Sumitomo Corporation of Japan - The Commodity Derivatives Fiasco

            
 
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Case Details:

Case Code : FINC029
Case Length : 13 Pages
Period : 1996 - 2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Sumitomo Corporation
Industry : Financial Trading, Minerals
Countries : Japan

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Events Leading to the Debacle

On taking charge of the copper trading team, Hamanaka tried to recover the losses by taking huge positions in copper commodity futures on the London Metal Exchange.

The huge volume of trading attracted the attention of the exchange and it gave a warning to Hamanaka. Hamanaka then struck a deal with Merrill Lynch for US $150 mn, which enabled him to trade via Merrill at LME.

Hamanaka borrowed money from several banks without any authorization from his seniors. He used the funds either to buy copper or pay for the collateral that he was required to deposit at the LME to cover loss-making positions. By 1990, Hamanaka was reporting huge trading profits to the top management by showing invoices of fictitious option trades, which he had created through a nexus with some brokers...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Why Did it Happen?

Analysts felt that the debacle was the result of Sumitomo's poor managerial, financial and operational control systems. Due to this, Hamanaka was able to carry on unauthorized trading activities undetected by the top management.

The vesting of excessive decision power on a single employee and failure to implement the job rotation policy were the other reasons cited.

LACK OF SUPERVISION/INVOLVEMENT OF SENIOR MANAGEMENT

There was a lack of effective monitoring and supervision of Hamanaka's trading activities. Hamanaka was believed to be an expert in risk management and had a star trader status at Sumitomo. By entering into fictitious trades and manipulating accounts, Hamanaka successfully misled the management to believe that he was making huge profits...

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