The risks faced by financial services companies and executives around the globe from U.S. government investigations and prosecutions were emphasized again last week following the convictions of two British executives by a jury in New York for bid-rigging and fraud involving Libor, the interest benchmark rate that the world’s leading banks charge each other for short-term loans. The conspiracy and wire fraud convictions of Anthony Allen and Anthony Conti, for actions while employees of a Dutch-based financial institution, are the first obtained at trial by the U.S. Department of Justice in the long-running, multi-jurisdictional investigation into Libor. Significant financial penalties have also been levied on several financial institutions with over $9 billion in fines to date imposed by U.S. and European regulators.
The Libor investigation has been noteworthy from the U.S. government’s perspective because of the close cooperation between the Justice Department’s Antitrust and Criminal Divisions, described by senior officials in both Divisions as a first in terms of significant cooperation. Antitrust and fraud prosecutors worked together to interview witnesses, bring charges, and negotiate resolutions. Indeed, Allen and Conti were convicted at trial on both antitrust and fraud related charges. Cooperation between the Antitrust and Criminal Divisions has extended beyond Libor as well, a trend certain to continue into the future. Earlier this year, several banks entered plea agreements and agreed to multibillion dollar fines in connection with involvement in the alleged Forex cartel conspiracy, another investigation into the financial industry. Company executives also can expect to face an increasing threat of individual prosecution after Justice Department prosecutors were instructed in the recently issued Yates Memorandum to actively seek to bring cases against individuals.
The combined efforts in enforcement of the Justice Department’s Antitrust and Criminal Divisions (as well as between the Justice Department and overseas regulators) represent the new “normal.” It is imperative that companies and executives be alert to this environment and develop and implement a comprehensive compliance strategy that will cover the range of regulatory risks from antitrust to anticorruption and beyond that they now face.
Libor Investigation and Criminal Convictions
The origins of the Libor investigation date back several years when news first surfaced about the multi-jurisdictional investigation into a number of banks over alleged manipulation of Libor, a critical benchmark interest rate used by banks worldwide for the setting of interest rates on consumer and corporate loans. The procedure for calculating the Libor rate involves daily averaging of interest rates based on submissions by a representative panel of banks of the rates at which they perceive they could borrow unsecured funds from other banks. As alleged by the U.S. government and enforcement authorities in other jurisdictions, traders for certain banks asked their colleagues to manipulate the system by providing figures that benefitted the traders’ position rather than the rates at which the banks would actually pay or borrow money. In addition, traders from different banks were alleged to have coordinated with other banks their Libor submissions in a manner designed to benefit the traders. Any such coordination between employees of different banks exposed both the employee and the bank to risk of antitrust violations, while the submission of inaccurate rates to manipulate the system for purposes of increasing trading profits implicates fraud based charges. The combination of potential antitrust and fraud offenses led to the close cooperation between the Antitrust and Criminal Divisions in the U.S. investigation.
The consequences of the Libor investigation have been significant and harsh for banks and executives around the globe. In the past three and a half years, banks have been fined over $9 billion by authorities in the U.S. and Europe with several banks individually paying hundreds of millions of dollars. Executives too have been targeted, with the Justice Department extracting plea deals from several individuals, including three former colleagues of Allen and Conti. The U.K. authorities too are active with criminal cases against several individuals underway including one former trader, Thomas Hayes, who received a 14-year sentence following his conviction in the United Kingdom this summer. Against this backdrop, Allen, who supervised the Libor submission process for his employer as well as supervising some trading, and Conti, a senior trader, went to trial in a New York federal court on antitrust and fraud charges arising from their role in the alleged conspiracy. Following a three week trial, the jury took only eight and a half hours to conclude that the two defendants conspired to manipulate the interest-rate estimates submitted as part of the Libor process to benefit the bank’s trading positions. Allen and Conti now face lengthy prison terms when sentenced next year.
Future Trends for Companies and Executives
The convictions of Allen and Conti demonstrate several trends in investigations that companies and executives must take note of as the new “normal” in government enforcement. First, the Justice Department’s antitrust and fraud prosecutors undoubtedly will continue to cooperate on investigations going forward. Conduct such as the alleged coordination and manipulation at issue in Libor can give rise to both antitrust and fraud charges. Given the success of the Libor investigation from the government perspective and joint investigations by the Antitrust and Criminal Divisions into other financial benchmarks likely underway, companies and their executives must be on notice to the prospect of conduct giving rise to a range of potential violations. Second, the Justice Department and regulators in other jurisdictions will continue to work together, coordinating investigations, raids, and sharing information. This has happened for years on the antitrust side as several recent cartel investigations have featured simultaneous raids in the U.S., Asia, and Europe. Third, executives are firmly in the crosshairs of the U.S. government for criminal prosecutions. The Justice Department’s recent Yates Memorandum encouraged prosecutors to pursue individual executives following some external criticism that very few executives were prosecuted in the wake of the financial crisis of 2008. Executives should understand that the risks of criminal prosecution are greater than ever.
Finally, these trends simply reinforce the need for companies to ensure they have adopted and implemented an integrated approach to compliance that encompasses both antitrust and fraud, as well as anti-corruption, trade controls, data privacy, and other issues that give rise to potential government investigation. Failure to build a policy that (1) prevents misconduct by clearly articulating the appropriate standards for employees, (2) detects potential violations through internal monitoring and enforcement systems, and (3) reacts to potential violations through a combination of effective internal investigation and response to violations—significantly increases the risk to companies and executives of substantial fines and incarceration.