Marex Spectron warned by executive of fraud risk - lawsuit documents

Marex Spectron warned by executive of fraud risk - lawsuit documents

Reuters  | Jan 17, 2019 09:40

Marex Spectron warned by executive of fraud risk - lawsuit documents

By Eric Onstad

LONDON (Reuters) - Commodities broker Marex Spectron was warned by one of its executives about the risk of fraud before it finalised a metals financing deal with French bank Natixis (PA:CNAT) that triggered a $32 million (£24.8 million) lawsuit by the lender, court documents seen by Reuters show.

Natixis filed the lawsuit against Marex in May 2017 after the bank said warehouse ownership receipts for nickel provided by Marex had turned out to be fake. Natixis holds Marex responsible for not identifying the fraud before the financing deal was completed.

Court proceedings are due to start next week in London's High Court.

The receipts were part of a repurchase agreement, arranged by Marex, between Natixis and a Hong Kong firm. None of the parties in the case have disputed that the receipts were fraudulent but no accusation has been made as to who faked them.

Marex has rejected the lawsuit and issued a claim against Glencore (L:GLEN) unit Access World, which stored the metal. Marex said it had been diligent in verifying the receipts and had received assurances from Access World about their validity.

According to court documents filed in December and seen by Reuters, concerns were aired by one of Marex's executives when Marex was in negotiations with Hong Kong firm Come Harvest Holdings Ltd (CHH), which allegedly said it would supply nickel ownership documents in exchange for financing from Natixis.

Marex and Natixis declined to comment. Reuters was unable to contact CHH for comment. CHH is not a party to the lawsuit.

The documents by Marex's insurers, who rejected a claim for indemnity from Marex, stated that concern about potential fraud was raised within the brokerage in November 2016 by Kevin Nutt, chief operating officer of metals at Marex, and Judi Ferrari (NYSE:RACE), a trader.

The concern among Marex staff revolved around whether it was safe to accept warehouse receipts that had been passed on from one holder of the nickel to another rather than demanding original receipts, the court documents said.

"Both Mr Nutt and Ms Judi Ferrari ... expressed concern that there was a risk of fraud on the warehouse receipts and the underlying nickel," the documents from Marex's insurers said. "Mr Nutt expressed concern that those warehouse receipts were not in the name of CHH."

Reuters attempted to contact Nutt via Marex, but a Marex spokesperson said he declined to comment. Reuters was unable to contact Ferrari, who no longer works at Marex.

Natixis has also sued warehousing company Access World after it was discovered that the warehouse receipts were fake. Access World has denied that it validated all of the warehouse receipts provided by Marex.

Glencore declined to comment.

In its defence, Marex said Nutt subsequently contacted Access World, where the nickel was stored. Access World said there would be nothing unusual about the endorsement of warehouse receipts, according to the documents.

"Despite the initial concerns ... Mr Nutt was reassured following a telephone conversation and an email exchange (with Access World)," Marex lawyers said in the court documents.

The practice of using metal as collateral in warehouse repo deals has come under increasing scrutiny since a $3 billion fraud four years ago at Qingdao port in China, which led to a $440 million fine for the firm involved, Dezheng Resources, and a 23-year jail sentence for its chairman.

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