Benchmark Manipulation and Corporate Crime: Insights on Financial Misconduct

In the second innings things were different. The reverse swinging old ball meant that the Serious Fraud Office’s openers came back to the pavilion with a duck and those charged with misconduct and put in the dock began to eye up the opportunity of scoring a hat trick. Coupled with the reduction in Hayes’s sentence by the Court of Appeal (Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ, see here) on the ground that he was not in a managerial position and suffered from autism, the fact that Darrell Read, Danny Wilkinson and Colin Goodman, Noel Cryan, Jim Gilmour and Terry Farr were found not guilty of LIBOR manipulation casts doubt over future successful prosecutions in benchmark rigging cases. Hamblen J directed the jury to convict the brokers if they had played a “significant” role in helping him rig LIBOR. Apparently they had not. The Court of Appeal’s refusal to grant Hayes permission to appeal to the Supreme Court may provide limited comfort to the SFO but the acquittal of the above brokers charged in the second “sham” LIBOR trial has reversed the momentum gained by the authorities. The brokers’ exoneration exposes the SFO to the accusation that it has been wildly swinging a sledgehammer to smash a nut. So, having tasted blood after Tom Hayes’s conviction, taking a gung-ho approach to weeding out the City’s “bad apples” seems to have backfired because the clever brokers had simply let Hayes believe whatever he wanted.

According to the brokers, the SFO “didn’t investigate it properly and didn’t listen”. Despite big increases to its funding, claims that the SFO’s director David Green QC has overseen a “string of successes” and that the extension of his contract for two years is a “boon” for justice are proving to be totally without merit. These days it is the SFO which is in the dock and Tom Hayes’s tormented father Nick Hayes used the opportunity to defend his son and said: “Today Tom Hayes stands tall. He refused to testify versus the LIBOR brokers and paid the price … I’m proud of him.” Of course, measured against such poor performance, the fact that the embattled agency wants a top-up of £21.5 million in emergency funds for “blockbuster” probes to bolster its dwindling fortunes amounts to expecting rewards for failure; it is completely unjustified.

The SFO has also come under fire for incompetence because it botched a nine-year investigation (and a nine-week trial) involving Jim Sunderland and Jack Flader who were accused of laundering $120/£83 million for share fraudsters through Zetland Fiduciary Services. The co-defendants accused of boiler room scam were found not guilty last week and Sunderland’s defence lawyer said that the SFO’s case was manufactured “on unjustified and unsustainable assumptions”. Similarly, Sunderland accused the fraud agency of building its case on “mud-slinging, smear and innuendo.” All this only adds to the battering that the SFO has already taken at the hands of tycoons such as Vincent Tchenguiz, who seems to outfox just about everyone including the banks.

The Times has also accused The Financial Times of publishing “dictated articles” about the SFO’s “string of successes” and the two organisations seemed to be ensnared in a dispute over the fraud watchdog’s prowess. Indeed, in light of the second “sham” LIBOR trial, Alistair Osborne of The Times argued that trying to use the monikers “Lord LIBOR” and “Big Nose” to prosecute Colin Goodman and Darrell Read has ultimately meant that “the biggest comic character was the SFO chief himself, David Green.” Given that such a high degree of contradiction of views on important legal and financial matters exists in the media, it is hard for the public to know the real truth about things and this dilemma is explored further below in connection to the new regime for senior management.

May 2015’s foreign exchange rigging penalties of $5.6 billion were seen as a watershed in disciplining misconduct because villainous groups such as the “Cartel” and the “Coiled Cobra” rigged the $5.3 trillion-a-day forex markets at will, their behaviour completely dwarfing the cheating of small-time traders like Tom Hayes and his buddies. In addition to LIBOR and EURIBOR manipulation, forex rigging is yet another manifestation of market abuse. Importantly, the scale of the problem outsizes LIBOR manipulation because the total value of the forex markets exceeds the total $350 trillion value of financial contracts underpinned by LIBOR. Essentially, the use of terminology such as “if you ain’t cheating, you ain’t trying” meant that there was very little doubt about the fact that wholesale cheating penetrated every aspect of the system.

Yet the SFO decided that those participating in chatrooms under aliases such as the Cobra and the Cartel could not be prosecuted due to “insufficient evidence” notwithstanding the existence of “reasonable grounds to suspect the commission of offences involving serious or complex fraud.” Sadly, the probe ended in disaster leaving the SFO bedevilled by yet more problems and despite blatant cheating the people were deprived of their right to justice against evil individuals drunk on their money and power. The probe bit the dust in an extremely undignified manner but its details are juicy. However, the SFO chief David Green defended the decision to drop the case and hit out against critics – who accused of misunderstanding the legal system – by saying that he took “excellent advice” prior to abandoning the forex probe. “When Tom Hayes was convicted last August, I was actually criticised by experienced journalists for not celebrating enough,” he explains in his interview (10 April 2016) to The Sunday Telegraph.

Those under investigation included Rohan Ramchandani (previously European head of spot trading at Citigroup) and Richard Usher (formerly the chief currency dealer in London for JP Morgan). Like Achilles Macris, see here, the pair is apparently also pursuing challenges because of being identified by the FCA in the $4.3 billion global settlement in November 2014 as regards forex manipulation involving a half a dozen banks. Apart from Ramchandani, other alleged members of the Cartel included Usher, Matt Gardiner and Chris Ashton (a temporary member). Further details of these venal networks have also emerged out of May 2015’s forex rigging penalties. Unsurprisingly, unnerved by the shelving of the “blockbuster” investigation, the executive director of Transparency International UK Robert Barrington bemoaned:

This is a case in which there was clear wrongdoing, once again in the banking sector, and yet neither the individuals involved nor their senior managers have been held to account.

Notably, big words and bombastic Mansion House speeches have given rise to new laws and in that regard the Senior Mangers Regime (SMR) came into force on 7 March 2016; it entails potential prison sentences of up to 10 years’ imprisonment. Notably, in order to enhance accountability, the SMR and Senior Insurance Managers Regime (SIMR) apply to individuals who are subject to regulatory approval. The regimes will require firms to allocate a range of responsibilities to these individuals and to regularly assess their fitness and propriety. Moreover, a Certification Regime (CR) applies to banking firms and requires relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its customers. Furthermore, a new set of Conduct Rules applies to banking and Solvency II firms and includes the responsibility of senior managers for oversight of any delegated activities. In relation to the above, Tracey McDermott, the FCA’s outgoing head, has echoed her former boss Martin Wheatley’s position that the SMR is not meant to be a “heads on sticks strategy”.

Whatever the pros and cons, the SMR came into action amid huge fanfare and some of the publications that anticipated its arrival – e.g. Anthony Browne’s Ignorance is no longer an excuse for banks’ failure or misconduct in the Telegraph – were so outrageously in its favour that they just made you smell a rat. This is especially so because the maxim ignorantia legis neminem excusat (“ignorance of law excuses no one”) has been around since the days of the Roman Empire. From the viewpoint of the common person, Browne’s arguments are anchored in nepotism and plutocracy and he thereby tends to overlook ground realities.

Browne’s rendering of the SMR, which he labels the “gold standard for accountability”, is full of platitudes. Designed to bolster the credibility of the regulators and the chancellor, it paints too pretty a picture and he claims “[t]he new regime creates a clear bridge between corporate and individual accountability”. These developments are not revolutionary and reasonably speaking even in the past those culpable in corporate misconduct must have been aware of their liability for their actions but they probably thought they could get away with it, and many of them no doubt did.

Browne argues further that regulators will now possess the ability to criminally prosecute senior figures but because of the SFO’s dismal performance to bring people to justice it is hard to see how other less specialist agencies will do better in securing convictions. His commentary is adamant that the removal of the reverse burden of proof originally contemplated by the SMR – to end the dilemmas of what the Parliamentary Commission on Banking Standards dubbed the Murder on the Orient Express defence – does not change its “overall objective”. Under the reverse burden of proof, rather than the regulator having to prove that the manager had failed in his duties, it meant the manager had to prove he had not. (The approach would inevitably conflict with human rights law and frustrate the regime’s objective by creating enforcement problems.) It is fair enough to expect those prosecuting to make a positive case of misconduct but the details of botched probes and “sham” trials will only test that expectation to its outer limits.

It is important to note that, despite the last minute changes, senior managers will still have to explain in their defence why they should avoid a misconduct finding. However, as originally conceived, if a breach occurred of a requirement covered by a senior manager’s statement of responsibility, he/she would be deemed guilty of regulatory misconduct unless he/she was able to show that he/she took such steps as a person in his position could reasonably be expected to take to avoid the breach. It may well be correct to argue that such an approach would inevitably conflict with the presumption of innocence, a fundamental human right, but that is not the rationale relied upon by Browne who instead finds his personal interaction with bank staff sufficient grounds to conclude that “bankers are embracing … the benefits of setting out clear internal lines of responsibility.”

Arguably, without an element of retributive justice (i.e. high-powered people actually being penalised), the changes entailed in the regime are arguably nothing more that cosmetic innovations which are designed to make the City attractive to the world in testing economic times. It is impossible to disagree with Browne that the recommendations of the PCBS must be given full effect but his extreme confidence that the findings – or perhaps the lack of them – of the “new independent” Banking Standards Board will “ensure high professional and ethical standards in banks” confirms that he is deliberately pushing the agenda of the financial elite to depict the UK as a “world leader” in the sphere of financial services. Measured against all that we have become privy to over the past few years, nothing could be further from the truth because the evidence shows that the UK’s banking system has been a “world leader” in outright corruption.

Browne is right about the centrality of culture, a “crucial component”, in bringing change to the discourse of banking. But then again, he betrays his own argument by reaching the unpalatable conclusion that “[t]he SMR, Certification Regime, and the Banking Standards Board provide a comprehensive new framework for ensuring clear accountability and more ethical cultures in banks.” Somewhat comically, in making this argument, Browne calls the BSB a “regulator” and states that it “will also be engaging with firms on a bilateral level to ensure their culture is up to scratch.” Despite new powers to bring criminal prosecutions, we are told that “unless warranted” the SMR is not about taking “high-profile scalps”. Instead, it is a tool to inspire good governance out of thin air, which will be anything but plain sailing.

His analysis is made even more haggard by his invocation of Bob Diamond, to define culture as “the way people behave when they know no-one is looking”, which is a dead giveaway that he speaks for the bankers and not for the people or for the integrity of the market. Browne, who is the chief executive of the British Bankers’ Association, suffers from a bias and credits global predatory banks with doing “a huge amount of work” to rise to meet the challenges confronting the industry. On that footing, his article verges on outright deception because he invites the public to share his conclusion that the low point the industry had reached some years ago has now been reversed because standards have been raised.

Notably, prior to being overhauled and shifting to the ICE Benchmark Administration in 2014, LIBOR was the BBA’s responsibility and people such as Anthony Browne were either totally oblivious to all the cheating surrounding the benchmark or they simple did not care and overlooked it. Properly understood, Browne’s analysis constructed on the basis of the analogy that the rulebook reform underpinned by a fortification of ethics will produce a spidey sense in bankers which will operate to preclude misconduct is misplaced. In reality, as demonstrated by the failures highlighted above, the situation is actually akin to the “spider and the fly” analysis devised by Michael Lewis in Flash Boys: Cracking The Money Code – the details above show that as the spider bankers are spinning up a web of deceit in which the regulators/public are stuck like the trapped fly.

Of course, in reality, the abandonment of the important review of culture in banking by the Financial Conduct Authority was another unexpected blow/shock to the reform agenda. The Fair and Effective Markets Review, considered to be a blue print for the future by many, was at pains to point out the centrality of culture in setting standards for the industry; it therefore took a multidisciplinary and multi-jurisdictional approach to culture which it, like the PCBS, saw as one of the key issues at stake. The output of the so-called “Banking Standards Board” was cited as one of the reasons to scrap the study on culture but the paradox is that the BSB, which has no regulatory or statutory powers, has not as yet laid down any “banking standards”. As we know only too well, despite the absence of any real regulatory teeth, the BSB does represent elite interests and its head Dame Colette Bowe was handpicked by the Bank of England governor Mark Carney who is openly being condemned by commentators as a “disaster” and “failure”.

The BSB, a self-proclaimed “new catalyst for positive change across the banking industry”, lacks the critical analysis so badly needed to reform the banking sector and has failed to publish any standards. After raising high expectations, apart from dithering the BSB also refused to use a system of ranking – i.e. or a league table – to measure culpability in misconduct. Similarly, the hamfisted methodology used by the BSB also fails to engage with the progress of individual banks or the sector as a whole and its brief report falls short of the tasks that the organisation set itself upon its creation. The BSB’s long awaited report asks more questions than it answers and after procrastinating for a year Bowe is still “pleased” to get things “off the ground”. Inexplicably, she has been trying to lull the public into a false sense of security by asserting the misrepresentation that “people in charge of this industry are tackling the issues with utmost seriousness.”

In light of the brief report produced by the BSB earlier this month, the head of Conduct Costs Project Research Foundation Professor McCormick bemoaned that “the BSB is not actually publishing any standards – that is pretty hard to defend.” Clearly there is a lot to be worried about and he is right in warning us that “something is seriously amiss here” because “if we saw banks knuckling and taking this issue seriously, that would be fine, but we are not seeing that.” Professor McCormick is at pains to point out that the overall conduct picture is bleak because the Cost of Trust Gone Wrong is $300 Billion and Counting.

Because it so accurately reflects ground realities, I can only repeat what Roger McCormick, said last year because it is still true:

At some point, this organisation is going to have to move from telling us what it is going to do to actually doing something. One thing is clear, they will not be publishing tables relating to bank conduct performance that will enable the public to compare one bank with another. So that’s good news for banks that might feel embarrassed about such information being available. What they don’t do is tell us why they reject this approach (when others, such as the B of E and the FCA, seem to like it). Make of it what you will.

To shore up the fortunes of the banking elite, the chancellor has also made Andrew Bailey the head of the FCA. High expectations are placed on the tough talking Bailey, who has always been a Bank of England insider, to cool the bubbling cauldron of misconduct.

Bailey, who presently heads the PRA and is a deputy governor of the BoE and looks set to take over as the CEO of the FCA this summer, has said in the past that regulators should break up banks by force in the event banks try to meander their way around the ring-fencing rules (which the PCBS endorsed in its final findings published in mid-2013). However, given that the BoE has calculated that $150 billion in fines works out to $3 trillion in lost lending capacity, in the past Bailey has also pacified the banks by arguing that without proper consultation imposing backbreaking penalties are capable of creating “real or potential negative effects on the safety and soundness of the firms we regulate.” Thus, his message is a mixed one and he seems keen to strike the right balance in his role as the City’s future conduct czar.

Dropping the study on culture for reason that the “report cards” produced by the BSB – which was created by the financial elite in the aftermath of the LIBOR scandal and the imposition of £290 million in fines on Barclays – will provide an adequate substitute for an official review is quite a serious copout by the regulators.

Ultimately, the BSB seems to be in quite serious disarray and one of their frontrunners Lord McFall, the former Labour MP who used to chair the Treasury select committee, resigned in rather undignified circumstances after he had over a row with his colleagues about checking his mobile phone during a discussion. However, in his totally nonsensical account of the banking sector detailed above, you won’t catch Anthony Browne saying anything on the controversy; like the larger issues surrounding financial misconduct, he prefers to sweep it under the carpet altogether. (Sir Brendan Barber has replaced McFall.)

Since it is now plagued by internal bickering among its senior members, it is pretty futile to expect the BSB to make any type of meaningful impact on the practice of conduct, leave alone contribute to the debate, in the banking sector. Even though recidivist banks show few signs of pulling back from their rampage of misconduct, no work has been done by the BSB to critically analyse cheating banks’ predatory outlook. Similarly, no explanation has been provided by its board about why this high-profile organisation has been dragging its feet on what it labels promoting “high standards of behaviour and competence across UK banks and building societies”.

Desperately needed teeth were given to the FCA under the Financial Services Act 2012 to pursue criminal prosecutions for benchmark manipulation. However, until now the organisation has not tested its new statutory powers in the field. Perhaps it can endeavour to do better than the SFO, which unexpectedly announced on 15 March 2016 that it had closed its investigation into allegations of fraudulent conduct in the foreign exchange market. Even though its performance has become a semaphore for failure, the fraud watchdog said that it shall continue to liaise with the US Department of Justice over its continuing investigation and explained its position in the following way:

The decision followed an independent investigation lasting more than 18 months and involving in excess of half a million documents. The SFO concluded, based on the information and material it obtained, that there was insufficient evidence for a realistic prospect of conviction.

The SFO said a review of the available evidence led it to the conclusion that the alleged conduct – even if proven and taken at its highest – would not meet the evidential test required to mount a prosecution for an offence contrary to English law. It concluded that such an evidential position could not be remedied by continuing the investigation.

As seen on this blog in the past, the SFO has issued criminal proceedings against numerous individuals accused of manipulating EURIBOR. Christian Bittar and Achim Kraemer of Deutsche Bank and Colin Bermingham, Carlo Palombo, Philippe Moryoussef, Sisse Bohart of Barclays made their first appearance at Westminster Magistrates’ Court on 11 January 2016 and were charged with conspiracy to defraud. Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou and Kai-Uwe Kappauf of Deutsche and Stephane Esper of Societe Generale did not appear at the hearing and the SFO is said to be evaluating its position in relation to them.

Despite closing the forex investigation, it will still be a very busy year for the SFO. Specifically in relation to benchmark rigging court, the following proceedings are important:

• R v Christian Bittar & Ors, EURIBOR manipulation, mention hearing, 18 March 2016.

• R v Stylianos Contogoulas, Jonathan Mathew, Jay Merchant, Peter Johnson, Alex Pabon and Ryan Reich. Criminal proceedings for manipulation of LIBOR US Dollar against Barclays employees began on 17 February 2014 and 28 April 2014 and trial will begin on 4 April 2016. Criminal proceedings against Peter Charles Johnson, Jonathan James Mathew and Stylianos Contogoulas, former employees of Barclays Bank Plc, began on 17 February 2014. Proceedings against Jay Vijay Merchant, Alex Julian Pabon and Ryan Michael Reich, also former employees of Barclays, began on 28 April 2014.

• Confiscation began in the case of R v Tom Hayes on 14 March 2016. Hayes seems to have transferred some property to his wife, Sarah Tighe, and the couple resisted the seizure of £2.4 million in assets built up by the fraudster during his time as a trader. However, Cooke J found that £878,806 was the proceeds of crime. A Rolex watch, Mercedes car, £32,000 in cash were part of the sum. To avoid confiscation, he had also transferred his half of a £1.7 million property to Tighe for £600,000 at undervalue which the court found to be a “tainted gift”. He reacted by issuing a statement which maintained his innocence. “The Serious Fraud Office has tried to take everything from me – from my liberty to my wedding ring,” he said. As noted above, the Court of Appeal refused Hayes permission to appeal to the Supreme Court. Disappointed, he is now reportedly considering appealing to the Criminal Cases Review Commission which looks at miscarriages of justice.

• A plea and case management hearing will take place in Southwark Crown Court in R v Bittar & Ors on 16 December 2016 and trial will begin on 4 September 2017.

In the case of US v Allen, US District Court, Southern District of New York, No. 14-cr-272, in New York District Judge Jed Rakoff sentenced Anthony Allen (Rabobank’s former global head of liquidity and finance) to two years in prison. The judge also sentenced Anthony Conti, an ex-senior trader, to one year in prison. Both men are British and like Tom Hayes they deny wrongdoing. They will remain free on bail pending further appeals.

The Britons were found guilty last November. Thus far, they are the only individuals to be found guilty of benchmark rigging after Tom Hayes. Sentencing them, Judge Jed Rakoff remarked that:

The offense is too serious … You can’t go around … helping rig one of the most important markets in the world and not pay the price