Hedge fund sues Barclays for $850m in metal market abuse case

iStock

London - Red Kite Management, the world’s largest metals hedge fund, is suing Barclays for alleged market abuse in the copper market that it claims cost the firm at least $850m between 2010 and 2013.

The case pits a $2bn hedge fund against a bank that has been hit by a number of scandals in previous years, including large fines for manipulating Libor, the benchmark for interest rates. 

Red Kite, whose co-founder is the former treasurer of the UK Conservative Party, alleges that Barclays allowed staff to share confidential information about its positions with the bank’s proprietary traders on the floor of the London Metal Exchange, according to court documents filed by the hedge fund in the UK High Court.

Barclays traders used the knowledge about Red Kite’s positions to profit by placing opposing trades, the fund said in court documents filed in October 2016, but only recently made public. Red Kite alleges the bank "sought to manipulate the LME by ‘ramping’ prices” to manipulate the closing price, a benchmark widely used by traders.

In a separate document, Barclays denied all the claims, saying that it had not mishandled Red Kite’s confidential information.

Copper valuations

The legal battle could resonate well beyond the hedge funds and banking community as the allegations centre around the valuation of trades in the $150bn-a-year copper market.

Barclays and Red Kite declined to comment further when contacted by Bloomberg News. A spokesperson for the LME declined to comment on ongoing legal proceedings, but said the exchange “has strict rules regarding market manipulation and abuse” and “anyone found in breach of LME rules could be subject to disciplinary proceedings.”

Red Kite, founded in 2005 by Michael Farmer and David Lilley, is one of the last surviving hedge funds in commodities after prominent rivals closed over the last decade. The lawsuit covers the metal’s heyday, when China’s economic boom drove copper prices above $10 000 a metric ton in 2011.

In the court documents, Red Kite said Barclays traders in the commodities division, which handled proprietary trading, were able to view open positions from the prime brokerage division, which managed Red Kite’s account.

The proprietary traders knew prime brokerage “had only one client of substantial size” in the non-ferrous metals market and could figure out Red Kite’s positions, the fund alleged.

Details about Red Kite’s trades were circulated within the commodities division in a daily email, and at least one third-party broker working for rival funds was also allowed to attend meetings at the LME where Red Kite’s positions were discussed, the claimants said.

Repeat bids

According to Red Kite, Barclays took proprietary trading positions opposing those of the fund, and then attempted to manipulate the LME copper market by "repeatedly bidding large sums for copper positions in the moments before the close of ‘kerb’ trading on the LME".

As a result, Red Kite was "effectively forced by Barclays to close out positions at a time and in a manner profitable to Barclays”.

As a consequence of the alleged actions by Barclays, the Red Kite funds lost as much as $850m, an estimate based on a tally of losses in the court filing that includes losses to net asset value, fees, damages, and management income. The exact figure may require further examination, said Red Kite, which made the claim with an associated group of funds.

HFZ, a joint venture between Red Kite and Maike Metals International, one of China’s largest metals and mining groups, is also named as a claimant in the case.

Table of estimated losses detailed by Red Kite in filing:

NAV decline $210.9m.

 Abnormal investment returns $45.3m.

NAV damage in future years $367.6m

Red Kite managers’ loss in fee income $102.2m

HFZ managers’ loss in fee income $644 000

Redemptions and lost NAV growth  $132m 

Total $858.6m.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter:


ZAR/USD
16.77
(-0.09)
ZAR/GBP
21.15
(-0.12)
ZAR/EUR
18.95
(-0.11)
ZAR/AUD
11.66
(-0.17)
ZAR/JPY
0.16
(-0.09)
Gold
1798.22
(+0.06)
Silver
18.69
(+0.13)
Platinum
824.50
(+0.30)
Brent Crude
43.14
(+2.10)
Palladium
1961.36
(+0.61)
All Share
55417.89
(-0.66)
Top 40
51154.08
(-0.74)
Financial 15
10472.31
(+1.28)
Industrial 25
76134.69
(-1.67)
Resource 10
52483.78
(-0.20)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1938 votes
I am taking a hit, but should be able to recover in the next year
23% - 2542 votes
My finances have been devastated
35% - 3793 votes
It's still too early to know what the full effect will be
25% - 2720 votes
Vote