LIBOR: The Largest Banking Scandal In History.... Again! Or Why We Need Bitcoin And Complete Financial Reform!
Libor, or the London interbank offered rate, underpins interest rates on trillions of dollars of financial products around the world – everything from mortgages to corporate loans to complex derivatives.
It is compiled daily based on submissions from more than a dozen banks, which estimate what it would cost them to borrow money from fellow banks over a variety of time periods and in various currencies. Authorities say manipulation potentially caused widespread mis-pricing of loans and other products and also undermined public confidence in the global financial system.
Updated May 23, 2016
In a setback for some of the world’s largest financial institutions, a U.S. appeals court on Monday reinstated the private antitrust lawsuits filed against 16 banks for allegedly rigging Libor interest rates.
The ruling from the Court of Appeals for the Second Circuit reverses a lower court decision from 2013, in which U.S. District Judge Naomi Buchwald dismissed the claims in the lawsuits because she said the banks’ alleged conduct did not violate federal antitrust laws.
The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.
The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities like Baltimore, San Diego and Houston.
Judge Buchwald had said the plaintiffs failed to show they were injured by the alleged rate manipulation. She said that because setting Libor was a “cooperative endeavor,” there could be no anticompetitive harm to consumers.
But a federal appeals court Monday disagreed and kicked the case back to the lower court for further proceedings. A three-judge panel found that the plaintiffs did show an antitrust injury “by alleging that they paid artificially fixed higher prices.”
If this private litigation is ultimately successful, the potential total bill to banks could be in the billions, analysts have estimated.
Updated Feb. 17, 2014 8:08 p.m. ET
Charges Filed In Libor Probe
British prosecutors filed criminal charges against three former bank traders for alleged fraud, opening a new front in a global investigation into alleged rigging of benchmark interest rates, with more charges in the pipeline.
BOE Told About Foreign-Exchange Behavior, Trader Says
The U.K.'s Serious Fraud Office said Monday that it charged three former Barclays BARC.LN +1.21% PLC traders with conspiracy to defraud for their alleged roles rigging the London interbank offered rate, or Libor. The agency, which opened its criminal investigation in July 2012, also is likely to file charges against three former ICAP IAP.LN +0.65% PLC brokers for allegedly helping bank traders manipulate rates, according to people familiar with the case.
The U.K.'s latest charges represent a broadening of the Libor investigation, which got under way in 2008. They serve as a reminder of the scandal's scope and the pervasive nature of the alleged misconduct, even as the Libor investigation begins to be overshadowed by nascent criminal and civil examinations into potential manipulation of other financial benchmarks.
Monday's charges bring to 13 the number of people criminally charged in the U.S. or U.K. investigations into Libor, a benchmark used to set interest rates on trillions of dollars of loans and other financial contracts.
Until now, criminal charges filed against people in the U.S. and U.K. have all been in connection with an alleged rate-manipulation ring led by a single trader: Tom Hayes, who used to work in Tokyo for UBS AG and Citigroup Inc. C -0.68% and who has pleaded not guilty to U.K. charges.
But the charges against the former Barclays employees— Peter Johnson, 59 years old, Jonathan Mathew, 32, and Stylianos Contogoulas, 42—don't appear to relate to that investigation. Most of their alleged activity took place during a different time period, and Barclays wasn't part of Mr. Hayes's alleged ring, according to people familiar with the U.S. and U.K. investigations. A lawyer for Mr. Mathew declined to comment. Lawyers for Messrs. Johnson and Contogoulas didn't respond to requests for comment.
Other alleged rings remain under scrutiny. Authorities in the U.S., U.K. and European Union have been investigating a group of former traders from several banks for allegedly working together to manipulate the euro interbank offered rate, or Euribor, according to people familiar with that case.
Authorities allege that bank traders tried to push Libor and other benchmarks up or down to increase the value of their trading portfolios, which included contracts that were based largely on the benchmarks' levels.
The likely U.K. criminal charges against the former ICAP brokers— Colin Goodman, Darrell Read and Daniel Wilkinson —are notable in part because the U.S. Justice Department last September charged the men with similar fraud-related offenses. They haven't entered pleas to the U.S. charges.
"We would not be surprised to find that he would be charged," said Matthew Frankland, a London lawyer representing Mr. Wilkinson.
After the U.S. filed charges, lawyers for the former ICAP brokers were in the unusual position of pushing the U.K. Serious Fraud Office to file criminal charges against their clients, according to people familiar with the case. The reason: Being charged in the U.K. likely would preclude the men from being extradited to the U.S. to face similar charges, these people said. The former brokers would prefer to be tried in Britain because the penalties they would face if convicted are much lighter than in the U.S.
Relations between the Justice Department and the Serious Fraud Office soured in late 2012 over a similar incident. U.S. officials informed their British counterparts at the time that they planned to file criminal charges against Mr. Hayes. Within days, the Serious Fraud Office arrested Mr. Hayes, a move that the Justice Department perceived as impeding the U.S. from nabbing a prime suspect, these people said. The dispute escalated to senior officials on both sides of the Atlantic.
Mr. Hayes hasn't pleaded to the U.S. charges. He told The Wall Street Journal last year that "this goes much much higher than me."
People close to the Serious Fraud Office said the agency has been in close contact with the Justice Department about its decisions about whom to charge and that the two agencies have patched up their relationship since the 2012 fracas.
The flurry of announced and anticipated charges by U.K. authorities comes as the agency tries to regain momentum in its Libor case. People involved in the investigation said it was nearly derailed last year when Mr. Hayes, who had been cooperating with the agency, changed his mind and decided to fight the charges against him. The agency had been counting on Mr. Hayes to testify against his alleged co-conspirators, and without his help it became much harder to bring charges against other people, these people said.
The former ICAP brokers allegedly worked with Mr. Hayes and other bank traders to rig rates, according to the Justice Department.
ICAP, which serves as a middleman for large institutions looking to buy and sell financial products, last September settled the U.S. and British Libor investigations, agreeing to pay $87 million. Its chief executive at the time admitted that the firm's employees engaged in gross misconduct and apologized for the firm's actions.
Barclays was the first bank to resolve its case, paying about $450 million in June 2012 and admitting wrongdoing. A political furor over the settlement led to the abrupt resignations of Barclays's chairman, chief executive and chief operating officer.
That warning took place at a 2012 meeting of currencies traders and Bank of England officials. A bank trader who was there, and who has since been suspended amid the current investigation into market misconduct, handed over his handwritten notes from the meeting to investigators at the U.K.’s Financial Conduct Authority, according to a person familiar with the notes. The news was first reported by Bloomberg.
The market-manipulation investigation, launched by the FCA last year with authorities in several other countries subsequently joining in, has been focusing on whether traders colluded to manipulate currency markets, sometimes by sharing client and market information with their competitors in electronic chat-rooms. Banks have handed over reams of evidence to investigators, some of which appears to show behavior that bank officials view as improper. That has triggered the firings or suspensions of more than 15 traders, at last count.
At the 2012 meeting, traders informed Bank of England officials about the widespread practice of sharing and aggregating client orders, according to the person familiar with the notes. The notes appear to show Bank of England officials saying such conduct was permissible, the person said.
“The Bank of England has already released its record of the April 2012 meeting, and we are continuing to support the FCA in its investigations,” said Bank of England spokeswoman Fiona Shaikh. The records of the 2012 meeting do not include any discussion about the propriety of sharing market or client information among banks. Ms. Shaikh declined to elaborate.
The episode is reminiscent of the scandal over banks’ attempts to manipulate the London interbank offered rate, or Libor. Executives at Barclays which settled Libor-rigging charges in June 2012, felt that they received instructions from a senior Bank of England official to tweak their Libor submissions.
Barclays Ordered to Pay $2.1 Million to Trader Fired in Libor Scandal
According to regulatory filings made by Barclays, Dong Kun Lee was discharged July 30, 2012, for having "engaged in communications involving inappropriate requests relating to Libor."
In a subsequent arbitration claim, Mr. Lee accused Barclays of, among other things, breach of contract and violating New York labor laws. He originally asked for about $5.3 million in damages, but later reduced his request to about $2.1 million. He won that smaller amount in a decision by a Financial Industry Regulatory Authority arbitration panel.
As is common, the arbitrators didn't provide details of the case or explain their reasoning. Their award, dated Nov. 15, was published by Finra Tuesday night or Wednesday.
Deutsche Bank, at Board Meeting Later This Month, Plans to Address Actions of Three Managers
German giant Deutsche Bank AG will address the alleged roles of three senior managers in the Libor rate-manipulation scandal at its supervisory meeting later this month, and supervisors will demand consequences if misconduct is found, people familiar with the matter said.
The bank's 20-member supervisory board meets Jan. 28, a day before the bank's release of fourth-quarter and 2013 results. Deliberations of the board's committees start Jan. 27.
The board's agenda hasn't been circulated, but it is clear that three senior managers who were criticized for their alleged roles in the rate-rigging scandal in a recent report by the German banking watchdog BaFin "will be under scrutiny," said one of the people with knowledge of the matter.
A Deutsche Bank spokeswoman declined to comment on what will be discussed at the supervisory-board meeting.
Based on investigations so far, "no current or former member of the management board had any inappropriate involvement" in alleged rate-rigging, the spokeswoman said. She said the bank is cooperating with various regulatory probes.
"It is clear that the supervisory board will have to take a close look as to what [the managers'] responsibility was and what their potential misconduct was, also in view of the labor lawsuits recently lost," said the person familiar with the plans.
Libor, or the London interbank offered rate, is among key benchmarks used as reference in pricing financial products and contracts worth trillions of dollars globally. Regulators world-wide are investigating whether more than a dozen banks manipulated those rates to boost profits.
A German labor court in September ordered Deutsche Bank to reinstate four money-market traders it had fired as part of an internal probe into the alleged rigging. The judge found signs of improper communication among the traders but said the dismissals were unjustified because the bank lacked proper rules and controls to ensure adequate separation of rate submitting and derivatives trading. Deutsche Bank is appealing the verdict.
Supervisors "are addressing the issues" raised by the trial and the BaFin report, said one of the people close to the matter. The BaFin report hasn't been made public.
Pressure is mounting on Deutsche Bank to root out misconduct and change its internal culture, as its two co-chief executives have pledged to do. In December, Deutsche Bank was ordered to pay a fine of €725 million ($984 million), the largest penalty among six financial institutions that settled with European Union regulators, for colluding in attempts to manipulate benchmark interest rates. The bank is still under investigation by U.S. and British regulators and prosecutors and is likely to face further penalties this year, according to people familiar with that investigation.
BaFin, the banking supervisor, in August delivered to Deutsche Bank a report accusing it of failing to adequately clarify and investigate internal procedures or discipline managers in response to allegations related to Libor, according to excerpts of the report published by the German weekly magazine Der Spiegel. A person familiar with the matter confirmed the accuracy of the excerpts.
BaFin's probe began in 2012, and it has initiated a second probe that it hopes will answer questions raised by the first one, said a person close to the matter.
The Libor manipulation scandal has ensnared at least 17 financial institutions and 22 individuals in a wide-ranging investigation spanning 11 countries and four continents. So far, it has netted at least $5 billion in penalties, with more on the way.
The report, the latest effort to tally the wide variety of incoming bank legal bills, was put out Tuesday by analysts at Keefe, Bruyette and Woods. It said litigation has cost global investment banks $44 billion since the first quarter of last year, and $13.8 billion in the third quarter alone.
KBW says civil claims are likely to drag on for the rest of the decade as ” the nature of some manipulation offences and the volume of evidence to sift through” makes it potentially “more costly … harder to prove and also hard to quantify a loss.”
The firm estimates that civil actions tied to the London interbank offered rate, or Libor, and its lesser-known peer, the Euro interbank offered rate, or Euribor could burn the biggest hole in banks’ pocketbooks, costing $46 billion. KBW says actions related to foreign exchange probes could cost $26 billion and that Federal Housing Finance Agency costs about $24 billion.
“Litigation costs are here to stay and are part of the fabric of investment banking costs,” said KBW analyst Andrew Stimpson. He notes that, despite the large numbers of potential litigation costs, these would still be a slow-down from the run-rate seen in 2012-13 if the charges taken are spread across the next decade.
KBW says that J.P. Morgan—which is expected to announce a $13 billion settlement with the Justice Department and other regulators—is its top global investment bank pick, along with Société Générale. The firm notes that J.P. Morgan “should start 2014 with a cleaner slate than most peers” after a quarter heavy on legal provisions. KBW also says that, despite being exposed on civil Libor actions, J.P. Morgan’s “balance sheet is more than strong enough to take it.” J.P. Morgan’s shares were down 25 cents to $53.72 in recent trading. The stock has risen 34% in the past 12 months.
J.P. Morgan’s legal costs have ballooned. Excluding its expected settlement, a mortgage-litigation push has caused overall legal expenses this year at J.P Morgan to nearly triple—to $10.3 billion through September—from $3.8 billion over the first nine months of 2012. A J.P. Morgan spokesman wasn’t immediately available for comment.
KBW notes that while relative few of the global investment banks have actually settled with regulators, the provisions taken mean that future settlement announcements of regulator fines may be neutral for their net asset values. However the firm warns that “purely building reserves does not help investors relax and can prove to be too optimistic as banks underestimate the resolve of regulators and prosecutors.”
European Union antitrust regulators are poised to levy large fines against a group of six global banks tied to their alleged attempts to manipulate benchmark interest rates, such as Libor and Euribor.
Meanwhile, big global banks have also been grappling with allegation that some of their currency traders allegedly behaved in ways that helped rig foreign exchange rates.
Earlier this month it was reported that banks including Barclays and UBS have suspended a number of high-profile currency traders in New York, London and Tokyo amid an escalating probe into how traders appeared to inappropriately share market-sensitive information with competitors in online chat rooms.
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