In Britain, Libor-Rigging Conspiracy Case Is Also a Test for Regulators
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Version 0 of 1. LONDON — Banks have paid billions. Regulators and prosecutors have extracted guilty pleas from financial institutions. Dozens of employees have been fired, and at least one chief executive has lost his job. Now, on Tuesday, the first trader in the sprawling, half-decade-old investigation into the rigging of global benchmark interest rates will go on trial in Southwark Crown Court. The British authorities have charged Tom Hayes, a 35-year-old former trader from Citigroup and UBS with eight counts of conspiracy to commit fraud. Mr. Hayes’s indictment claims that he was a ringleader among more than a dozen traders engaged in what the authorities say was a brazen attempt to manipulate the London Interbank Offered Rate, or Libor, a reference rate used to set various others, including those for student loans and mortgages. Mr. Hayes has pleaded not guilty to all eight charges. His lawyer did not return calls seeking comment. UBS and Citigroup declined to comment. Banks have paid more than $9 billion to settle allegations that some of their traders manipulated Libor and other related interest rate benchmarks. (In total, banks have paid more than $160 billion since 2009 to settle charges related to issues such as rigging interest rate benchmarks, manipulating currencies, mis-selling insurance, packaging toxic mortgages and evading taxes, among others.) It has been a long road of steep fines for the banks. Barclays, which took a chance and opted to settle first, paid more than $450 million to resolve the Libor allegations in June 2012. The bet seemed ill advised: The bank became the prime example of wrongdoing, and Robert E. Diamond Jr., its swashbuckling chief executive, lost his job as Barclays tried to stem the fallout from the rate manipulation scandal. But the stakes have risen. Last month, Deutsche Bank agreed to pay $2.5 billion to settle charges from the authorities in the United States and Britain that said it rigged rates and misled regulators. A London unit pleaded guilty to criminal charges in the United States, and the fine brought Deutsche’s total Libor-related fines to $3.5 billion. Reporting of Mr. Hayes trial will be circumscribed by strict court restrictions that are common in Britain. In September, six other traders from three other institutions will go to trial on Libor-related charges. Mr. Hayes was known as a well-connected trader, court documents show. He worked at the Royal Bank of Scotland and Royal Bank of Canada before joining UBS, where he worked in Tokyo trading yen derivatives. In 2009, Citigroup tried to lure him away with a multimillion deal. UBS fought to keep him. He left anyway. The United States government filed an indictment against him in December 2012. He was arrested in London and later charged by the Serious Fraud Office. Court documents claim that Mr. Hayes conspired with others to manipulate Libor in an attempt to make money for themselves or the institutions for which they worked. Libor is the rate at which banks lend to one another. It is used to price $350 trillion in securities, including student loans, credit cards and mortgages. The rate was not set by a computer but rather by a group of individuals in certain banks, called “submitters,” who would offer a range of rates in differing currencies and duration at a certain time every day, making it vulnerable to manipulation. Reams of documents show traders intentionally moved the rates close to the time of the fix to benefit their own trading books. The trial will be a test for Britain’s Serious Fraud Office, which has suffered many setbacks and is often criticized in the United States for being less aggressive than the Justice Department. In fact, the case almost did not happen because the prosecutor was not interested. In 2011, the Financial Conduct Authority passed evidence related to its Libor investigation to the Serious Fraud Office. The head of the office declined to pursue it. After Barclays paid more than $450 million in fines to British and United States regulators in June 2012, the chancellor of the Exchequer, George Osborne, told the fraud office to reconsider. Now, 80 people are on the case, and David Green, the new head of the office, has made it clear that this trial is critical to the future success of the agency. “When David Green came into office, he staked his reputation within the Serious Fraud Office on the success or otherwise on the investigation into Libor,” said Barry Vitou, head of corporate crime and investigations at Pinsent Masons, a British law firm. The trial will once again thrust banks into the spotlight for allegations of wrongdoing, an unwelcome prospect for an industry grappling to restore its reputation. While nearly every major British and global bank has sought to improve its culture and ethics, staggeringly high fines, damaging emails, chat room transcripts and settlements keep appearing. Last week, five global banks paid more than $5 billion in combined penalties and pleaded guilty to criminal charges, ending the foreign exchange investigation into whether traders colluded to manipulate currencies to improve their profits. “These unprecedented figures appropriately reflect the conspiracy’s breathtaking flagrancy, its systemic reach and its significant impact,” Attorney General Loretta E. Lynch said. In one particularly damning email, a trader said, “If you aint cheating, you aint trying.” The banks will watch the case closely for another reason: Many settle with regulators because they cannot risk going to trial. As a result, they often complain — quietly — of sky-high fines that punish their shareholders but do not hold individuals accountable. Mr. Hayes’s trial, and the others that follow, will show whether the actions were, in fact, criminal and worth the banks’ fines. The trial is expected to last three months. |