Anthony de Angelis, a New York commodity trader, is unknown today. Tino, as he was called, was a short and plump man. The Bronx native had immense confidence and a devious mind.
Tino was a central figure in the salad oil scandal of 1963. The scam was not related to a dietary fad. Instead, it involved fake soybean oil. Soybean oil is a vital ingredient in salad oil. It is also the root behind the vegetable oil used for fried food. Staples of Singaporean food like nasi goreng and roti prata would be unthinkable without vegetable oil.
Tino was behind Allied Crude Vegetable Oil & Refining Co, a trader in this product. Its business was similar to that of Wilmar International F34 , Golden Agri Resources and Adani. It processed and traded commodities.
The company processed soybean oil. Most of its profits were not from factory operations. Instead, it speculated on the futures of soybean oil. By 1963, Allied traded almost all of America’s vegetable oil supply. The total vegetable oil supply in the US was 5 billion pounds. Allied alone held over 80% of that amount. Its inventory was worth US$175 million (about US$1.7 billion or $2.2 billion today).
Tino was then the golden boy of agriculture trading. He was chauffeured around New York in a stretch limousine. He used to carry thick wads of cash in his coat. This was before the ApplePay era. He was feted like royalty in Madrid, Singapore and Karachi.
The truth was not as rosy as Tino projected. Allied had used its vast inventory of soybean oil as collateral for its trading operation. The problem was Allied was involved in an elaborate scam. Oil floats on water. Allied’s containers were filled with water with a little soybean oil on the top.
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Inspectors would check the containers. They were misled by the oil on the top and cleared the cargo. Allied Crude, the cargo clearance documents were used as receipts for collateral. It financed Allied Crude’s mammoth commodity trades. Over US$2 billion (in today’s money) was borrowed from banks on the back of these fake receipts. This is like borrowing money using fake deeds for a house as collateral.
Tino’s employees revealed the truth because of a pay dispute, exposing the scam through court testimony. An avalanche of creditors, including American Express and Bank of America, faced bankruptcy. The scam came to light a few weeks after US President John F. Kennedy’s assassination in 1963. The market was reeling with uncertainty. The government had to bail out the brokers. Tino went to jail for seven years.
Over 60 years have passed since the salad oil scam. There are now safeguards to prevent scams of this nature. The certification of the cargo is more elaborate. Several layers of approval are required before a container of oil is certified. It is very difficult for Tino’s successors to sell fake oil.
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Fakery may be harder, but scams have not ended. Last month, Archer-Daniel Midlands (ADM US), one of the largest commodity traders, suspended its CFO after allegations of accounting fraud. Its nutrition segment represents about a tenth of its net earnings. Executive compensation is linked to operating metrics in that segment. The allegation is that ADM’s management had manipulated the figure for operating metrics.
Asian agri commodity trader Wilmar’s subsidiary was accused of fraud in China. The company’s Chinese listed affiliate has denied the accusations that allegedly involve a RMB5.2 billion ($971 million) tax fraud. It maintains that the case in contention involved a former employee.
Olam was accused last year of fraud in Nigeria amounting to US$67 million. An inquiry has since cleared it. These allegations are unproven. But, the problem with commodity traders is that scandals are never far away.
The vulnerability to scandals is just one issue. The balance sheets of the commodity traders leave them susceptible. Wilmar’s net debt is the highest on the Singapore Exchange S68 at US$19 billion. This is 1.5 times the market capitalisation. The company argues that the net debt can be offset against its inventory. This may be challenging as Wilmar processes a third of the world’s palm oil. A quick sale of large quantities of oil may be hard in a bear market.
Investors need to tread with caution. Heavy debt levels and the risk of scandal are a slippery slope. Tino’s rotund shadow looms large in this industry.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
