comey said it remains unclear what the men actually did with the money, and that U.S. investigators are also focusing on trades in London, Hong Kong, Singapore and the United Arab Emirates, some of which apparently were legitimate. Lawyers for the arrested men couldn't be reached. If convicted, they each face up to five years in prison on the conspiracy charge and at least $250,000 in fines.
According to U.S. officials, Mr. Rastogi served as chief executive of Allied Deals Inc., Hampton Lane Inc. and SAI Commodity Inc., a group of Piscataway, N.J., metal-trading companies. Mr. Anand served as the companies' chief financial officer; Mr. Nijhawan was Allied Deals' deputy general manager; and Mr. Shankar, until he resigned in January, was Allied Deals' treasurer. All are Indian nationals, authorities said, except Mr. Anand, who is a naturalized U.S. citizen.
Eventually, Mr. Comey said the scam collapsed when J.P. Morgan became skeptical of the documents attached to a $1.2 million loan it made for a trade conducted by a firm called "Island Metals," which turned out to be nonexistent.
In another case, a bank employee went to the New York City address of another of the trading firms' counterparties, Jersey Metals, only to find a "nondescript door with a peephole" and a typewritten sign with the company's name taped to an address plate.
While the scope of the alleged fraud has come into focus only in recent weeks, complaints against the companies involved have been building for months.
In March, Dresdner Bank Lateinamerika, in U.S. District Court in Miami, claimed that it had provided Allied Deals a promissory note totaling $25 million. In the lawsuit, Dresdner Bank said Allied Deals was in default and that Allied Deals had refused to make payment. The relationship between Allied Deals and Dresdner dated to November 1999.
In April, in U.S. District Court in Pittsburgh, Deere Credit Inc. said it was owed more than $26 million relating to a credit agreement between Deere and Allied Deals. Deere Credit is a subsidiary of Deere & Co., of Moline, Ill. |
