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Carlyle Dragged Into $300 Million Hong Kong Nickel-Fraud Saga

Benjamin Robertson, Jonathan Browning and Heather Perlberg

(Bloomberg) -- Carlyle Group is the latest big name to emerge in a years-long attempt to untangle an elaborate nickel-trading fraud that ensnared major metals brokerages.

ED&F Man Capital Markets Ltd. is seeking a court order allowing its lawyers to question two former employees of a Carlyle unit known as Vermillion Asset Management, according to a document filed earlier this month with a U.S. court in New York. Carlyle funds took in more than $110 million from a firm tied to the alleged $300 million scam, the document states.

ED&F Man has “reason to believe that the witnesses can offer relevant information,” and has “no present intention” to make the two men parties to litigation the firm has initiated in the U.K., according to the document filed by ED&F Man. Carlyle and the two former staffers aren’t accused of any wrongdoing in the document.

Representatives of ED&F Man and Carlyle declined to comment.

The Carlyle links were discovered as part of a series of long-running lawsuits by ED&F Man and others against several Hong Kong firms accused of using fake warehouse receipts to sell the same nickel holdings to multiple buyers.

Bogus Receipts

In late 2015, ED&F Man purchased around $300 million of nickel from Hong Kong-based Come Harvest Holdings and Mega Wealth International before selling the metal on to Australia and New Zealand Banking Group Ltd. The metal itself was stored across Asia, with brokers trading warehouse receipts as proof of ownership, according to the document.

The scheme came to light when the Sydney-based bank looked into selling the nickel and discovered that most of the receipts were probably fake.

The courtroom drama will be an unwelcome reminder for Carlyle of its ill-fated stumble into commodities hedge funds with the 2012 purchase of Vermillion, which lent to commodities traders around the world, including Asia, and secured loans by taking title of the metals. The unit was later shuttered after one of its key funds lost more than 97% of client assets in the wake of soured futures bets.

Shortly after leaving Vermillion, the two employees -- Matthew Olivo and Ian McGuinn --received a combined $350,000 from Genesis Resources Inc., a second firm at the center of the alleged fraud, according to the document filed by ED&F Man.

Bank Accounts

McGuinn, who was head of business development and marketing at Vermillion, helped Genesis with market analysis and initial planning to start a hedge fund, according to a person with knowledge with the matter. Genesis paid McGuinn a consulting fee, though it didn’t end up going into that business, the person said.

A spokeswoman for McGuinn declined to comment.

Olivo, a director of structured investments at Vermillion until April 2016, did not respond to email and LinkedIn requests seeking comment.

ED&F Man and ANZ filed claims in Hong Kong courts to gain access to bank account information for Come Harvest and Mega Wealth as well as U.S.-based Genesis Resources, the broker that helped put the deal together.

Fund flows totaling more than $110 million to Carlyle funds were discovered as a result of the bank-account trawl, with “significant portions of these payments” traced to money ED&F Man paid Come Harvest, according to the document.

Representatives for Come Harvest, Mega Wealth and Genesis Resources declined to comment. Previously a lawyer for Come Harvest and Mega Wealth said they were “vigorously” contesting ED&F Man’s claims.

To contact the reporters on this story: Benjamin Robertson in London at brobertson29@bloomberg.net;Jonathan Browning in London at jbrowning9@bloomberg.net;Heather Perlberg in Washington at hperlberg@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry, David Glovin

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