Elliott Sues the LME For $456 Million Over Nickel Chaos

(Bloomberg) — Paul Singer’s Elliott Investment Management is seeking $456 million in damages from the London Metal Exchange over its decision in March to cancel billions of dollars worth of nickel trades after a massive short squeeze.

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The move by the activist investor ratchets up pressure against the LME, which has been widely criticized for its handling of the crisis in nickel. The exchange is also facing a review by UK regulators, while the nickel market has been stuck in an extended limbo of low liquidity and volatility.

The suit was filed by two Elliott vehicles against the LME and its clearinghouse in the English High Court on June 1, according to a statement issued by Hong Kong Exchanges & Clearing Ltd., which owns the LME. The LME said it views the claim as without merit, and will contest it vigorously.

The exchange suspended its nickel market on March 8 and controversially canceled $3.9 billion of trades after prices surged in an unprecedented squeeze centered around a large short position held by nickel tycoon Xiang Guangda. The crisis shook the metals industry and has thrust the LME into the global spotlight, with critics ranging from the International Monetary Fund to Citadel Securities chief Ken Griffin.

The LME said at the time it took action after the nickel price spike posed a systemic risk to its market. The move, which rescued several brokers from potentially ruinous margin calls, served as a bailout of Xiang’s Tsingshan Holding Group Co. and its banks, while wiping out huge profits for those investors that held bullish bets.

Elliott believes that the LME “acted unlawfully in that it exceeded its powers when it canceled those trades, or that it exercised the powers that it did have unreasonably and irrationally,” a spokesperson for Elliott said in an emailed statement. It contends that the LME considered irrelevant factors, including its own financial position, and failed to take other relevant factors into account, the spokesperson said.

Read: The 18 Minutes of Trading Chaos That Broke the Nickel Market

Elliott’s lawsuit claims the cancelation was “unlawful on public law grounds and/or constituted a violation of their human rights,” according to the HKEX statement. The statement didn’t elaborate what trades Elliott had executed or the impact of the cancellation.

The LME acted in the interests of the market as a whole, it said in a statement on Monday. The cancellations were made “retrospectively to take the market back to the last point in time at which the LME could be confident that the market was operating in an orderly manner,” it said.

While Tsingshan has since reduced its total short position by more than half, easing pressure on its banks and removing a key overhang for the nickel market, the crisis has left a more permanent mark on the LME. The exchange has implemented new daily price limits and is seeking increased oversight of over-the-counter trading in metals by its members. Volumes in the nickel market remain well below normal levels.

Bloomberg also reported previously that JPMorgan Chase & Co. was reviewing its business with some commodity clients, a move that threatens to drain more liquidity out of the sector.

The suit will also add pressure on the Hong Kong exchange, which is already suffering under a drought of initial public offerings. Back in 2013 and 2014 the firm was hit by US litigation over anti-competitive and monopolistic behavior in connection with LME’s warehousing system. The cases were dismissed but ended up costing the bourse in legal fees, hurting its bottom line.

(Adds statement from Elliott.)

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