FOCUS - Lawsuit alleges Pacorini falsified documents to mask zinc stock movement

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

London 10/06/2016 - Several US galvanisers allege that warehouse operator Pacorini Metals USA falsified bills of lading to disguise high-volume zinc stock movements in New Orleans.

In a lawsuit filed in New York, Duncan Galvanizing Corp and four other zinc consumers allege that Glencore and warehousing subsidiary Pacorini engaged in various anti-competitive acts from 2010 that increased the load-out queues at New Orleans warehouses registered with the London Metal Exchange. This in turn artificially inflated the Midwest zinc SHG premium, the suit claims.

While the defendants have been accused before of various queue-building strategies, this specific allegation centres on how warehouse companies report their data to the LME.

"The plaintiffs allege that Pacorini took advantage of LME load-out rules by engaging in a scheme to create falsified bills of lading to make it appear (presumably to the LME) that more metal was shipped out of its warehouses than was actually the case," according to court documents.

A confidential witness, who worked in management for Pacorini Metals Inc, alleged that Pacorini executives informed him in the late summer or early autumn of 2012 of plans to transfer large volumes of cancelled LME zinc between its New Orleans warehouses, according to a second amended complaint filed by the galvanisers. 

The confidential witness said that he was advised that he would have to create falsified bills of lading so that it looked like the zinc would be delivered to a customer location when it was either not being moved at all or was being redirected to another Pacorini warehouse. This was done to avoid being "flagged by the LME", according to the complaint.

"The falsified bills of lading contained false signatures, stated that the metals were picked up by truckers that never existed, and sometimes contained incorrect tonnage amounts," it contended.

"In contrast to these falsified documents, which involved handwritten bills of lading that were not recorded in Pacorini's computer system, legitimate transactions were reflected in computer-generated bills of lading and a tally sheet," it added.

Duncan's lawyers allege that the purpose falsifying bills of lading was to "manipulate the daily reports sent to the LME, which are published on the LMESword system that tracks warranted metals entering and leaving LME warehouses" and also provided "backup documentation for fake transactions in the event of an LME audit".

The lawsuit contends that Glencore and Pacorini's alleged efforts to manipulate the warehouse queues were successful and caused an increase in the MW SHG premium, which ultimately caused consumers to pay higher all-in prices for SHG zinc.

A Pacorini representative declined to comment on the allegations. FastMarkets understands the claims are being investigated internally.

A third-party warehouse operator said that he "did not believe the zinc [stock story] is any different" and pointed out that "US law allows you to bring a lawsuit and settle for lots of money".

An LME spokeswoman said the exchange does not confirm or comment on its internal investigations. Still, the LME is probably looking into the matter considering that it could compelled to submit documents and testify in court, several market participants noted.

On Monday, US District Judge Katherine Forrest granted a request by Duncan to move forward with its lawsuit.

Discovery will start immediately. The parties have been directed to confer on a schedule for the remainder of this case, including fact and expert discovery, briefing on class certification, final motions for summary judgment and trial.

Glencore and Pacorini have been at the centre of several lawsuits in the US, with consumers accusing them of driving aluminium and zinc premiums up via long delivery queues. Pacorini has so far won all of the cases.

(Editing by Mark Shaw)



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