A sign hangs outside a branch of Barclays bank, part of Barclays Plc, in London. (Photographer: Chris Ratcliffe/Bloomberg)

Barclays, a Hedge Fund and Two Traders’ Hidden $400 Million Loss

(Bloomberg) -- A hedge fund’s lawsuit has unearthed some trading losses that Barclays Plc might have preferred to forget.

Two metals traders at Barclays were dismissed seven years ago after racking up losses of $396 million, according to documents disclosed in a court case. The losses -- some of the biggest ever disclosed by a bank in the commodities markets -- were denied by Barclays at the time.

Iain Macrae, who ran metals trading at Barclays until his firing in 2011, was let go “for irresponsible risk taking” that led to a $327 million loss. The hedge fund, Red Kite, cited materials Barclays turned over as part of a London lawsuit into alleged market abuse in the copper market.

It’s the first time the bank has detailed the size of the trader’s losses and comes in the middle of a $850 million dispute with Red Kite. Founded by Michael Farmer and David Lilley, Red Kite alleges that Barclays allowed staff to share confidential information about its positions with the bank’s proprietary traders on the floor of the LME, London’s last venue for open-outcry trading.

Macrae’s colleague Christian Saunders, a copper trader at the bank’s Canary Wharf desk, also suffered losses totaling $69.2 million. Red Kite says that he was "summarily dismissed," again citing Barclays documents.

Contact details for the traders wasn’t available and attempts to reach them through former colleagues, business associates and family members weren’t successful. A spokesman for the bank said only that the Red Kite claim "is without merit and Barclays will be vigorously defending it."

In 2011, Barclays denied reports that it had suffered significant losses in metals trading. "The reports of big losses are nonsense,” a spokeswoman for Barclays said at the time. “There has been no abnormal trading in the commodities business.”

Still, the next year Barclays quit the trading floor of the London Metal Exchange citing a "challenging trading environment," and in 2014 decided to withdraw from most of its global commodities activities.

The losses came at a time when banks like Barclays, Goldman Sachs Group Inc. and Morgan Stanley, were powerful players in global commodities, able to make big bets with the banks’ own money.

In the years since, many banks have reduced their presence in commodities amid pressure from heightened regulations and tough trading conditions. Goldman, which has retained one of the biggest businesses in the sector, last year suffered high-profile losses in natural gas and power trading.

The hedge fund claims that Macrae and Saunders used their knowledge of Red Kite’s positions to trade heavily against the fund. In court filings last week, Red Kite cited disclosures from Barclays that the fund said indicates that Macrae had sought to justify his position to risk officers by pointing to Red Kite’s opposing trade.

The disclosures suggest that the trading undertaken by Saunders and Macrae may have run afoul of the bank’s internal risk controls.

In one document, Macrae told an employee "Red Kite had a very large position the other way as ours." The fund’s lawyer Alain Choo-Choy said that as a proprietary trader -- someone who trades with the bank’s own money -- Macrae had "no business" knowing what the positions of Barclays’ prime brokerage customers were.

Red Kite alleged that Barclays carried out an investigation into the two traders and the broader commodities division in 2011 and 2012, amid rumors that Macrae and Saunders had sought to manipulate markets and traded against Barclay’s clients. They were also alleged to have personally traded against the bank’s positions.

The Barclays trading collapses are among a number of high-profile losses in the base metals business. Glencore Plc founder Marc Rich lost $172 million when his company tried to corner the zinc market in 1992, according to a biography of the trader. Sumitomo Corp. copper trader Yasuo Hamanaka’s losses were in the billions of dollars.

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