Metals scam stings US banks for $600m

Four metals dealers have been arrested in the US for operating what prosecutors called a world-wide metals trading fraud "of …

Four metals dealers have been arrested in the US for operating what prosecutors called a world-wide metals trading fraud "of astonishing scope" that may have cost major banks more than $600 million.

The case raises new questions about controls at the trading desks of prestigious financial houses, which were taken in by bogus trades from shell companies using faked documents.

It is the largest fraud involving money transactions across international borders since the trading debacle at Allfirst in February, which cost the AIB-owned bank $691 million.

The metals trading scam was allegedly operated through several firms, including British-based RBG Resources, formerly Allied Deals, and the arrests follow the detention by police in London on May 3rd of Mr Virendra Rastogi, chief executive of RBG and one of Britain's richest Asian businessmen, who is charged with trying to destroy documents related to the firms' business.

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The case is an embarrassment to the British Labour government as former Labour cabinet minister Mr Jack Cunningham once worked for Mr Rastogi as a £25,000 sterling a year consultant, and the British Government helped Mr Rastogi buy a smelter in Romania.

JP Morgan Chase, FleetBoston Financial and PNC Financial Services Group are among the banks that lent millions of dollars for the bogus metals deals. The fraud was detected when officials from JP Morgan Chase found that a trading company called Island Metals to which it had loaned $1.2 million did not exist. A bank official who called at the New York address of another company listed as a counter-party, Jersey Metals, found only a door with a peephole and a typed sign with the company's name.

Prosecutors said the total amount involved could reach $1 billion and that the scam was unusually complex. The businessmen acted as brokers from offices in New Jersey and used shell companies and forged shipping invoices to trick banks into financing deals between fictitious buyers and sellers across the world.

In some cases money from one bank was used to repay loans at another to give an appearance of legitimacy.

Mr Seth Taube, a former Securities and Exchange Commission lawyer, said the common thread linking the metals fraud with the rogue trading at Barings Bank and Allfirst was that they involved transactions that crossed borders.

FleetBoston took the biggest hit, writing off between $70 million and $132 million, while PMC lost $50 million and JP Morgan $4 million.

Police arrested the four businessmen - Mr Narendra Kumar Mr Rastogi, Mr Manoj Nijhawan and Mr Udhay Shankar, all Indian nationals, and Mr Anil Anand, a US citizen - at their homes in New Jersey. They were charged with conspiracy, mail fraud and wire fraud in Manhattan District Court.

US Attorney Mr James Comey said: "It's a scam as old as the Ponzi scheme, but with an incredible level of intricacy."