The fallout from the LIBOR manipulation scandal continues to attract headlines across the globe, particularly as the LIBOR investigations themselves appear to have triggered separate enquiries into the alleged manipulation of other benchmark rates. Investigations into various financial institutions are continuing and further eye-catching fines, along the lines of the USD 370 million paid by Lloyds Banking Group in July 2014 (see below) are anticipated. In the meantime, regulatory focus is now shifting towards individuals, and we therefore consider it likely that LIBOR will remain in the news for the foreseeable future. In this article, we look at recent developments in LIBOR actions internationally.
Lloyds Banking Group is the latest financial institution to be fined by US and UK regulators for its participation in the manipulation of benchmark rates, which include, amongst others, LIBOR. In July 2014, Lloyds Banking Group agreed to pay fines totalling USD 370 million, which comprised fines imposed by the Financial Conduct Authority (“FCA”) (GBP 105 million), the US Commodity Trading Commission (USD 105 million) and the US Department of Justice (USD 86 million). The Bank of England Governor, Mark Carney, described the manipulation by Lloyds Banking Group as “highly reprehensible” and “clearly unlawful”. In the wake of the fine, at least four traders at Lloyds Banking Group have been suspended and, according to press reports, the financial institution is investigating the involvement in the scandal of approximately twenty individuals.
In June 2014, the European Commission issued a Statement of Objections to interdealer broker ICAP, which alleged that ICAP “may have breached EU antitrust rules by facilitating several cartel infringements in the market for interest rate derivatives denominated in the yen currency”. ICAP has denied such allegations and has confirmed that it will “defend itself against these allegations vigorously”. ICAP will now respond to the Statement both in writing and at a hearing before representatives of the European Commission and national competition authorities. This course of action follows the imposition of a EUR 669.9 million fine by the Commission on six financial institutions in December 2013 for their participation in cartels relating to interest rate derivatives which derive their value from LIBOR.
Martin Wheatley, head of the FCA, confirmed in July 2014 that while investigations were still ongoing into the manipulation of LIBOR, such investigations were not as serious as those which have now concluded. However, at least some of the on-going LIBOR investigations appear to have been delayed on the grounds that the allegations in issue extend beyond the manipulation of LIBOR, and therefore the mere fact that the LIBOR allegations may be less serious should not be taken as meaning that substantial fines will not follow.
According to press reports, BaFin, Germany’s financial regulator, is expanding its investigation into Deutsche Bank’s alleged participation in the manipulation of LIBOR and other benchmark rates. BaFin’s initial intention was to conclude its investigations by Summer 2014, but the expansion of the investigation is now likely to delay the publication of its findings.
Regulatory fines imposed to date
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Criminal prosecution of individuals
In June and August 2014 respectively, two former Rabobank traders, Takayuki Yagami and Paul Robson, pleaded guilty to one count of conspiring to commit wire fraud and bank fraud before US District Judge Rakoff. These two individuals are the first to plead guilty to charges involving the manipulating of benchmark rates, and another two former Rabobank traders, Paul Thompson and Tetsuya Motomura, continue to plead not guilty to the same allegations. Rabobank has previously paid fines totalling USD 325 million to US regulators in relation to manipulation charges.
The SFO’s investigations into the involvement of individuals in the manipulation of LIBOR continue. To date, criminal charges have been brought by the Serious Fraud Office against twelve former traders (from UBS, Barclays, RP Martin and ICAP) for the manipulation of LIBOR, with the first trial listed for January 2015.
Litigation against institutions
Numerous lawsuits have been filed in the United States relating to LIBOR manipulation. Of particular interest is the suit filed by Jeffery Laydon, against a number of financial institutions, in the US District Court., Southern District of New York (Jeffrey Laydon et al v Mizuho Bank Ltd et al). Mr Laydon alleges that he suffered losses on futures contracts that were manipulated by various international banks.
In March 2014, US District Judge Daniels granted the defendants’ motion to dismiss antitrust, vicarious liability and unjust enrichment claims brought by Mr Laydon. However, the judge also granted Mr Laydon leave to amend his complaint, to include allegations that the banks violated the Commodity Exchange Act by manipulating yen-denominated interest rate benchmarks between 2006 and 2010. The lawsuit seeks to rely on information taken from the various notices accompanying the regulatory fines imposed on financial institutions over the past two years.
In the UK, there have so far been two key cases concerning claims in respect of LIBOR-based products – Graiseley Properties Limited & Ors v Barclays Bank plc (2012) and Deutsche Bank AG v Unitech Limited (2013). The Graiseley claim was brought by various parties within the Guardian Care Homes Group, which entered into agreements with Barclays for an interest rate swap and an interest rate collar, as hedges to loans of GBP 41 million and GBP 29 million. The Deutsche Bank claim is in fact two actions being heard together. In the first, a syndicate of banks seeks repayment of a USD 150 million loan made to Unitech Global Limited, and in the second, Deutsche Bank seeks to recover around USD 11 million allegedly due from Unitech Global under an interest rate swap purportedly entered into as a hedge of its interest liabilities under the loan agreement.
Following protracted interlocutory skirmishes regarding pleading amendments, in November 2013, the Court of Appeal allowed both sets of claimants to amend their particulars of claim to include allegations of misrepresentation in connection with LIBOR and/or the swaps/collars. The Graiseley case settled earlier this year before it was due to go to trial, but the Deutsche Bank claim continues and will be monitored closely by others considering LIBOR-related claims.
While the focus of the litigation and investigations appears to have shifted to individuals it would seem that the height of the LIBOR scandal has now passed. Even once LIBOR passes, however, its legacy will cast long shadows over financial institutions for years to come. The LIBOR scandal has spurred on global investigations into the manipulation of numerous other benchmarks, including foreign exchange rates, oil and precious metals, and as yet there is no end in sight. We expect to see rate-fixing investigations, and the consequent 9 and 10 figure fines, hitting the headlines for the foreseeable future.