Making headlines around the world this week, UBS has agreed to pay approximately $1.5 billion in fines and disgorgements to regulators in the United States (including the Commodities Futures Trading Commission and the Department of Justice); the United Kingdom’s Financial Services Authority; and Switzerland’s FINMA, to resolve investigations into the bank’s alleged manipulation of the LIBOR interest rate. UBS’s wholly-owned Japanese subsidiary has agreed to plead guilty to one count of felony wire fraud as well.
The FSA has issued a final notice stating that UBS employees made nearly 2,000 requests to manipulate the LIBOR rate submitted for Japanese yen and other currencies between 2005 and 2010. This notice states further that more than 1,000 of these requests were made to 11 brokers at six firms in an often successful attempt to manipulate the rates reported by other banks.
According to the DOJ, as a result of their positions as intermediaries, the brokers had relationships with traders and LIBOR submitters at other banks and had knowledge of money market activity. It apparently is common for LIBOR submitters to collect information from these brokers regarding the availability and price of cash in the money markets, and this information can influence the banks’ LIBOR submissions. The UBS traders repeatedly colluded with the brokers “by asking them to disseminate false market information to Yen LIBOR submitters at other Contributor Panel banks. In this way, recipients of such misinformation could be influenced, often unwittingly, to contribute YEN LIBOR submissions that benefited UBS Yen derivatives traders’ positions.” One UBS manager later estimated that this scheme was successful 50-60% of the time during one six-month period when it was used every day. In some other instances, the brokers were asked to communicate directly with traders at other banks and ask them to set their LIBOR rates in a way that would benefit UBS.
Further, the FSA notice states that UBS did in fact collude with other banks, stating specifically that “UBS’s misconduct extended beyond UBS’s own internal submission processes to sustained and repeated attempts to influence the submissions of other banks, acting in collusion with panel banks and brokers at a number of different firms.” The DOJ’s statement of facts concisely states that: “[w]hen UBS derivatives traders influenced the submissions of other Contributor Panel banks…the manipulation of those submissions affected the fixed benchmark rates on various occasions” leading to “a significant positive impact on the profitability of a trader’s trading portfolio, and a correspondingly negative impact on their counterparties’ trading positions.”
These new disclosures could have a significant impact on the ongoing LIBOR civil litigation, particularly the MDL complaints which are currently subject to a motion to dismiss before Judge Naomi Reice Buchwald in the Southern District of New York. For example, in those cases, the plaintiffs have alleged antitrust violations, but defendants argued that “the mere opportunity to conspire does not by itself support the inference that such an illegal combination actually occurred.” In their view, because LIBOR submissions were published daily, the process allowed for conduct where the defendants adjusted their submissions in line with one another without any conspiracy, and the plaintiffs could allege “at most parallel conduct.” Now that major regulators have released evidence of actual collusion by UBS, this argument may fall apart.
In addition, the defendants have argued that the plaintiffs cannot prove loss causation, now directly contradicted by the DOJ’s conclusion of significant positive and negative impact on trading positions.
These developments could mean several things for the ongoing litigation in the SDNY. First, the plaintiffs likely will seek to file supplemental papers citing these new disclosures in support of their legal position. Second, UBS, if not the other defendant banks, may be motivated to settle early. Third, the interbank brokers will likely be the next round of defendants facing complaints connected to this scandal. At the very least, oral argument on these motions will be highly important to their outcome. We will be monitoring the cases very closely.