Trying times: Traders on the trading floor of the open outcry pit at the LME. Lawyers for Elliott and trading firm Jane Street will take to the High Court in London to argue their case against the LME in a three-day hearing soon. — Bloomberg
LONDON: A decade ago, Paul Singer did battle with the government of Argentina – and won. Next week, the notoriously pugnacious hedge fund boss is taking on a bastion of the City of London, the 146-year-old London Metal Exchange (LME).
For Singer, the case is personal, said several people familiar with the matter.
When on March 8 last year the LME decided to cancel billions of dollars in nickel trades as prices skyrocketed, Singer was appalled and affronted, seeing it as a perversion of the free market with few precedents in the modern history of finance.
Within a day, his fund Elliott Investment Management had hired lawyers to pursue action against the exchange.
Now, Singer’s fight is heading for a climax, as lawyers for Elliott and trading firm Jane Street take to the High Court in London to argue their case against the LME in a three-day hearing starting tomorrow.
Elliott is better known for its battles over sovereign debt, like the case against Argentina that included seizing one of the country’s warships, and for its activist investing – taking stakes in companies and agitating for change.
Its aggressive tactics are the stuff of Wall Street lore. But Elliott is also a sizeable player in commodity markets, two of the people said, trading across energy, metals and agriculture as well as more obscure markets like carbon credits.
In the run-up to the nickel crisis on the LME, an Elliott commodities portfolio manager called Tom Houlbrook had built up a bullish position in the metal, the people said.
Houlbrook, who has worked at Elliott for 17 years, according to his LinkedIn profile, is a petrolhead who races cars when he isn’t making big commodities bets for Elliott.
Elliott declined to comment, and the hedge fund hasn’t publicly disclosed all the details of its nickel position.
However, it had amassed a sizeable position in call options in nickel ahead of the March crisis, according to legal filings and people familiar with the matter, meaning it stood to profit if prices spiked.
Which they did. Nickel surged in the early days of March, hitting a record on March 7 amid fears that Russian supplies could be shut off and a building short squeeze focused on Chinese tycoon Xiang Guangda and his company Tsingshan Holding Group Co.
In the early hours of March 8, prices more than doubled in a few hours. And by then, Elliott was selling.
Over the course of the night, Elliott sold 9,660 tonnes of nickel for a total of US$728mil (RM3.36bil) – an average price of just over US$75,000 (RM346,087) a tonne that effectively locked in what was set to be a sizeable profit on its bullish bet.
But any sense of satisfaction only lasted a few hours. At 8.15 AM London time, the LME suspended the market. Just after noon, it retrospectively cancelled all trades that had taken place that day.
Singer was incensed. His fellow billionaire hedge fund founder, Citadel’s Ken Griffin, described it as “one of the worst days in my professional career in terms of watching the behaviour of an exchange” – a view that Singer shared, according to the people.
In the aftermath of March 8, Elliott’s lawyers engaged in a testy back-and-forth with the LME.
At one point, it wrote to the LME jointly with AQR Capital Management – whose co-founder Cliff Asness has been one of the exchange’s most vocal critics – according to a filing.
But while Elliott proceeded to formally challenge the LME’s decision through a judicial review, AQR did not (although it has since filed a separate claim against the LME that could benefit if Elliott’s action is successful).
That has left Elliott’s US$456mil (RM2.1bil) case as the standard bearer for the hedge fund industry in its battle with LME.
Jane Street, with a much smaller claim of US$15mil (RM69mil), was the only other party to mount such a legal challenge against the LME’s decision before a three-month deadline.
Still, the case is likely to be an uphill struggle, said legal experts. Judicial reviews exist in the UK to review the decision-making of public bodies – a category that applies to the LME because it performs a regulatory role in the metals markets.
But they focus on the way in which a decision has been made, rather than on its outcome.
Elliott and Jane Street will attempt to establish that the LME’s decision-making on the morning of March 8 was unfair, irrational, or motivated by improper motives.
It’s an approach that has had some success before – United Co Rusal International PJSC successfully persuaded a judge in 2014 that the LME hadn’t considered all viable alternatives when it changed its warehouse rules, although the decision was later overturned on appeal.
Based on its earlier filings, Elliott is likely to argue that the LME rejected alternative courses of action that would have had a less damaging outcome for the market than its decisions on March 7 and 8. —Bloomberg
