InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
DOJ Announces Prison Sentences of Former Derivatives Traders for LIBOR Manipulation
On March 10, the DOJ announced that U.S. District Judge Jed S. Rakoff sentenced two former derivatives traders for a Netherlands-based bank to prison for their roles in a scheme to manipulate the London Interbank Offered Rates (LIBOR) for the U.S. Dollar (USD) and Japanese Yen (JPY) from 2005-2009. The defendants, who were convicted of bank fraud, wire fraud and conspiracy charges in November 2015, were sentenced to 24 months and 12 months and a day in prison. Two additional bank employees were convicted in the same LIBOR investigation after pleading guilty to one count of conspiracy each for their roles in the scheme; two other individuals were charged and are awaiting trial.
Former Derivatives Trader Convicted and Sentenced in U.K. on Libor Manipulation Charges, Also Facing Criminal Charges in U.S.
On August 3, a jury in the United Kingdom convicted former derivatives trader Tom Hayes on eight counts of fraud for his role in the manipulation of the London Interbank Offered Rate (Libor) for Japanese Yen. Hayes was subsequently sentenced to 14 years in prison. Prosecutors had argued that Hayes, a former trader at two international banks, had asked traders at his bank who were responsible for submitting the bank’s daily Libor submissions for publication – as well as submitters at other banks and brokers involved in the Libor process – to raise or lower their submissions for the Yen Libor from 2006 to 2010 to help Hayes increase the profit on his trades. Hayes was the first individual to be tried in U.K. courts for Libor manipulation, with some of Hayes’ alleged co-conspirators set to go to trial in late September. Hayes is also facing criminal charges for the same conduct in the U.S.
DOJ Announces Plea Agreements with Five Major Banks for Manipulating Foreign Currency Exchange Markets
On May 20, the DOJ announced plea agreements with five major banks relating to manipulations of foreign currency exchange markets. Four of the banks pled guilty to felony charges of “conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market.” These four banks agreed to pay criminal fines totaling more than $2.5 billion and to a three-year period of “corporate probation,” which will be “overseen by the court and require regular reporting to authorities as well as cessation of all criminal activities.” A fifth bank pled guilty to manipulating benchmark interest rates, including LIBOR, and to violating a prior non-prosecution agreement arising out of the DOJ’s LIBOR investigation. That bank agreed to pay a $203 million criminal penalty. The DOJ emphasized that these were “parent-level guilty pleas” to felony charges and that it would continue to investigate potentially culpable individuals. The five banks also agreed to various additional fines and settlements with other regulators, including the Federal Reserve, the CFTC, NYDFS, and the U.K. Financial Conduct Authority. Combined with previous payments arising out of the FX investigations, the five banks have paid nearly $9 billion in fines and penalties.
DOJ and International Investment Bank Enter Into Plea Agreement to Resolve LIBOR Manipulation Claims, Bank Agrees to Pay $2.5 Billion Penalty
On April 23, the DOJ announced that an international investment bank and its subsidiary agreed to plead guilty to wire fraud for its alleged conduct, spanning from 2003 through 2011, in manipulating the London Interbank Offered Rate (LIBOR), which is used to set interest rates on various financial products. In addition, the DOJ announced that the bank entered into a deferred prosecution agreement to resolve wire fraud and antitrust claims for manipulating both the U.S. Dollar LIBOR and Yen LIBOR. Under terms of the agreement, the $2.5 billion in penalties will be divided among U.S. and U.K. authorities - $800 million to the Commodity Futures Trading Commission, $775 million to the DOJ, $600 million to the New York Department Financial Services, and roughly $340 million to the U.K.’s Financial Conduct Authority. The authorities also ordered the bank to install an independent compliance monitor.
Fannie Mae Delays Modification Policy Updates, Substitutes ARM Loan Indices
On March 12, Fannie Mae issued a notice postponing the April 1, 2014 implementation deadline for changes to its standard and streamlined modification programs announced in SVC-2013-28. Those changes expanded the programs to include loans with a pre-modification mark-to-market loan-to-value (MTMLTV) ratio of less than 80%. In the “near future,” Fannie Mae will announce a new effective date and updated requirements for such loans. Until the new requirements become effective, loans with MTMLTVs of less than 80% will continue to be eligible for a standard or streamlined modification if the loan servicer has fully implemented the previously-announced changes. In a separate notice relating to its adjustable-rate mortgage (ARM) plans, Fannie Mae announced that it is requiring sellers and servicers to substitute certain LIBOR indices for the discontinued Federal Reserve Board CD index, and as a result it is retiring two standard ARM plans based on the discontinued index.
SDNY Retains Jurisdiction Over Three LIBOR Suits
On December 30, the U.S. District Court for the Southern District of New York held that three LIBOR suits should remain under federal jurisdiction and denied the plaintiffs’ motions to remand. In Re LIBOR-Based Fin. Instruments Antitrust Litig., No. 11-md-2262, slip op. (S.D.N.Y. Dec. 30, 2013). One of the cases was removed from state court, and the other two were referred by the Judicial Panel on Multidistrict Litigation, to be joined with the numerous consolidated suits that have been brought by investors and bondholders who claim that certain financial institutions colluded to deliberately depress LIBOR, which caused the plaintiffs various economic injuries. LIBOR is a global benchmark rate used in financial products and transactions, which was set using data from the banks under the auspices of the British Bankers’ Association. Focusing on the only disputed element for Edge Act jurisdiction—whether the conduct “arises out of” (i) transactions involving international or foreign banking or (ii) other international or foreign financial operations—the court held that it has federal jurisdiction under the Edge Act. Applying a “common sense” statutory interpretation, the court reasoned that the cases arise out of the financial institutions’ allegedly misleading submissions to the LIBOR panel, which is an international or foreign financial operation, and without which there would be no cases at all. Although it did not need to address the financial institutions’ alternative basis for federal jurisdiction, the court explained that it could also retain jurisdiction under the Foreign Sovereign Immunities Act.
Deputy AG Outlines Financial Crimes Enforcement Approach, Compliance Expectations
On November 18, at an American Bar Association/American Bankers Association conference on the Bank Secrecy Act/Anti-Money Laundering (BSA/AML), Deputy Attorney General (Deputy AG) James Cole challenged financial institutions’ compliance efforts and outlined the DOJ’s financial crimes enforcement approach. Noting that compliance within financial institutions is of particular concern to the DOJ, based in part on recent cases of “serious criminal conduct by bank employees,” the nation’s second highest ranking law enforcement official detailed DOJ’s approach to investigating and deciding in what manner to pursue potential violations. The Deputy AG included among his examples of serious misconduct recent BSA/AML, RMBS, mortgage False Claims Act, and LIBOR cases. He explained that the DOJ is particularly concerned about incentives that encourage excessive risk taking, and stated that “too many bank employees and supervisors value coming as close to the line as possible, or even crossing the line, as being ‘competitive’ or ‘aggressive.’”
Deputy AG Cole stated that the DOJ’s decisions about bringing criminal prosecutions are informed by the Principles of Federal Prosecution of Business Organizations, which include, among other factors: (i) the nature and seriousness of the offense; (ii) the pervasiveness of the wrongdoing within the corporation, including the complicity of corporate management; (iii) the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory actions against it; and (iv) the adequacy of a corporation’s pre-existing compliance program. He added that the DOJ “look[s] hard at the messages that bank management and supervisors are actually giving to employees in the context of their day-to-day work.” Specifically, the DOJ (i) reviews chats, emails, and recorded phone calls; (ii) talks to witnesses to assess management’s compliance message; and (iii) examines the “incentives that banks provide their employees to either cross the line, or to exhibit compliant behavior.”
The Deputy AG stressed that “[i]f a financial institution wants to encourage compliance – if its values are not skewed towards making money at all costs – then that message must be conveyed to employees in a meaningful and effective way if they’d like [the] Department to view it as credible.” He echoed past calls by federal authorities for institutions to create “cultures of compliance” that include “real, effective, and proactive” compliance programs. Any institution that fails to do so, he cautioned, could be subject to prosecution.
NCUA Files LIBOR Action
On September 23, the NCUA announced a lawsuit against 13 international banks alleging violations of federal and state antitrust laws by artificially manipulating the London Interbank Offered Rate (LIBOR) system. The NCUA filed the complaint in the U.S. District Court for the District of Kansas on behalf of five failed credit unions. The NCUA claims the institutions individually and collectively gave false interest rate information through the LIBOR rate-setting process to benefit their own LIBOR-related investments, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness and to deprive investors of interest rate payments. According to the NCUA, the now defunct credit unions held tens of billions of dollars in investments and other assets that paid interest streams tied to LIBOR, and that the alleged conspiracy to artificially depress LIBOR caused the failed credit unions to receive less in interest income than they otherwise were entitled to receive.
U.K. Parliamentary Commission Report Offers Comprehensive Bank Governance Reforms
On June 19, the U.K. Parliamentary Commission on Banking Standards published a report titled “Changing Banking for Good.” The Commission, established in July 2012 after the alleged rigging of LIBOR was revealed, was tasked “to conduct an inquiry into professional standards and culture in the U.K. banking sector and to make recommendations for legislative and other action.” The report covers a broad range of banking sector issues, but focuses on the impacts of a perceived misalignment of incentives in banking. Some of the key recommendations include: (i) establishing a new regime to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks ; (ii) creating a new licensing regime underpinned by Banking Standards Rules; (iii) creating a new criminal offense of reckless misconduct in the management of a bank for senior bank officers; (iv) adopting a new remuneration code to better align risks taken and rewards received that would also defer more remuneration for a longer period of time; and (v) giving the bank regulator a new power to cancel all outstanding deferred remuneration for senior bank employees in the event their banks require taxpayer support.
Financial Stability Oversight Council Releases 2013 Annual Report
On April 25, the Financial Stability Oversight Council (FSOC) met in an open session to announce the release of its 2013 Annual Report to the Congress. The Annual Report outlines the FSOC’s views with regard to, among other things, (i) the need for housing finance reform to attract private capital to the housing finance system, (ii) increased awareness of operational risks, whether from cyberattack or acts of nature, and (iii) the importance of working with foreign counterparts to reform the governance and integrity of interest reference rates like LIBOR. FSOC Chairman and Treasury Secretary Lew also advised that the FSOC met in executive session to discuss its continuing analysis of non-bank financial companies and that he expects a vote on an initial set of systemically important designations of non-bank financial companies soon.