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A federal judge refused to dismiss lawsuits alleging that two major New York banks aided and abetted a rogue trader in a worldwide scam involving the copper market. Judge John S. Martin Jr. of U.S. District Court for the Southern District of New York found that Sumitomo Corp. had stated a plausible racketeering claim against the Chase Manhattan Bank and J.P. Morgan & Co. The Japan-based company alleged that the banks extended gigantic loans to Sumitomo’s former employee, Yasuo Hamanaka, and then helped Hamanaka disguise the fact that they were loans. The ruling came in the cases of Sumitomo Corp. v. The Chase Manhattan Bank, 99 Civ. 4004, and Sumitomo Corp. v. J.P. Morgan & Co. Inc., 99 Civ. 8780. Hamanaka was once known as “Mr. Copper” because of a seemingly successful run in the copper market. That run ended when he was charged with unauthorized trading that caused Sumitomo to lose $2.6 billion. He is appealing an 8-year prison sentence for fraud and forgery. Sumitomo, the defendant in several civil actions triggered by Hamanaka’s trading, sued both Chase and Morgan in 1999 claiming the banks schemed to defraud the company by hiding the fact that Hamanaka was making trades using borrowed money. Also named as a defendant was former J.P. Morgan managing director Keith Murphy, who Sumitomo claimed was the “architect” of the scheme that allowed Hamanaka to secretly borrow the funds. As Judge Martin framed the issue, Hamanaka and the banks structured certain transactions “so that they appeared to be normal copper transactions without disclosing other related transactions that transformed these transactions into bank loans . …” The complaints seek $532 million from Chase and another $735 million from J.P. Morgan. Both banks moved to dismiss, contending that the complaints fell short of alleging their involvement in the operation and control of a racketeering enterprise under the Racketeer Influenced and Corrupt Organizations (RICO) Act. “However, the complaints allege an enterprise comprised of Hamanaka and each bank which was engaged in an ongoing scheme to make a series of large loans to Hamanaka’s rogue trading operation by disguising large loans as straightforward copper transactions,” Martin said. “The complaints clearly detail the participation of each of the defendants in carrying out the affairs of that enterprise.” FINANCING AS RACKET Martin distinguished this case from others in which federal courts have found that merely financing a racketeering enterprise does not amount to participation in that enterprise. “Here, by contrast, it is the fraudulent financing operation which is itself the RICO enterprise, and the complaints sufficiently allege the particular defendant’s participation in its affairs,” the judge said. Chase and Morgan also argued that Sumitomo had failed to allege an enterprise that was distinct from the predicate acts, in this case mail and wire fraud, as required to state a claim under RICO. But Martin found that “their own factual contentions defeat their argument.” “The defendants allege that they were engaged in a course of legitimate business activity with Hamanaka,” he said. “The complaints do not contend that the specific transactions were themselves illegal, it is contended that the defendants committed predicate acts of mail and wire fraud by misrepresenting the nature of the transactions and otherwise misleading Hamanaka’s superiors.” Martin also rejected an argument by Morgan that the court lacked subject matter jurisdiction because many of the predicate acts took place outside of the United States. And he declined to grant a Chase Manhattan motion to dismiss, which argued that the alleged pattern of racketeering activity lacked continuity. Celia Goldwag Barenholtz of Kronish, Lieb, Weiner & Hellman represented Sumitomo in the Chase Manhattan case. Martin London and Bruce Birenboim, of Paul, Weiss, Rifkind, Wharton & Garrison, represented Sumitomo in the J.P. Morgan case. Thomas C. Rice, of Simpson Thacher & Bartlett, and Kent T. Stauffer, of the Chase Manhattan Legal Department, represented Chase Manhattan. James H.R. Windels of Davis Polk & Wardwell represented J. P. Morgan & Co. Edward M. Spiro of Morvillo, Abramowitz, Grand, Iason & Silberberg represented Murphy.

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