Trafigura: The 10-day unravelling a $500mn fraud

The details of one London’s most notorious commodity fraud cases are a mystery. A heart attack, a note in handwriting and 1,000 shipping containers containing unknown material.

Trafigura, a Singapore-based trading company, has charged Prateek Gupta, a metals tycoon and his companies with selling it fake nickel cargoes valued at hundreds of millions of US dollars in a high profile lawsuit. This has caused shockwaves throughout the sector.

Court documents reveal how the situation reached its peak during a stressful 10-day period of November. The relationship between the parties soured. Trafigura also faced increasing customer complaints and threats of legal action before it decided that it would pursue Gupta through the courts.

These filings provide new insights into the fraud that was committed against one of the largest commodity trading houses in the world.

Trafigura claims that Gupta, 43, was the “controlling brain” behind a number of linked companies, including TMT Metals and UIL Malaysia. All of these are defendants in this case.

In 2014, the trading relationship began with Indian zinc transactions and then grew to include global trades of nickel and aluminum.

Most of the transactions between Trafigura’s and Gupta groups by 2022 were “buyback transactions.” Trafigura would buy a cargo from the group and then own it on its journey — providing critical trade financing — and then sell it to Gupta’s companies or to another party that he or his colleagues arranged, paying an interest payment.

Citibank, which provided $850mn in credit to Trafigura for these transactions, began to be concerned about the size and time taken to complete the nickel deals.

Sokratis Oikonomou was Trafigura’s chief nickel trader by last summer. He wrote in court testimony that he was concerned by the fact that UIL entities had stopped participating in any buyback transactions and stopped paying Trafigura.

Citi requested Oikonomou to arrange for a physical inspection on cargoes to be held on November 9.

Citi ended its credit line before it could be used. Citi was apparently alarmed at the “red flags”, which its due diligence had revealed, and Trafigura began to finance the cargoes using its own balance sheet.

Gupta admitted that he was experiencing medical problems as the Rotterdam inspection date approached. Gupta then said that he had suffered from a heart attack on November 7, just two days before the inspection.He was concerned about his health and resorted to bargaining. He wrote that he was closing terms for a substantial reduction in Trafigura’s nickel exposure to his companies. He added that he would require him to “stall inspection” in order to “avoid any problems between us”.

Trafigura continued to push ahead. “My priority was to ensure that the inspection was completed. . . “It went ahead,” Oikonomou wrote in his written testimony.

None of the nickel-containing containers found in Rotterdam was discovered when they were opened. Instead, inspectors found carbon steel. This is typically less than 20 percent of the nickel value.

Gupta claimed he was still at the hospital. However, Trafigura managers learned from news articles that Gupta was also facing serious legal problems in India. Gupta was being investigated by the Indian Central Bureau of Investigation for allegedly causing a loss of $174 million at the State Bank of India via illicit commodity trading. According to a July charge sheet (Gupta stated in December that the charges were settled).

Gupta attempted to make a deal with Trafigura after he was discharged from the hospital in November. Gupta acknowledged that the cargoes weren’t as expected and said he would purchase them back once he had the money.

Gupta presented Trafigura a spreadsheet containing 93 cargoes related to the dispute. He allegedly admitted that none of them contained high purity nickel as required by the contracts.

He and his business partner Arvindprasad presented Trafigura at various times with a list of assets they suggested could be used as collateral while a phased payment plan was in place. These assets included a India-based wind farm, a steel mill, and a Singaporean energy company called Ultravolt. Hangji Global is an engineering group.

Prasad didn’t immediately respond to my request for comment.

Gupta also offered letters to credit from Silver Bank in Mauritius, a small lender that is being scrutinized for its ties with the metals trader.

Gupta tried to raise funds during this time by issuing bonds from TMT Metals Group. Oikonomou was notified by Gupta via WhatsApp that he claimed that he had two sovereign wealth funds from “very respectable countries” and one Swiss family office ready to invest EUR100mn.

Trafigura faced a new problem when customers to whom it had sold purported nickel shipments began to realize that the cargoes were not made of the correct material. Trafigura stated in court documents, that Gupta and his networks had arranged the deals for the third-party clients.

Gupta claimed that TMT had raised EUR50mn via a bond sale. However, he later stated that know-your-customer issues were preventing the money from clearing. Gupta hosted a Christmas Eve video call with Oikonomou, the bond investor (whose identity is not disclosed in the affidavit) to explain the “reasons why the delay”.

Gupta presented Oikonomou in January with a handwritten note detailing a repayment plan. Gupta proposed that Oikonomou pay $200mn by March 31st, and the rest over the next two years. Trafigura didn’t believe that the proposal was credible.

Trafigura was notified by Xiamen C&D Aluminum Co on November 17th, about discrepancies in customs codes and certificates of analysis that were not consistent with the shipment of 286 tonnes it received.

Two weeks later, Xiamen threatened legal actions. Trafigura agreed to purchase back the cargoes that were causing problems to Xiamen’s subsidiary companies in December.

Soon another client, Argentem from the USA, raised similar concerns. A third client, Mind ID from Singapore, opened alleged nickel containers in January and found no metal within. A fourth customer, Axiom from Hong Kong, conducted an inspection in Rotterdam on Jan 9, and found the same thing.

Trafigura’s management group met on January 10 to address the customers’ outrage. The trading, operations and legal teams presented a variety of options. Management decided it was too late to bargain. It was now time to file a fraud claim and obtain a worldwide freeze order for the assets of the defendants.

Four weeks after the London court filed the legal claim, more evidence was already mounting. Xiamen discovered more suspect shipments, and wrote to Trafigura early February stating that the goods were “completely wrong” and that it was a fraud and not a simple quality issue.

Multiple requests for comment were not answered by Xiamen and Argentem, Mind ID, and Axiom.

A spokesperson for Gupta stated that his team was “preparing an aggressive response to the allegations made by Trafigura and will share it soon”.

Gupta, who was trying to raise more funds, was still stalling. He paid Trafigura $5mn in January.

Although Trafigura’s court case is still pending, it has already taken a significant financial hit. The commodities trader announced a $577mn writedown. He is currently negotiating with customers who received the purported nickel shipment to find a solution.

It is unclear how much Trafigura knew about Gupta’s activities. According to Oikonomou’s testimony, Harshdeep Bhatia from Mumbai was the main trader on Gupta’s account. He may also have introduced the two parties.

According to Reza Ispahani’s witness statement, Bhatia shared an “apparent cosiness” with Gupta. This was based upon their WhatsApp exchanges. However, he stated that there was no direct evidence that Bhatia was involved in the fraud.

Witness statement by Ispahani stated that they were unable to fill “certain gaps in the WhatsApp Exchanges” between Gupta, Bhatia. Bhatia didn’t respond to requests for comment.

After the court documents showed several mistakes, there are questions about Trafigura’s compliance processes. These include a failure to request analysis certificates and disregarding incorrect customs codes.

Trafigura stated that it has “seen nothing to suggest that any person at Trafigura was involved in or complicit with this illegal activity”, and “the fraud is limited to one line of business”.

According to court documents, even the value of the material in the containers is a mystery.

Out of the 1,100 containers that were involved, more than 156 had been checked by February 6. Some containers contained carbon steel, others steel products and iron products. However, none of the containers had contained nickel or nickel alloy.

Oikonomou wrote that Trafigura doesn’t know what is inside the containers.

Although legal settlements can take months, or even years to reach an agreement, some cargoes remain at sea. The latest is expected to arrive in May.

More clues will likely be revealed as the court battle progresses.

Post Disclaimer

The following content has been published by Stockmark.IT. All information utilised in the creation of this communication has been gathered from publicly available sources that we consider reliable. Nevertheless, we cannot guarantee the accuracy or completeness of this communication.

This communication is intended solely for informational purposes and should not be construed as an offer, recommendation, solicitation, inducement, or invitation by or on behalf of the Company or any affiliates to engage in any investment activities. The opinions and views expressed by the authors are their own and do not necessarily reflect those of the Company, its affiliates, or any other third party.

The services and products mentioned in this communication may not be suitable for all recipients, by continuing to read this website and its content you agree to the terms of this disclaimer.