High Value Metal Fraud: Illegal Means Conspiracy | White & Case srl
In recent years, forged warehouse receipts have proven to be a breeding ground for commodity finance disputes. In Natixis SA against Marex Financial and Access World Logistics (Singapore) Pte Ltd1 the Commercial Court rendered a judgment with broad implications for the financing and storage of commodities, in particular with regard to sale and repurchase (or “repo”) transactions governed by English law.
The Commercial Court issued another commodity finance judgment in ED&F Man Capital Markets Limited v Come Harvest Holdings Limited.2 At first glance, the judgment is analogous to that of Natixis: both relate to the use of forged nickel storage receipts in the context of repurchase transactions. However, ED&F stands out because the plaintiff in this case had purported to terminate the purchase agreements. If effective, cancellation would mean that contractual remedies were not available to the plaintiff. Accordingly, Plaintiff’s claims have been brought primarily in tort and equity, engaging causes of action that can often arise in the context of fraud claims, including (i) the tort of deception; (ii) unlawful means conspiracy; (iii) knowing receipt; (iv) equitable property rights; and (v) unjust enrichment.
These causes of action are fully addressed in Justice Calver’s 164-page judgment. In this alert, we focus on one particular cause of action, the economic tort of conspiracy by unlawful means.
The plaintiff was ED & F Man Capital Markets Limited (“MCM“), a global financial brokerage firm. Between May and October 2016, the first defendant, Come Harvest Holdings Limited (“Come harvest“), and the second defendant, Mega Wealth International Trading Limited (“Mega wealth“), sought to raise funds by entering into various nickel purchase agreements with MCM (the “Purchase contractsEach of the purchase agreements was intended to be the first step in a repurchase transaction whereby Come Harvest or Mega Wealth would repurchase the nickel at a higher price at a later date.
Under the purchase agreements, Come Harvest and Mega Wealth provided MCM with 92 purported original warehouse receipts (the “Deemed receipts“) issued by the warehouse storing the nickel. 83 of these were transferred as consideration for the purchase contracts. The remaining nine receipts were retained by MCM as collateral for margin payments. In exchange for the purported receipts, MCM provided funding (including hedging) to Come Harvest and Mega Wealth totaling over $284 million. This funding was in turn funded by MCM selling 83 of the purported receipts to a third party.
In January 2017, MCM discovered that some resold warehouse receipts had failed to authenticate with logistics warehousing provider Access World. After verification, the nine alleged receipts kept by MCM also failed the authentication process. In each case, the nickel in question had already been sold by Come Harvest and Mega Wealth to another defendant, Straits (Singapore) Pte Ltd (“DetroitThe purported receipts provided by Come Harvest and Mega Wealth to MCM were in fact color scanned copies of the original warehouse receipts with forged signatures.
On June 21, 2017, MCM served notice of rescission on Come Harvest and Mega Wealth regarding the purchase agreements. Therefore, MCM’s position was that the Purchase Agreements were void and that the parties should be restored to the position they were in before the Purchase Agreements were entered into.
On this basis, MCM brought a tort action for conspiracy to harm against Come Harvest, Mega Wealth, their agent and advisor Genesis Resources Inc. and its sole director and shareholder, Mr. Steven Kao (“Mr Kao“), and Straits. In addition, MCM brought actions against various defendants for knowledge of receipt of funds, equitable ownership interest, unjust enrichment, breach of contract (in the alternative ) and the tort of causing a breach of contract.
Illegal means conspiracy3
Straits was the only defendant to appear at trial. Accordingly, the unlawful means section of the judgment concerning conspiracy is primarily concerned with Straits.
MCM alleged there was “a deal, combination or conspiracy”4 between Straits and Mr. Kao (acting on behalf of some of the Defendants) to, among other things: (i) provide color scanned copies of the original warehouse receipts, (ii) provide “PMA letters” suggesting that Straits was free to release the nickel, and (iii) to enter into contracts which, on the face of it, were supposed to be repurchase agreements, but were in fact not repurchase agreements. This allowed some defendants to pretend to sell nickel to MCM which was in fact owned by Straits.
Elements of the offense
In his judgment, Justice Calver adopted the key elements of the conspiracy of unlawful means used in FM Capital Partners Ltd v. Marina:5
(i) “A combination, arrangement or understanding between two or more persons”;
(ii) “Intent to injure another distinct person or entity, although this need not be the sole or predominant intent”;
(iii) “Use of Illegal Means in the Concerted Action”; and
(iv) “Loss caused to target of conspiracy.
As is often the case with claims of conspiracy by unlawful means, the second and third elements were the most contentious – in particular, (ii) the nature of the intent to harm that is required; and (iii) whether an unlawful act is the means by which harm is inflicted.
(ii) Intent to injure
The intention to injure has already been described as the “mental element” of the tort. On this requirement, the Court relied on the usual test established in OBG v Allan.6 The statements of Lord Hoffmann and Lord Nicholls of OBG against Allan were summarized in the judgment as distinguishing between “ends”, “means” and “consequences”:7
(I) “Ends: If the prejudice caused to the plaintiff is to finish wanted by the defendant […] then the required intent is established.”
(ii)”Means: If the prejudice caused to the plaintiff is means whereby the defendant seeks to secure his end […] then the required intent is established (even if the defendant would have preferred to secure the end without causing loss to the plaintiff […]”; and
(iii)”Consequences: If the damage is neither the end nor the means but simply a foreseeable consequence, the required intent is do not made from […] “recklessness” will not be enough […]”.
A key dispute between the parties was whether the tort — in addition to the three elements set out by the Supreme Court in OBG v Allan — required a defendant to “target” the plaintiff. Straits argued that the test was not established “whether the defendant intended to harm a third party or class of persons; rather, the defendant must have directed his actions towards the specific applicant […]” (emphasis added).8
The Court referred to Lord Hoffmann’s dicta in OBG v Allan: if the injury to the plaintiff “is neither an end in itself nor a means to an end, but merely a foreseeable consequence […] it cannot be said that it was intended for this purpose.”9 Therefore, the “targeting” or “face” of an intent to injure is “simply a repetition of the criterion of intent […] that the damage caused to the plaintiff must be to finish requested by the defendant or the means whereby the defendant seeks to secure his end rather than a mere predictable consequence of his actions”.ten Therefore, it is not necessary that the prejudice be directed against a “specific” plaintiff.11
The judge concluded that Straits had therefore satisfied the mens rea of the tort: it had sought to advance its own interests by using means that would necessarily be prejudicial to MCM and other financiers similar to MCM.
(iii) Illegal Means
The parties agreed that the wrongful act in question was capable of founding liability for the purposes of the tort. What was in dispute was “[w]’an unlawful act is, in effect, the “means” by which harm is inflicted on the plaintiff by virtue of the conspiracy”.12 Straits argued that there were two subcomponents to the illegal means:
(a) causation (i.e. the unlawful means were “in fact the means” by which the harm is inflicted); and
(b) intent (intent to injure the plaintiff by illegal means which caused the plaintiff’s loss).13
Straits argued that “every defendant must also have had knowledge of illegal means in order to intend them” (although Straits accepted that blind acquaintance suffices).14
The Court rejected Straits’ argument, holding that there was no intent requirement with respect to the unlawful means element of the tort, which was a matter of causation. Intent to injure is a separate part of the tort, as noted above. Therefore, the illegal means – forgery and deception – are indeed the means that caused the damage suffered by MCM.
In addition, the Court found that Straits had knowledge of the “specific means” used by Come Harvest and Mega Wealth in all cases: deception as well as infringement.15
This decision is a useful reminder of the Commercial Court’s approach to legal action for criminal association. Potential third party defendants should beware. As this case shows, it is not enough to plead ignorance of the precise method of unlawful means or Nelsonian (i.e. blind) knowledge.
1  EWHC 2549 (Comm).
2  EWHC 229 (Comm).
3 ED&F Man Capital Markets Limited,  for .
4 Ibid., .
5  EWHC 1768 (Comm), to  (which was in turn adopted by Butcher J in Iranian Offshore Engineering and Construction Co v Dean Investment Holdings SA  EWHC 472 (Comm)).
6 OBG vs. Allan  1 AC 1. ED & F Man Capital Markets Limited, at .
7 ED & F Man Capital Markets Limited, at .
8 Same, .
9 OBG vs. Allan  1 AC 1, to .
10 ED & F Man Capital Markets Limited, at .
11 Same, .
12 Ibid., .
13 Ibid., .
14 Same, .
15 Ibid., , .
James Brook (Trainee Solicitor, White & Case, London) and Ashwini Mohan (Trainee Solicitor, White & Case, London) contributed to the development of this publication.