By Eric Onstad
LONDON (Reuters) - Glencore (L:GLEN) warehouse unit Access World was mostly to blame for $32 million (£26.12 million) of losses from a complex metals fraud, but broker Marex Spectron will have pay most of the bill to French bank Natixis (PA:CNAT), a UK judge ruled on Wednesday.
Access World failed to quickly identify fake receipts for nickel stored at Asian warehouses, but its terms and conditions capped liability, London High Court Judge Simon Bryan said.
"Access World's breaches were of very high relative causal potency," Bryan said in his judgment.
"They also bear the lion's share of relative blameworthiness when compared to Marex's contributory negligence."
However, the judge said Marex would have to pay $32 million to Natixis after the bank sued Marex in 2017 over the fraudulent receipts, which were part of a repurchase agreement. A trial was held in January.
The deal between Natixis and a Hong Kong firm was arranged by Marex. None of the parties in the case have disputed that the receipts were fraudulent but it is unclear who faked them.
Since Bryan said Access World was largely to blame for allowing the fraud to go undetected, he allowed Marex to partially recover its losses from the warehouse company.
Access World's terms and conditions limit liability to 100,000 euros per warehouse receipt and Bryan cut Marex's recovery by 25% due to its own negligence.
The judgment did not specify the total amount Marex could recover from Access World, but since the case involved 16 warehouse receipts, Reuters calculates a total of 1.2 million euros, a fraction of the $32 million Marex owes Natixis.
Marex, which took a provision of $31.9 million linked to the court action in its April results, welcomed the ruling.
"We are a victim of this industry-wide fraud and we are now looking at other options available to us, including appealing this judgment and seeking recourse from the relevant client in the Hong Kong courts," it said in a statement.
Natixis declined to comment.
"Whilst the Court did find that certain aspects of Access World’s authentication of some warehouse receipts could have been more meticulous, the court did comment upon the level of sophistication of the fraud," Access World said in a statement.
The warehouse firm also said that since the fraud was uncovered, it had implemented additional features and procedures, including new technology.
COMMERCIAL MOTIVATION
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.
In January 2017, Access World said it had become aware of fake warehouse receipts circulating in its name and urged holders to seek authentication.
The judge faulted both Marex and Access World for not uncovering the fraud earlier.
London-based Marex failed in November 2016 to send originals of the first several warehouse receipts to Access World to be authenticated.
"I consider that it allowed its commercial motivation to prevail over what would have been the appropriate... course of conduct," Bryan said.
But Access World gave the green light to several warehouse receipts before uncovering the fraud.
"Access World was negligent in a number of respects...it was Access World that had special knowledge of the security features of its own warehouse receipts," the judgment said.
In a related case, broker ED&F Man last year filed a $284 million lawsuit against two Hong Kong companies, alleging that they knowingly provided fraudulent warehouse receipts for nickel stored in Asia.