EURIBOR Manipulation: SFO Charges First Individuals

George Osborne recently compared bad bankers to shoplifters and Mark Carney said that nobody at the Bank of England (BoE) “will be hugging a banker” – despite the crack down some “bad apples” remain. Two days later, on 13 November 2015, the Serious Fraud Office (SFO) issued the first criminal proceedings against 10 individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). Deutsche Bank employees Christian Bittar, Achim Kraemer, Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou, Kai-Uwe Kappauf and Barclays employees Colin Bermingham, Carlo Palombo, Philippe Moryoussef and Sisse Bohart have all been charged with conspiracy to defraud in connection with the SFO’s ongoing investigation – announced on 6 July 2012 – into the manipulation of EURIBOR, the daily reference rate, published by the European Banking Federation, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the interbank market, or euro wholesale money market. According to the SFO, criminal proceedings will be issued against other individuals in due course and the above defendants will make their first appearance at Westminster Magistrates’ Court on 11 January 2016. On the other side of the Atlantic, in the first US LIBOR trial, on 5 November 2015 a New York jury found former Rabobank employees Anthony Allen (global head of liquidity and finance) and Anthony Conti (a senior trader) guilty of rigging LIBOR and the pair face lengthy jail sentences.

Unlike Tom Hayes and Nav Sarao, Allen and Conti waived extradition to fight charges of conspiracy and wire fraud in America and they maintain their innocence despite having “left a paper trail a mile long”. Both men are British citizens and American prosecutors are adamant that the guilty verdicts are founded on “rock solid evidence”. Rabobank paid £662 million in LIBOR penalties in 2013 of which the Financial Conduct Authority (FCA) imposed £105 million. Both men were convicted in a district court in Manhattan on every count of conspiracy and wire fraud they faced and the outcome is a major triumph for American law enforcement officials in the US Department of Justice which brought charges against the Britons a year after the Dutch bank managed to achieve the $1 billion/£662 million compromise in October 2013 in relation to pending US and European probes.

While the SFO has climbed down in relation to other high profile investigations, the fraud watchdog is adamant that cheating in financial services will not be tolerated; retribution will be severe and the punishment imposed on the crooked UBS trader Tom Hayes proves this point beyond a reasonable doubt. Such events have forced the BoE, whose officials have raised eyebrows over the continuing popularity of the London interbank benchmark, to move markets from LIBOR to a “risk free reference rates”; the full plan to achieve this migration will be announced next year.

In addition to the EURIBOR prosecutions highlighted above, the SFO reports that on 3 October 2014 a high-ranking banker from an important British bank pleaded guilty to conspiracy to defraud in connection with manipulating LIBOR. Prior to that, Tom Hayes was found guilty on 3 August 2015 of offences of conspiracy to defraud in the Yen LIBOR setting process and sentenced to 14 years’ imprisonment. It is reported that he is appealing his conviction and sentence. But be that as it may, the overall trend of public aggression underlying the present culture of banker bashing is a natural offshoot of the new “settlement” for the City.

Despite being under fire from the SFO, Christian Bittar, the former Deutsche Bank money markets derivates manager who was sacked in 2011, has won his Tribunal case – reported as Bittar v FCA [2015] UKUT 602 (TCC) (10 November 2015) – against the FCA for improperly identifying him in April’s historic benchmark manipulation settlement with American and British regulators which left Deutsche Bank nursing fines totalling $2.5 billion. (As noted in an earlier post, the issue of identification of bank employees in enforcement notices is being appealed to the Supreme Court as the FCA is aggrieved by the Court of Appeal’s decision in FCA v Macris [2015] EWCA Civ 490).

Bittar has been privately warned by the FCA that it wants to fine him £10 million for benchmark rigging, but he alleged that he was not provided the opportunity to make representations before the watchdog’s findings were published. He was identified in the FCA’s final notice as “Manager B” and in the US as “Trader 3”. As regards the charges brought by the SFO, it has been reported that Bittar’s lawyers have responded that the trader:

intends to fully contest the criminal proceedings started today by the SFO.

Similarly, Moryoussef’s lawyers said they will “vigourously” defend the charges at trial and Katzen’s lawyers have also reiterated his innocence and will defend the charges against him.

Barclays was fined $150 million yesterday by the New York Department of Financial Services (NYDFS). Anthony Albanese, Acting Superintendent of Financial Services, explained that Barclays will pay an additional $150 million penalty to the NYDFS (bringing the total penalty paid by Barclays to $635 million) and is terminating its Global Head of Electronic Fixed Income, Currencies, and Commodities (eFICC) Automated Flow Trading for misconduct related to automated, electronic foreign exchange trading through its “Last Look” system. It appears that NYDFS was pleased with the cooperation extended by the bank and Albanese said:

We are pleased that Barclays worked with us to resolve this matter.  This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street, which is a wider industry issue that requires serious additional scrutiny

Moreover, the trial of Terry Farr, James Gilmour, Danny Wilkinson, Darrell Read, Colin Goodman and Noel Cryan is currently ongoing at Southwark Crown Court (see here). These individuals are charged with conspiracy to defraud in respect of LIBOR manipulation and their prosecution is inextricably linked to Hayes’s activities while he was working for the Swiss lender UBS. The trial of these brokers, accused of helping Hayes manipulate LIBOR, began in the first week of October this year is expected to last 12 to 14 weeks and is likely to end early in the new year. All six men deny the charges and have elected to plead not guilty. The highly respected judicial figure of Mr Justice Hamblen is presiding over their case, which is being prosecuted by Mukul Chawla QC; as noted, he has invited the jury to find that all six defendants conspired with Hayes and others and that they were rewarded in various ways to corrupt the system.

However, at the opening of the defence’s case, Darrell Read denied engaging in nepotism and told the jury that he deliberately mislead Hayes in relation to his ability to aid in manipulating LIBOR whereas in reality he would have gone “from hero to zero” with his customers/clients because in order to execute trades he needed to be on good terms with everyone in the banks and it would be financial suicide to favour one trader over another. The prosecution contends that the ICAP brokers acted as intermediaries and assisted Hayes in influencing LIBOR rates by inducing traders in alternative banks modify their submissions. Read testified that he did not know any rate submitters and traders in banks would not have acquiesced with his requests to manipulate LIBOR. So Read’s defence is that he was unable to aid in gaming the numbers but took credit for having helped Hayes when high rates were reported by a mere coincidence. On September 2013, the FCA fined ICAP Europe Limited £14 million.

Moreover, the SFO informs us that the trial of Jonathan Mathew, Stylianos Contogoulas, Jay Merchant, Ryan Reich and Alex Pabon on charges of conspiracy defraud in respect of manipulating US dollar LIBOR is scheduled to begin in January 2016 at Southwark Crown Court. Like the LIBOR probes, the SFO is working in close coordination with the FCA and the US Department of Justice in relation to the EURIBOR investigations.

As noted previously, these proceedings are the result of a wide-ranging crackdown on corporate crime involving an alignment of tactics and enhanced coordination by international regulators. The global banks (such as HSBC, Deutsche, UBS, RBS and Citibank) have already paid hundreds of billions to global regulators. Since the onset of regulatory action into LIBOR rigging by the Commodities and Futures Trading Commission in 2008, banks have paid at least £6 billion as a consequence of international investigations connected to rate rigging.

Finally, in relation to the spectrum of culpability and the growing trend of settling misconduct through regulators’ preferred choice of imposing  financial penalties, the Conduct Costs Project Research Foundation notes that:

FCA has published a Benchmark Fines list covering the period up to May 2015 on which events such as LIBOR, Euribor and FX failings are recorded for several banks. In the context of our paper, “Seven Deadly Sins: Retrospectivity, Culpability and Responsibility”, those events fall under the category Case 1 – ‘Clustered Criminality’. These fines of course only tell part of the Conduct Costs history for the banks in question. The Conduct Costs recorded in our International Results Table, reflect many other categories of misconduct.