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By John Helmer in Moscow

In the first of a worldwide series of trials scheduled against JP Morgan Chase, the US-based banking colossus, a judge of the New South Wales Supreme Court in Sydney decided last week that an attempt by JP Morgan to claim A$50.18 million (dollars are Australian unless noted) in fees was “capricious, unreasonable and unjust”. He also ruled that, before JP Morgan launched its lawsuit, the bank had received a $20 million payment for services rendered that was too much, with the balance to be refunded.

The precision with which Judge David Hammerschlag (German for “hammer blow”) dismissed JP Morgan’s calculations of the transaction value, on which it based its fee claims, has started a shockwave of reaction and review in the Asian markets of the terms on which the international investment banks demand compensation for their advice. Analyzing what JP Morgan claimed was its role in warding off a hostile takeover of manganese mining house, Consolidated Minerals (ConsMin), the judge said of two of several of the competing bids: “there was no need for either of them to be repelled or warded off.’

The judge also threw out as fee-padding JP Morgan’s attempt to include in the base transaction value it had purportedly earned for ConsMin a total of $14 million in share purchases by Gennady Bogolyubov’s companies, before they decided on a takeover offer, and and $44.3 million in Consmin’s debt, which it had accumulated long before JP Morgan signed its contract between September 8 and 11, 2006.

According to Hammerschlag, JP Morgan’s claim also revealed a cardinal error for an institution of such standing because it “does not take account of the established distinction between a company and its shareholders.”
In the court documents, it can be seen that JP Morgan assigned its September 2006 contract with ConsMin the codename “Project Universe”.

The timing of the Australian decision is awkward for JP Morgan. Coming up in May, in Milan, Italy, JP Morgan faces criminal charges of fraud for a complex scheme of enrichment buried under a €1.7 billion municipal bond issue by the city of Milan. According to the charges filed by the Italian prosecutor, the city says it was misled by JP Morgan – together with UBS, and two German banks – and paid excessive and hidden fees amounting to €101 million, plus €56 million in excessive costs.

At the same time, in the US, JP Morgan (and other banks) is being prosecuted on civil charges in the state court of San Francisco. It is alleged there by the Federal Home Loan Bank that it was misled and defrauded by dealer advice involving “untrue or misleading statements about the characteristics of mortgage loans underlying the securities.” In this case, the Home Loan Bank was persuaded to buy US$19.1 billion worth of securities, and so far it has had to write off US$2.4 billion in losses.

Regarding the Italian charges, JP Morgan has issued this statement: “The employees involved in the transactions acted with the highest degree of professionalism and entirely appropriately.”

Judge Hammerschlag’s 43-page ruling is the first judgement by a court on what is lawful, and also what is appropriate, in what bankers like JP Morgan do for their professional living. The ruling comes 23 months short of the initial court filing, when JP Morgan sued ConsMin for $50,818,436.08. The claim sheet also proposed an alternative claim calculation of $86,978,264.18. The bigger of the two claims was dropped before the trial opened in Sydney on February 22.

Attached to the claim is a treasure trove of accounting detail from JP Morgan on how it calculated its take from the two-year battle in the Australian stockmarkets over the source of one of the world’s most lucrative minerals, manganese – a steel-hardening alloy. The sums invoiced and documented by JP Morgan covered service fees, commission fees, monthly cash retainers, and expenses, including $6.32 for a meal taken on a business trip somewhere outside Australia.

That Big Mac has come to epitomize the over-weaning charging practices and misleading accounting of the international banks. But a source close to Consmin says this isn’t what victory means. “We are not against JP Morgan,” he told Asia Times. “We are a mining company trying to defend shareholder rights, improve disclosure and accountability practices for the market as a whole. We love JP Morgan, and I love Big Macs. Whenever an investment banker asks me to take him to lunch, I always take him to McDonald’s.”

With the Supreme Court endorsement of his reputation, Ukrainian mining and metals magnate Gennady Bogolyubov — whose takeover of ConsMin inspired envy and backbiting in the Australian market — is now positioned to expand in Asia and Africa to open the rising value of manganese to Asian shareholders, as well as the Australians. “We welcome the court’s decision,” said Bogolyubov after the March 18 decision was released. “It is a win for all shareholders who should not be subject to the excessive contractual terms of investment banks.”

Late last year, ahead of the trial, JP Morgan’s Sydney Managing Director John Gidney was asked to clarify why his bank believes it is proper to claim duplicate or triplicate fees for the same set of services rendered; and to explain how he justifies fees for services that appear to have ended in failure, and for Bogolyubov’s success which was guided by a rival bank, at a significantly lower charge. Gidney declined to respond, adding: “I don’t think there is any purpose in having this discussion.” Asked for comment on the judge’s ruling, JP Morgan’s Sydney spokesman Andrew Donohoe told Asia Times: “We believe there are strong grounds for appeal and we are currently assessing our response in that regard.”

The contest for Consmin began in October 2006, when Pallinghurst, a London-based holding of South African mining magnate Brian Gilbertson , offered to take over ConsMin for a price equivalent to $2.08 per share. The following April, Central African Mining & Exploration Co (CAMEC) made a confidential bid. This was followed by other bids from Territory Resources Ltd at $3.37, and Tinfos (owned by Eramet, Europe’s largest manganese miner) at $3.75. It was nine months into the contest before Bogolyubov’s Palmary Enterprises launched its takeover offer. By the time the contest was over in December 2007, Palmary’s $5 per share bid was roughly two-and-a-half times Pallinghurst’s opening offer.

It was Bogolyubov’s resistance to being charged by JP Morgan two sets of fees for value gained that wasn’t earned, which has now been supported by Judge Hammerschlag. He examined JP Morgan’s Base Defence Response Fee and its Incentive Fee, dismissing the duplication and JP Morgan’s claim that without two types of charges, it wouldn’t have the incentive to do its best for its client. According to the judge, JP Morgan had no right to earn an incentive fee unless the bank generated additional value to the company’s shareholders: “there will be no such achievement where there is no completed transaction.” The judge also dismissed the bank’s attempt to collect from Bogolyubov’s ConsMin the increase in share price which started when Pallinghurst started bidding, and long before Bogolyubov moved into the contest.

“It is far from inevitable,” Hammerschlag says, “that the plaintiff [JP Morgan] will receive less when it is entitled only to a Base Defence Response Fee for advice in relation to a single offer that proceeds to completion than it would receive if it were entitled as well to an Incentive fee where there has been an initial Offer price and an increase in it.”

Bogolyubov’s ConsMin is the largest manganese miner in Australia, and one of just two independent manganese miners in Asia. The second, OM Holdings (OMH), is listed on the Australian Stock Exchange; mines in northern Australia; runs a refinery in China; and is registered in a Caribbean haven. A year ago, OMH’s controlling shareholders, Low Ngee Tong and his wife Heng Siow Kee, defied Australian stock market transparency and disclosure rules when challenged by Bogolyubov, who currently owns a 12% stake in OMH. The Australian market was initially supportive of the Australian chief executive of OMH, Peter Toth. Legal proceedings initiated last June by Bogolyubov to obtain more corporate disclosure from Toth and Low were settled out of court.

Since then, there has been market speculation that Low and Bogolyubov have been discussing closer cooperation. “It is natural to look at these two companies, ConsMin and OMH, together,” a South African metals specialist said. They are the two largest independent producers of manganese to supply the steel market. If they can agree to combine in some form, they have the chance to compete against the dominant price-setters in the global manganese market – BHP Billiton, Xstrata, and Eramet.”

China rules the world of steel — biggest producer, biggest consumer, and until last year, biggest exporter. Nine out of every ten tonnes of manganese ore mined goes into the making of steel, and almost half the world’s steel production is based in China. China also produces most of the world’s supply of manganese, but as its steel output accelerates, and its domestic ore supplies dwindle, China is obliged to import more manganese from abroad. In August last year, China became a net importer of manganese for the first time.

But Chinese demand rules the world of manganese, which is concentrated in Australia and two southern African countries, Gabon and South Africa; and also the price of manganese; and thus, the share price of the manganese mining companies. Based on projections of growth in Chinese steel output, a recent report by investment bank Macquarie is forecasting roughly 20% annual growth in the price of manganese for the next three years.

Russia is the world’s second largest steelmaker and exporter, and it was thus natural for the Russian oligarchs to try to build their own corner on the manganese market. But the attempts have failed for a variety of reasons. One of the oligarchs, Victor Vekselberg, has been trying to start a manganese mine in the Kalahari region of South Africa, but with limited effect. He is hobbled by the reluctance of the state-owned railroad to allow increased volumes of manganese ore to move from the minehead to seaport. The resistance of the rail management is being encouraged by South Africa’s established manganese mining companies, BHPB and Assmang.

OMH has tried to expand its production capacity by looking for new deposits of manganese and acquiring new mines. The effort has had mixed success. Mineable resources at its Bootu Creek deposit, in Australia, were reported last December to have grown to 32.9 million tonnes (23% manganese), though proved reserves declined by 2 million tonnes to 20.5 million tonnes. In recent weeks, OMH has also paid $41 million for a 10% stake in Sydvaranger, a Norwegian iron-ore deposit that is being revived after years of bankruptcy; and a 13% stake in the South African manganese deposit known as Tshipi, costing $64 million.

To the market, those $105 million of outlays have looked over-priced and mistimed. The collapse of the global steel market in 2008 caused manganese prices to plummet. A month ago, OMH reported that its sales revenues of $574.1 million in 2008 had dropped to $280.3 million in 2009. Earnings fell even more sharply from $143.2 million to $37.6 million. The sharpness of the financial decline at OMH prompted questions from the Australian Stock Exchange, and on March 10, OMH received a letter from the exchange querying whether OMH had made timely disclosure of its financial problems. OMH responded on March 19 saying it does not provide forecasts for annual revenues or earnings, but it defended its quarterly financial releases over the past year. According to the company letter to the exchange, it is in compliance with the listing rules. The Australian exchange has yet to respond, but it released the correspondence last week, before OMH had posted it:


OMH’s share price followed the price of manganese upwards until it peaked in July of 2008 at $2.80 per share – well below the $5 per share at which ConsMin was sold. OMH’s share then fell to a low of 78 cents in November of 2008. The recovery reached $2.03 in January of this year, only to go into decline again, hitting bottom of $1.65 in mid-February. As Judge Hammerschlag cast his vote in favour of rival manganese miner ConsMin, whose shares are now unlisted, OMH’s share price has been falling on low demand.

With JP Morgan’s scalp under his belt, ConsMin owner Bogolyubov may now count on Australian and Asian market support for a strategy of reviving OMH’s share value in line with the prospects for manganese, and Chinese steel.

And about that Big Mac which JP Morgan insisted Bogolyubov pay for? Judge Hammerschlag ruled no contest: “the parties are agreed on the…expenses to which the plaintiff [JP Morgan] would otherwise be entitled.” But Bogolyubov has already over-paid for it, according to the judge’s arithmetic, sending JP Morgan a cheque for $20 million on February 5, 2008. Judge Hammerschlag’s ruling details his calculation that the bank had earned just $19,250,680.08. His ruling obliges JP Morgan to return to ConsMin a total of $749,319.92; that is equivalent to more than 108,000 Big Macs.

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