The SFO, which investigates major fraud in Britain, has taken on the case together with the City of London Police. It will be co-operating with London's Securities and Investments Board, whose original investigation unearthed the losses which were run up over a period of 10 years.
The scale of the losses eclipse even Nick Leeson's pounds 830m of losses at Barings and the $1.1bn lost by Daiwa Bank last year from unauthorised bond trading by Toshihide Iguchi, one of its executives in the US.
Uncovering the scandal represents a coup for the Securities and Investments Board in London. The SIB has been tracking the affair for more than six months with a team led by Jeremy Orme, the SIB's enforecement division.
The SIB, together with the London Metals Exchange, had become concerned about the wild fluctuations in the copper price. On Thursday only hours before Sumitomo broke the news about its problems, David King, Chief executive of the LME, said: "We don't believe that minipulation is taking place. We have carried out inquiries and are looking at the issues on an on-going basis."
As copper prices plunged yesterday, there were fears that other copper traders might face financial difficulties. The three-month copper price closed $175 down yesterday at $1,980 per tonne
It was unclear yesterday whether or not Sumitomo had closed its trading positions. Dealings in Sumitomo's shares were suspended in Tokyo yesterday, however the scandal is unlikely to result in the collapse of the company which is one of the largest in the world with assets of around $50bn.
Copper dealers said Sumitomo's losses could eventually reach $2.5bn: "The copper market will remain extremely volatile," one dealer said.
In a shame-faced press conference in Tokyo, Sumitomo's president Tomiichi Akiyama placed the entire blame for the scandal on 48-year old Yasuo Hamanaka, the former head of trading who was dismissed on Thursday.
"We deeply regret - and are profoundly embarrassed by - these sever violations of our company's business policies," he said. "I am overwhelmed with shame." Later he added that Mr Hakahama had carried out the trades on his own initiative. "It wasn't discovered for 10 years because of a highly skilled cover-up operation."
However, other copper experts are certain Mr Hamanaka was acting in concert with others. "There must have been people in the London market who knew what he was doing," one expert said.
One metals analyst agreed: "He must have been booking fake trades and rolling them over. There has to have been collusion."
The trail to the epic fraud began with the Securities and Investments Board, the City regulatory authority. Together with the London Metals Exchange it had become concerned later last year about the volatility of the copper price. Certain rumours in the market had also given cause for alarm.
One of the anomalies Mr Orme at the SIB focused on was the causes of backwardisation in the copper price. This is when the immediate (cash) price of the commodity is higher than the futures price. This is unusual with copper due to the cost of warehousing and insuring the metal. Normally the cash price is lower.
A further problem for the investigators was that much of the metals trading in London operates outside of the Exchanges jurisdiction. Market professionals use the base price of copper as guidance but conduct deals on their own account. It is one of the few markets left with this relatively low level of regulation.
SIB mounted an investigation under Section 105 of the Financial Services Act which enable them to take evidence from clients and official sources.
The trail led to Mr Hamanaka, known as "Mr Five per Cent" because of the huge proportion of the world copper market he controlled. During a 26 year career he had built up a reputation as a skilled and aggressive trader.
Based in Tokyo but conducting many of the deals through London and New York, Mr Hamanaka controlled a team of up to seven copper traders but saw himself as very much "the main man". He had a reputation for taking long positions on copper.
Late last year, Britain's Securities and Investment Bureau (SIB) and its American counterpart, the Commodities Futures Trading Commission (CFTC) began to examine fluctuating copper prices and it was during this investigation, according to Sumitomo, that Mr Hamanaka's subterfuge was uncovered. Last month, he was demoted from his position as head of copper trading after suspicions that he allowed a company outsider to use Sumitomo's name in a copper trading account. The mere hint that he might be on the way out was enough to drive down copper prices.
Further investigation by Sumitomo revealed a hitherto unknown bank account held in the company's name which had apparently been used to fund secret and unauthorised trades on copper futures and options. According to the Corporation, aware that he was about to be unmasked, Mr Hamanaka confessed to his activities on 5 June.
He had been conducting "off-the-books" trading for a decade, apparently in an effort to recoup spiralling losses, and was formally sacked yesterday.
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