Sumitomo Corporation

THE SUMITOMO CORPORATION is a large Japanese company with interests in a wide range of fields. Like many other Japanese companies, Sumitomo has suffered from the effects of excessive diversification in the post-boom period and has subsequently been afflicted with various non-performing loans. In 2003, Sumitomo Mitsui, Japan's second biggest lender reported a loss of Y465 billion (approximately $3.9 billion) and was forced to seek additional funding. Some of its subsidiaries have been linked with poor environmental practices, for example, with respect to stockpiled pesticides which can pose a threat of toxicity.

However, a more startling revelation of corporate malpractice was revealed in 1996 when Yasuo Hamanaka, a trader at Sumitomo, was revealed to have cost the company some $3 billion through losses in the copper market. Hamanaka had, with the apparent collusion of his former supervisor Saburo (Steve) Shimizu, been attempting to make money by cornering a portion of the copper commodity market. They had resorted to this illegal practice in 1985, supposedly to recoup through trading in futures on the London Metal Exchange (LME) money previously lost on physical trading deals.

Cornering the market involves purchasing a large amount of a commodity and then withholding it from sale for a period, thereby reducing the supply and hence inflating the demand and cost for it. By doing so, Hamanaka could make profits by selling the copper he had earlier obtained at a lower price. This practice can only succeed when it is kept secret and when sufficient quantities of the product are obtained to provide a meaningful level of control over market supply. Hamanaka was eventually unable to obtain these criteria for Sumitomo and was obliged to sell some of his product at a loss. However, rather than accept the loss, Hamanaka attempted to manipulate the market further until his activities came to light and the market plunged into turmoil.

Hamanaka was subsequently jailed for eight years for his part in the deal, but Sumitomo, which brought a criminal complaint against Hamanaka in part to try to distance itself from allegations of its own wrongdoing, was not the only company to be implicated. In 1999, the brokerage house Merrill Lynch was accused of assisting Hamanaka's activities and fined £6.5 million (approximately $10.4 million) by the LME and £9 million (approximately $14.4 million) by the United States Commodity Trading Futures Commission.

Deutsche Bank, the leading German bank, through the actions of a subsidiary, was fined some £1.5 million (approximately $2.4 million) by authorities for failing to exercise sufficient care in purchasing large quantities of copper for a client. As in the case of Nick Leeson at Barings Bank and other scandals, the Hamanaka affair revealed that the complexity of many modern financial transactions and inadequate supervision can lead individuals to believe their activities are undetectable.