A jury examining a series of giant trades in the mid-1990s copper derivatives market might reasonably conclude that one of the country’s biggest banks, which financed the trades, conspired with its customer to manipulate the market, a U.S. district judge has ruled in rejecting a summary judgment motion by defendants J.P. Morgan Chase & Co. and Morgan Guaranty Trust Company of New York in Southwire Co. v. J.P. Morgan Chase & Co., MDL Docket No. 1303 (W.D. Wis. April 24, 2007).

Defendants had argued that the evidence merely shows legitimate transactions executed on behalf of a client.  But U.S. District Court Judge Barbara B. Crabb held that a jury could reasonably interpret the trades as part of a conspiracy with Sumitomo Corp., one of Japan’s oldest trading houses, to “squeeze” the copper futures market.

“I conclude that the evidence is sufficiently disputed to allow a jury to find reasonably that defendants ‘know that Sumitomo intended to restrain trade, intended that trade be restrained, and materially contributed to that restraint,'” Judge Crabb wrote, quoting from an appeals court opinion in a related case, Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469, 497 (7th Cir. 2002).

Judge Crabb also rejected defendants’ alternative theory that plaintiffs cannot prove antitrust injury because their damages expert did not determine whether the allegedly manipulative trades actually affected the price of copper traded on public metal exchanges.  Finally, the judge rejected defendant’s argument that plaintiffs lacked standing to sue because their experts hopelessly botched their damages analysis by failing to distinguish between plaintiff’s direct purchases from copper producers and indirect purchases made through merchants.  The judge scheduled a hearing before the May 29 trial date to determine exactly which copper purchases were direct and which were downstream.

The case centers around Yasuo Hamanaka, a Sumitomo copper trader who lost $6.5 billion yen in copper transactions in the mid-1980s.  Hamanaka covered up those losses through a variety of derivative transactions in the copper futures market, executed outside the scope of Sumitomo’s internal regulations and facilitated with counterfeit documents and forged signatures, according to the court’s summary judgment opinion.

In August 1993 Kevin Murphy, head of defendants’ base metal activities, approached Hamanaka to establish a copper trading relationship.  Between November 1993 and June 1996, defendants executed 149 trades on the London Metal Exchange, accounting for tens of millions of tons of copper, on Sumitomo’s behalf.

Several regulatory agencies eventually investigated this activity, including the Commodities Futures Trading Commission, the London Metal Exchange, the Securities and Investment Board and the U.S. Federal Reserve.  Hamanaka disclosed his unauthorized trading in June 1996, accelerating a sharp decline in the copper market, which fell from highs of around $2800 per ton to below $2000 per ton.  Hamanaka admitted guilt of fraud and forgery and was sentenced to eight years in prison.

Plaintiffs, integrated producers of copper or makers of copper wire or tubing, allege that defendants conspired with Hamanaka in violation of Sherman Act Section 1 by “squeezing” the copper market, effectively raising prices for Sumitomo’s copper holdings by causing a lack of supply.  Plaintiffs claim that defendants knew Sumitomo was manipulating copper futures prices and knowingly financed illegal trades.

Defendants, in their summary judgment motion, claim that the evidence is just as consistent with legitimate transactions and thus plaintiffs failed to meet their burden under Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 764 (1984) to present evidence “that tends to exclude the possibility that the alleged conspirators acted independently.” (internal quotations omitted).

Judge Crabb agreed that much of the circumstantial evidence offered by plaintiffs is indeed ambiguous, such as defendants’ promise to Sumitomo that their dealings be kept confidential; defendants’ acquiescence to Hamanaka’s practice of confirming his own trades; or Murphy’s intimate personal relationship with Hamanaka.

If plaintiffs’ case relied solely on such evidence, Judge Crabb said, defendants may be entitled to summary judgment.  But the court found that the trades themselves provided sufficient evidence to survive summary judgment.  The transactions might reasonably be seen as part of a conspiracy, the court found, and any jury that deemed them innocent trades must first “sort out a plethora of disputed issues of fact” aided by experts on either side with radically different opinions about whether the transactions could have a rational, legitimate economic purpose.

“I conclude that if the jury were to find plaintiffs’ expert more believable than defendants’, if it were to find that defendants knew the Sumitomo transactions were so commercially irrational as to be obvious disguises for financing manipulative conduct, and if it were to disbelieve defendants’ evidence of the steps they took to confirm Sumitomo’s awareness of the scope and volume of Hamanaka’s dealings, it could find reasonably for plaintiffs on the question of defendants’ involvement in Sumitomo’s scheme to manipulate the market,” the court wrote.  Southwire Co. at 37.

As an alternative theory, defendants argued that plaintiffs’ claims should be dismissed for lack of standing.  Defendants claim that plaintiffs’ damages experts failed to distinguish between transactions in which plaintiffs were “first purchasers” of copper and indirect purchases by plaintiffs that cannot provide a basis for recovery under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).  Defendants argued that this flaw renders the expert reports inadmissible.

The court disagreed.  “It is difficult to understand why plaintiffs chose to have their experts go through the fruitless task of tabulating many purchases for which they will not be able to recover damages and failed to take more care in separating out qualifying purchases from nonqualified ones ….” the court wrote.  Nonetheless, the reports are not rendered inadmissible merely because they include calculation that cannot provide a basis for damages.

The court noted, however, that it was disinclined to foist upon the jury the task of determining exactly which copper purchases can provide a basis for damages and which cannot.  While plaintiffs may recover only for first-time purchases of copper cathode and rod, the court noted that this begs the question: are purchases made through merchants “first-time” purchases?  Plaintiffs claim that such merchants are merely service providers who arrange for the order and delivery of products to be sent from a producer to a purchaser.

The court characterized the issue as a simple one: “Did the merchants purchase the cathode they passed along to plaintiffs?  If so, it is they who have the standing to recover for those purchases, not plaintiffs.”  But if the merchants merely took orders, the plaintiffs “are the first purchasers and may recover for the cathode purchases they made from the integrated producers with the assistance of the merchants.”  The court set a pretrial hearing to address these issues.