Court of Appeal Opens the Door to LIBOR and Benchmark Misrepresentation Claims

Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2018] EWCA Civ 355 (02 March 2018)

Infamously, the London Inter-bank Offered Rate (LIBOR) used to be a code word for corruption in the world of finance. In more ways than one, it is still a dirty word from the point of view of ethics. However, even now, despite planning to phase it out by 2021 and replacing it with a proxy, the FCA calls LIBOR a “systemically important benchmark”. Property Alliance Group (PAG) appealed Asplin J’s decision to dismiss its claims against the Royal Bank of Scotland (RBS) arising out of interest rate swap agreements. RBS advanced funds to PAG at interest rates referenced to LIBOR, which was published relying upon submissions from panels of banks on borrowing rates. These proceedings arose out of four swaps that RBS sold to PAG between 2004 and the spring of 2008. The first swap had a trade date of 6 October 2004 and a notional amount of £10 million. The second swap had a trade date of 25 September 2007 and a notional amount of £15 million for 4 years and then £30 million for a further six years. The third swap had a trade date of 14 January 2008 and a notional amount of £20 million. The fourth swap had a trade date of 16 April 2008 and a notional amount of £15 million. The global financial crisis of 2007-2008 trigged a fall in interest rates. All the swaps were tied to 3 month GBP LIBOR which plummeted and stayed low. The upshot was that the rates of interest that PAG was paying under the swaps far exceeded what it was receiving under them.

One consequence of the prolonged period of unusually low interest rates was that the swaps had a very large negative market-to-market value (MTM) from PAG’s point of view. The break cost incurred by PAG in 2011 was correspondingly substantial. PAG issued proceedings in 2013 seeking relief by way of rescission of the swaps and/or damages. The claims were divided into three categories: “the swaps claims”, which involved allegations of misrepresentation, misstatement and breach of contract on the part of RBS in connection with its proposal and sale of the swaps to PAG; “the LIBOR claims” which rested on RBS’s knowledge of and participation in manipulation of LIBOR rates; and “the GRG claims” by which PAG complained of breaches of contract arising out of its transfer to, and subsequent management within the controversial Global Restructuring Group to which RBS transferred its relationship with PAG in 2010. Asplin J dismissed the claims in their entirety. However, despite dismissing the onward appeal, light of the circumstances Sir Terence Etherton MR, Longmore and Newey LJJ were satisfied that RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR.

Supreme Court Clarifies the Law on Security and Enforcement of Foreign Arbitration Awards

IPCO (Nigeria) Ltd v Nigerian National Petroleum Corporation [2017] UKSC 16 (1 March 2017)

These proceedings involved the question whether the appellant Nigerian National Petroleum Corporation (NNPC) should have put up a further $100m security in English enforcement proceedings connected to a Nigerian arbitration award for $152,195,971 plus 5m Nigerian Naira plus interest at 14% per annum arising out of an agreement under which IPCO (Nigeria) Limited (IPCO) contracted to design and construct a petroleum export terminal for NPCC. The Supreme Court unanimously allowed the appeal. Giving the sole judgment, Lord Mance reversed the Court of Appeal’s decision and imparted much needed guidance on the provisions of the Arbitration Act 1996. He also said that rule 3.1(3) of the Civil Procedure Rules 1998 was not relevant to the appeal. The recognition and enforcement of foreign awards is addressed by sections 100-104 of Part III of the 1996 Act and these provisions implement the UK’s obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Lord Mance explained that section 103, which sets out conditions for refusal of recognition of enforcement of awards under the Convention, was key to resolving this case. His Lordship construed the provision to hold that the court has no power to impose security when making orders under section 103(2) and section 103(3). Instead, only an order made under section 103(5) can be made conditional upon the provision of security by the award debtor.

IPCO is a turnkey contractor specialising in the construction of on-shore and offshore oil and gas facilities. The arbitration was conducted pursuant to a contract made in 1994 which was subject to Nigerian law and provided that disputes would be settled in accordance with the Nigerian Arbitration and Conciliation Act 1988. IPCO has been seeking to enforce the award in this jurisdiction since November 2004. In 2009, evidence tendered by a former IPCO employee enabled NPCC to challenge the entire award on the basis that IPCO inflated quantum by using fraudulent documentation. The English courts accept that NNPC has a good prima facie case regarding IPCO’s fraudulent behaviour and realistic prospects exist for the whole award to be set aside. NPCC’s challenges to the award are still pending in Nigeria for non-fraud and fraud reasons. Notably, however, NNPC’s application to amend its pleadings in the Nigerian proceedings to raise the fraud challenge was adjourned by consent and never determined.

“Land Banks” and Collective Investment Schemes: Supreme Court on s.235, FSMA

Asset Land Investment Plc & Anor v The Financial Conduct Authority [2016] UKSC 17 (20 April 2016)

The Financial Conduct Authority is in the news a lot these days. Andrew Bailey has been handpicked to head the agency but the chancellor George Osborne has come under fire for making the appointment without conducting a formal interview, thereby sidestepping the two candidates (Tracey McDermott and Greg Medcraft from Down Under) formally on the shortlist. However, the beleaguered FCA chairman John Griffith-Jones agreed with outgoing chief executive McDermott and both of them were “happy” with the chancellor’s appointment of Bailey – a beefy looking BoE insider who impressively holds a doctorate in economic history. As seen in the last post, Panama has been in the news a lot. The FCA had originally given 20 banks until 15 April 2016 to report on the extent, if any, of their involvement and links with Mossack Fonseca or firms serviced by them. But now it warns that prosecutions over the Panama Papers are not clear-cut. According to Mark Steward, head of enforcement, the media frenzy is “quite different from prosecutions – the two don’t necessarily go together”. This case involved a Panamanian corporation called Asset LI Inc trading as Asset Land Investment plc against which the FCA brought proceedings for carrying on “regulated activities” without authorisation contrary to the general prohibition in section 19 of the Financial Services and Markets Act 2000. Schemes for investing in land with development potential are commonly known as “land banks” and the operation of such initiatives first came into the regulatory perimeter under section 11 of the PERG Manual of the FCA Handbook.  

In Financial Services Authority v Fradley [2005] EWCA Civ 1183, the Court of Appeal had described the drafting of section 235 (collective investment schemes) of FSMA as “open-textured” by virtue of which words such as “arrangements” and “property of any description” are to be given “a wide meaning”. Arden LJ found in Fradley that section 235 must not be construed so as to include matters which are not fairly within it because contravening section 19 may result in the commission of criminal offences, subject to section 23(3) of FSMA. Lord Carnwath of Notting Hill found her Ladyship’s approach to be “helpful guidance”. On the other hand, he remained cautious of drawing analogies from comparative Commonwealth legislation presented to the court – such as the Australian Corporations Act 2001 – on the ground that differences in drafting warranted keeping the discussion strictly within the boundaries of UK statutes and authorities. Like the first instance judge, the Supreme Court referred to the English and the Panamanian company indiscriminately as “Asset Land”.

Supreme Court on the ‘Houdini Taxpayer’

UBS AG & Deutsche Bank v Revenue and Customs [2016] UKSC 13 (9 March 2016)

As infamously explained by jailed fraudster Tom Hayes, UBS must be credited with issuing a “handbook” on rigging LIBOR. Doubling Hayes up, in the ongoing LIBOR trial, Jonathan Mathew, one of five charged Barclays traders, says that he was merely following orders and just did what his boss taught/told him to do. The five men say everyone in the big banks “knew LIBOR was rigged”. As seen in an earlier post, along with Barclays traders, Deutsche Bank traders are facing criminal charges for EURIBOR manipulation and proceedings are ongoing in the case of R v Christian Bittar & Ors – first appearances were made at Westminster Magistrates’ Court on 11 January 2016 and a mention hearing was held on 18 March 2016. Former Deutsche trader Martyn Dodgson has also been convicted for insider trading in Operation Tabernula. In the instant case, echoing Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, Lord Reed described UBS and Deutsche Bank’s behaviour as “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax.” The banks, which Lord King calls “the Achilles heel of capitalism”, may be disappointed with the Supreme Court’s ruling but most people will only be too delighted that top executives should become acquainted with some degree of retributive justice. The dry issue of tax is a hot political topic these days and the Panama Papers (see here) culminated in calls for the prime minister to resign for being a hypocrite.

Though this post is about the Supreme Court’s judgment, I use the opportunity to discursively expose other important tax issues reported in the media. Of course, Deutsche Bank announced last October that it would axe 9,000 full-time jobs and it has just recent lost its global position as a top-three investment bank. Research from Coalition, that ranks global investment banks by total revenue from fees and trading, shows that Citigroup and Bank of America are ahead of Deutsche Bank. JPMorgan Chase and Goldman Sachs retained their positions in first and second place respectively. Tim Wallace writes in today’s The Sunday Telegraph that once a cash cow, investment banking is now is serious crisis and jobs and pay across the sector has declined. It is a vicious cycle and the following insightful analogy is invoked “shrinking an investment bank is hard. It is like unravelling a jumper – once you start pulling on the thread it is hard to stop … then all of a sudden, you haven’t got a jumper at all.”

Supreme Court: Corporate Raids and the Proper Purpose Rule

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71 (2 December 2015)

In a judgment which may at first blush appear to be unremarkable, Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge held that the proper purpose rule applied to the exercise of the power conferred on the board – allowing it to issue a “restriction notice” whenever a statutory disclosure notice had been issued and had not been complied with – under article 42 of JKX’s articles of association and that the company’s directors acted for an improper purpose. Notably, section 793 of the Companies Act 2006 provides a public company the power to issue a statutory disclosure notice to any person whom it knows or reasonably believes to be interested in its shares. According to the Supreme Court, in circumstances where a company’s board of directors was entitled under the company’s articles of association to issue a disclosure notice against a shareholder and where the board was further entitled – in the event that they knew or had reasonable cause to believe that the statements given in response were incorrect – to restrict the shareholder’s right to attend or vote at any general meeting of the company, any such restriction would be invalid if the board’s purpose in making the restriction had been to prevent the shareholder voting at the meeting.

Lord Sumption gave the main judgment and Lord Hodge agreed with him. Lord Mance and Lord Neuberger agreed that the appeals should be allowed, but they preferred to not to express a view on aspects of the reasoning. Moreover, Lord Clarke agreed, but expressed a preference to defer a final conclusion on those aspects until they arise for decision and have been fully argued. Prior to this decision, the case had been reported in the Court of Appeal as [2014] Bus LR 835 and in the High Court as [2014] Bus LR 18. JKX Oil & Gas Plc, an English company listed on the London Stock Exchange, was the parent company of a group involved the development and exploitation of oil and gas reserves, primarily in Russia and the Ukraine. From that perspective, Lord Sumption used the opportunity to apply his unrivalled expertise on both company law and Russia to the present case. The exercise of a discretionary power by directors tends to be challenged on the ground that it does not promote the success of the company, a subjective question as regards the company’s business interests.

Notable Economic Forecasts

The UK has recently been dubbed by the Legatum Institute as “the third cheapest place in the world to start a business, far cheaper than the US or Germany.” The strength of the UK economy, which makes it one of the world’s most prosperous countries, is the underlying reason for creating successful businesses and opportunities for those seeking entrepreneurial roles. The Legatum Institute 2015 Prosperity Index, which is a league table ranking countries on the basis of economic success and a series of wellbeing indicators, ranks the UK (behind Germany) as the fifteenth most prosperous country in the world. (Norway has topped the ranking for the seventh consecutive year as the world’s most prosperous country.) However, as observed on this blog, misconduct in financial services is spiralling and no end to the conundrum appears to be in sight. In relation to trade, contrary to the findings of the Legatum Institute, the Institute of Chartered Accountants in England and Wales (ICAEW) has also found that business confidence in the UK is weakening and that investment is muted and exports are low.

For example, the Q4 2015 ICAEW/Grant Thornton UK Business Confidence Monitor results argue that though “still firmly in positive territory … the post-election honeymoon maybe over”. Exports and manufacturing have not been rebalanced which means there is continued reliance on domestic demand. In addition to the fall in business confidence after the post-election bounce, the Q4 2015 ICAEW/Grant Thornton report further found that exports are sliding below domestic sales, firms are restricting their budgets for R&D because they lack long-run confidence and skills shortages are rising – albeit wages are increasing steadily. The upshot is that business confidence is at its lowest level since 2013. Confidence in the services sector remains positive but is declining in the production sector.

Former Rogue UBS Trader Kweku Adoboli Loses Deportation Appeal

In comparison to Tom Hayes (who got 14 years’ imprisonment and is appealing his sentence and conviction) and others being prosecuted for benchmark rigging, it is arguably quite scandalous that UBS rogue trader Kweku Adoboli (who was convicted of two counts of fraud and sentenced to seven years’ imprisonment) was released from prison after spending just a bit over three years behind bars for losing $2.5 billion in unauthorised trading. Ghana-born Adoboli – who travelled the world as a child – is said to be the son of a United Nations official/diplomat. Because of his misconduct, the Financial Conduct Authority (FCA) understandably wishes to ban Adoboli, who reckoned he had a “magic touch”, from being a regulated person in financial services. But now it has emerged that Adoboli was notified of his liability to deportation and has lost his appeal in relation to the decision to deport him from the UK. The 35-year old Ghanaian national, who has resided in the UK for 23 years but never got around to obtaining British nationality, was released from prison in June 2015 and reportedly found the immigration tribunal’s decision upholding his deportation to be “heartbreaking”. His rogue trading wiped off £2.7 billion ($4.5 billion) from UBS’s share price.

The media suggests that the former public school head boy and University of Nottingham graduate – holding a degree in e-commerce and digital business studies – plans to appeal the tribunal’s decision. It has been reported that the home office only seeks to deport individuals whose sentence is longer than four years (Immigration Rules, Part 13, Deportation and Article 8, para 398(a)) unless they are able to demonstrate otherwise. (A sentence of four years’ imprisonment or more means the person is a serious criminal and “very compelling circumstances” is an extremely high threshold. As a general principle, the greater the public interest in deporting the foreign criminal, the more compelling the foreign criminal’s circumstances must be in order to outweigh it.) However, under para 398(b) the deportation of a person from the UK is conducive to the public good and in the public interest where they have been convicted of an offence for which they have been sentenced to a period of imprisonment of less than four years but at least 12 months. It is common knowledge that anyone who has been convicted of an offence exceeding 12 months’ imprisonment is caught by “automatic deportation” because after the foreign national prisoners crisis the government legislated in

The LIBOR Trial: Episode Two

The SFO lost this case: see here, original post continues. Only recently former rogue UBS trader Tom Hayes, who accused the Swiss lender of distributing a manual on rigging LIBOR, became the first person ever to be convicted of benchmark rigging. He got 14 years’ imprisonment for eight counts of fraud and is appealing his conviction and sentence. However, episode two of the LIBOR trial is underway in London this week and a number of brokers thought to be acting in cahoots with Hayes are facing a jury in Southwark crown court for manipulating the interbank rate. These proceedings constitute a continuation of the long promised clean up (being overseen by the Serious Fraud Office) of rampant cheating in the banking and financial services industry that erupted in the aftermath of the global financial crisis. The sequel proceedings involve a batch of allegedly crooked individuals, namely Darrell Read (50), Colin Goodman (53), Danny Wilkinson (48) of ICAP (“a leading markets operator and provider of post trade risk mitigation and information services”); Terry Farr (44) and James Gilmour (50), formerly of RP Martin; and Noel Cryan (49, of Tullet Prebon). Their criminal trial began today and 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 new/emergent point in these cases is the part played by brokers, and not traders and submitters, in LIBOR manipulation. The half a dozen individuals identified above stand accused of conspiring with Hayes to rig LIBOR by suggesting numbers which were falsified and misleading. Darrell Read and Colin Goodman are said to have conspired with Brent Davies (also of ICAP) and Hayes. Terry Farr and James Gilmour are said to have conspired with Luke Madden of HSBC and Paul Robson of Rabobank to rig LIBOR. Farr also faces charges for conspiring with Hayes during his time at Citibank (which ultimately reported him over his cheating ways). Noel Cryan is accused of conspiring with UBS traders. Mr Justice Hamblen, a highly accomplished and respected judicial figure, will hear the case and it is being prosecuted by Mukul Chawla QC who saw to it that no loose boards were left dangling from Hayes’s coffin when he went down. Opening the case for the prosecution, Mukul Chawla QC argued that all six defendants conspired with Hayes and others and that

PPI Complaints Deadline: FCA Gives Consumers Until 2018

Marking the removal of a dark stain on the financial services industry, the end of the Payment Protection Insurance (PPI) saga is finally in sight. A cut-off point to the debacle appears to be in the offing and the eagerly-awaited decision of the Financial Conduct Authority (FCA) – aiming to “rebuild trust in the retail financial sector” – about further intervention in PPI complaints has finally descended upon us. The PPI problem is said to have already cost the industry £20 billion and further payments up to £33.5 billion had been predicted by some studies because of the Supreme Court’s judgment in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 (though more conservative estimates place this at £15 billion). The FCA has decided to consult, by the end of the year, on setting a deadline by which PPI complaints need to be made “or else lose their right to have them assessed by firms or by the Financial Ombudsman Service.” Because questions hover over the influence of industry lobbying on the FCA, the Chairman of the Treasury Select Committee Andrew Tyrie MP said that the FCA should provide “reasons for its change of mind” over the deadline, one which may be linked to George Osborne’s new “settlement” for the City. The FCA wants to bring “finality” to the conundrum and wishes to prompt many consumers who want to complain, but have not yet done so, into action, resulting in them potentially getting redress sooner.

Consumers’ PPI problem, which generated billions in annual revenue for lenders, represents the UK’s costliest mis-selling episode – an ugly chapter in the history of the banks, one the industry surely wants closed for good. A flood of claims is expected because of the deadline and five leading banks have earmarked significant sums of money to put the controversy to rest. The sums set aside are Lloyds £13.4 billion, Barclays £6 billion, RBS £3.8 billion, HSBC £2.6 billion and Santander £800 million. Adding this to the misconduct bill of £200 billion from 2010-2014 (calculated by the Conduct Costs Project) takes the total to over £226 billion. However, some reports suggest that worst of the fines and penalties are already behind the banks; but only time will tell, you never know what’s around the corner. It has been reported that PPI complaints are declining with only 883,043 complaints

Tom Hayes: Trial By Fire

As ever, the world of finance is abuzz with sizzling news. Most of it, like the judgment in Plevin [2014] UKSC 61, makes pretty grim reading for banks. Similarly, forex fixing claims worth billions are brewing in London – a colossal currency market – because of last week’s $2 billion payout in New York by household names such as Barclays, HSBC and RBS and numerous others: indeed, the settlement of class action litigation with investors, arising out of the rigging of WM/Reuters 4pm London Fix, has been tipped as opening the floodgates. This comes off the heels of May 2015’s foreign exchange (forex or FX) rigging penalties of $5.6 billion: watch excellent video on how the “Cartel” and “Coiled Cobra” rigged the marketplace. Such events leave little room for doubt that the LIBOR scandal was just the tip of the iceberg because the rigging of the $5.3 trillion-a-day forex markets completely dwarfs the total $500-$800 trillion value of financial contracts underpinned by LIBOR. Citigroup, JPMorgan Chase & Co, Barclays and RBS all pleaded guilty in May in forex related criminal cases. In other news, things are looking dreadful for those charged by the Serious Fraud Office (SFO). In the first LIBOR trial, Tom Hayes, an obscure yen derivatives trader in UBS and Citigroup became the world’s first individual to be tried and convicted for benchmark rigging. He got 14 years’ imprisonment for his crimes. Against this nightmare sentence, his trial has set a chilling precedent for the 12 others in his shoes who are awaiting trial.

Hayes contended that he was operating in a “grey area” where there were “no rules” and that he had no compliance training, but this did nothing to help him. His predicament gives promise to the maxim that “the age of irresponsibility is over.” In the case against him, Hayes was described as a “ringmaster” whose avarice knew no bounds. The archetypical Foucauldian fiend, he stood accused of using corruption and accepted making “concerted efforts to influence LIBOR” but argued he “was operating within a system”. Discussing the dilemma’s associated with punishment, in Discipline and Punish: The Birth of the Prison Foucault concludes that the offender is “worse than an enemy” and that transgressing the boundaries set by society makes him “nothing less than a traitor, a monster.” The outcome of this pivotal case will serve as a yardstick for future prosecutions against benchmark manipulators and fraudsters. The system had to make an example of Hayes to create a deterrent effect, others will think twice before following in his wretched footsteps.