Gupta fights back against Trafigura fraud claims

Indian businessman Prateek Gupta has said that he plans to challenge a $625m global freezing order on him and his firms imposed by a London court, according to a spokesperson on Friday February 24th.

Geneva, Switzerland-based commodity trader Trafigura said on February 9th that it had booked a $577m charge relating to what it alleged was “systematic fraud” by Gupta’s companies over nickel cargoes which, said Trafigura, consisted of little to no high-value nickel, and a considerable amount of low-value metal as a substitute.

Gupta’s spokesperson said that “a robust response to the allegations is being prepared,” adding that lawyers for Gupta intended to file an application to remove the freezing order on or before April 6th.

A London court imposed the freezing order, dated February 8th, on bank accounts and other assets tied to Gupta and seven companies Trafigura said were controlled by Gupta. These included companies based in the UK, Singapore, Malaysia and Switzerland.

That order was in force until Friday’s English High Court hearing.

High Court judge Robert Bright said on Friday in a brief hearing that he had agreed to make an amended order, but did not supply details.

A court document filed by Trafigura for Friday’s hearing argued that the freezing order should be extended. It said that the trader had agreed with Gupta’s lawyers on an April 6th deadline for challenging the order.

An unnamed source with knowledge of the situation was quoted by Reuters as saying that the freezing order was extended on Friday, but it was not clear for how long.

In court papers submitted previously, Trafigura had said it began to suspect in October last year that around 25,000 tonnes of metal sold by Gupta’s firms may not be high-grade nickel, and began inspecting more than 1,000 shipping containers (IMN, February 16th)

Earlier in February, Trafigura told the judge in a closed-door hearing that some of the first containers inspected were found to contain carbon steel, which is worth a fraction of the price of nickel.

The court papers for Friday’s hearing also said Trafigura had obtained freezing and disclosure orders against defendants in local courts in the Cayman Islands, Singapore and Malaysia.

The document criticised Gupta’s companies as so far providing “very limited” and “wholly inadequate” disclosure regarding assets.

“Asset disclosure…leaves unanswered the central question of what has become of the very large sums of money which Trafigura has paid (defendants) in relation to the cargoes,” the document said.

Gupta’s spokesperson responded: “Our disclosure has not been inadequate. It wholly complies with the court order.”

Trafigura said it ended up inspecting 156 out of 1,104 containers by the time it filed court papers for the original freezing order, and that none of these contained nickel.

The Financial Times has reported that according to court documents obtained by the newspaper on Friday, Trafigura failed to require analysis certificates, ignored incorrect customs codes and missed other “red flags” that alarmed its bankers on nickel shipments it later discovered to be fraudulent,

Affidavits were released late on Friday evening which revealed that Trafigura itself made several risk-management errors, including waiving contractual requirements for certificates of analysis for the cargoes and ignoring incorrect customs codes.

The FT said that at the heart of the scheme were dozens of “buyback transactions” in which Trafigura purchased “nickel” shipments from the defendants, owned the cargo while in transit, then sold the cargo onwards in deals that were also arranged by Gupta’s companies. For the most part, the contents of these cargoes were not inspected.

It was one of Trafigura’s bankers, Citi, that first noticed the “red flags” in these transactions and grew concerned over the length of time the buybacks were taking.

In October 2022 Citi cancelled its $850m credit line that was being used to finance the nickel shipments. However, Trafigura continued the trades using its own cash. Sokratis Oikonomou, formerly Trafigura’s head nickel trader, wrote in an affidavit that “Citi stated they had seen sufficient ‘red flags’ to terminate the arrangements immediately”.

The FT said that several regular compliance steps were missed within Trafigura. These included not requiring certificates of analysis for the nickel in the shipment. These a standard requirement for payment in metals trades.

Trafigura’s in-house counsel Mirza Reza Ispahani wrote in his witness statement that Trafigura did not pick up that many of the bills of lading had the incorrect HS codes, which are used to identify the goods inside a container.

“It is not presently clear to me why this was not picked up by Trafigura at the time and why Trafigura paid out against bills of lading that contained the HS codes which did not match the contractual description of the material,” he wrote.

The counsel also wrote that there was a similar issue with Trafigura’s failing to insist on certificates of analysis being provided for each trade of nickel with Gupta’s companies, even though this was required under the contracts.

Trafigura’s operations team also noticed that the voyages were much longer than they needed to be, allegedly in order to maximize financing.

According to the affidavit, an email exchange between members of Trafigura’s operations team on November 1st 2022 observed that the client had booked cargoes “in a way that the cargo has the longest voyage possible to get the maximum benefit of financing”.

Trafigura is portraying itself as an inadvertent middleman, facilitating trades between a network of companies that were alleged to be working together with known fake cargoes to maximize financing.

Trafigura said that “any fraud is an opportunity to review and tighten systems and procedures, and a thorough review is under way”.