Goldman Sachs, LME Face Legal Challenge Over Aluminum Storage

Goldman Sachs, LME Face Legal Challenge Over Aluminum Storage

London Metal Exchange and Goldman Sachs Group, Inc. (NYSE:GS) face a U.S. class action suit for their alleged agreement to inflate aluminum prices.

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Goldman Sachs, LME Face Legal Challenge Over Aluminum Storage

The investment bank and the metal exchange are being sued in a U.S. court over their alleged anti-competitive and monopolistic behavior in aluminum storage.

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Superior Extrusion, which is an aluminum and related product-provider located in Michigan, is aiming to get class-action status for the law suit filed on August 1st.

Goldman Sachs: Restricted supply of aluminum

According to the lawsuit, the investment bank and the metal exchange restricted supply of 1.5 million tons of aluminum by simply stocking it in a warehouse in Detroit. This resulted in delays in deliveries to customers that sometimes meant a lead time of as high as 16 months.

Goldman Sachs Group, Inc. (NYSE:GS), however, contended that the suit was without merit and the investment bank would contest the accusation.

Banks under increased scrutiny

As reported earlier, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection in the U.S. led by Ohio Democrat Sherrod Brown questioned whether commercial banks should control oil pipelines, power plants and metals warehouses.

Recently, JPMorgan Chase & Co. (NYSE:JPM) announced its plans to exit the business of owning and trading physical commodities after a U.S. Senate panel questioned whether banks are abusing their ownership of raw materials to manipulate markets. Following JPMorgan’s planned exit, the spot light has now focused on possible future actions of Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).

David Ingram of Reuters notes that a class action so soon after the revelation of a government inquiry has at least two purposes: to jockey for a lead position among the many class action lawyers who may eventually sue, and to benefit in case information gets leaked about the government’s probe.

The past few months have seen increasing complaints from aluminum buyers as they feel owners of the warehouses of the London Metal Exchange have been restricting supply and increasing prices in a depressing market. It is also felt London Metal Exchange regulations too require drastic changes as the current regulations permit warehouses to release limited amounts of their stock each day at a lower level that what has been stored.

For instance, it has been observed Goldman Sachs Group, Inc. (NYSE:GS)’s Detroit warehouses took in 42 percent of all aluminum in the world for past one year beginning June 2012, while only 26 percent was allowed to come out.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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