Citigroup Panicked Over Fraud at Chinese Ports: Mercuria

Citigroup Inc. was in a “state of panic” when alleged fraud was uncovered in two Chinese ports, Mercuria Energy Group Ltd.’s lawyer said as a London trial over disputed metal finance deals got under way.

“The discovery of the fraud was a massive problem for Citi as it was their metal and it was at their risk,” Mercuria lawyer Graham Dunning told a London judge. “There was a state of panic.”

The disputed copper and aluminum is under lockdown in the ports of Qingdao and Penglai, where Chinese authorities are investigating an alleged fraud. Neither side can get access and they don’t know how much of the metal is there, Dunning said at a pre-trial hearing in August.

Citigroup argues that it effectively delivered the metal to Mercuria under the terms of a sale-and-repurchase agreement by handing over warehouse receipts. The bank says it is owed about $270 million. Mercuria, a Cyprus-based firm with major trading operations in Geneva, argues the products were never properly delivered.

“It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges,” Dunning said today.

Citigroup spokesman Simon Boughey didn’t immediately respond to an e-mail seeking comment.

‘Out of Pocket’

The probe at Qingdao, China’s third-largest port, is examining companies owned by a Chinese-Singaporean metals trader, Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator. Standard Chartered Plc, Standard Bank Group Ltd. and ABN Amro Group NV have also made loans affected by the alleged fraud.

“Mercuria’s apparent goal is for it to be Citi, not Mercuria, which is left out of pocket,” Citigroup said in documents from the trial. Mercuria was responsible for safeguarding and insuring the metal, the bank said.

Dunning cited a transcript of a telephone conversation between Citigroup employees in which one of them said the period around the fraud probe was one of the worst weeks of his career.

He also read out an internal e-mail from a Citigroup employee saying that a phone call to Mercuria’s owners “advising that we expect them to keep us out of a potentially messy situation would be the best course of action.”

The case is: Citigroup Global Markets Limited & Anr v. Mercuria Energy Trading PTE Limited & Anr, High Court of Justice, Queen’s Bench Division, Commercial Court, 14-884.

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