Cracks in Libor’s reckoning: Were traders criminals or scapegoats?


A decade on from the Libor scandal, US courts have rejected a series of criminal charges against traders accused of fiddling the rate once used to benchmark hundreds of trillions of dollars of financial contracts.

Between January and October, a New York court has thrown out criminal charges against Tom Hayes, a UK trader who worked at UBS and Citi trader, and Roger Darin, another former UBS trader. It also overturned the convictions of two former Deutsche Bank traders, Matthew Connolly and Gavin Black.

The rulings mean that all US trial convictions relating to Libor “rigging” have now been reversed.

For the traders, the rulings vindicate long-held feelings that they were made scapegoats for banks in need of sacrifices after the 2008 financial crisis. For others, some traders still deserve condemnation for the scandal, regardless of whether it amounted to criminality.

Even as the New York appeals court rejected the government’s arguments that Connolly and Black’s conduct had been criminal, it said that their behaviour “may have violated any reasonable notion of fairness”.

“At the end of the day, Libor rigging involved major corporate misconduct . . . It was absolutely right that prosecutors sought to hold people accountable for it,” said Sue Hawley, executive director at anti-corruption group Spotlight on Corruption, though she questioned whether the right people ended up in the dock.

Libor — the London Interbank Offered Rate — was meant to approximate the average rate at which banks could borrow short term cash from one another and at its peak underpinned some $350tn of financial instruments including credit card fees and corporate loans.

A scandal over how Libor was set erupted after 2012, resulting in charges for traders conspiring to rig the rate in their favour and some $9bn in fines for banks worldwide.

Connolly says he was clueless about his alleged involvement until 2013, when the FBI showed up at the New Jersey native’s home. The 57-year-old, who did not trade Libor directly himself, had left Deutsche in 2008, and was originally convicted on the back of four emails containing requests relating to Libor trades, one of which he was just copied into.

“The people held accountable were low hanging fruit — easy to get, easy to pin a crime on so the prosecutors could say ‘hey look we are doing something’,” Connolly, who is suing Deutsche bank for $150mn, told the Financial Times.

The problem with Libor — that it often relied on estimates of borrowing rates rather than actual transactions — had long been an open secret in corners of financial markets but only broke into the public consciousness in the wake of the financial crisis.

Libor settlements with global regulators

“There was a tremendous amount of criticism [before the Libor probes] that nobody went to jail for the 2008 financial crisis, and a feeling that fraud among major financial institutions was running rampant and something should be done,” says Jonathan Macey, a Yale law professor.

In the US, between 2016 and 2017, Connolly, Black and Hayes were all indicted for pressuring Libor submitters to enter rates favourable to their banks’ trading positions.

However, a Manhattan appeals court has now ruled that the government failed to show in Connolly and Black’s cases that any of the trader-influenced submissions were “false, fraudulent, or misleading”. Prosecutors withdrew Hayes and Darin’s charges in response.

There was a range of possible rates that banks could submit, not one true number, said the court. And traders’ motivations — for example their commercial interests — did not undermine the submissions as long as the bank could have borrowed at that price.

“The government couldn’t prove [in these cases] that the Libor rates submitted were fraudulent,” said Macey.

The UK is now the only country in the world to have criminalised the kind of Libor rate rigging the traders were alleged to have engaged in, which no longer meets the threshold for fraud in America and was not considered unlawful elsewhere.

In London, Hayes — the first person in the world to be found guilty by a jury over the Libor scandal in 2015 — is trying to use the US rulings to force a last-ditch appeal of his case.

He is hoping to persuade the Criminal Cases Review Commission, a panel that investigates miscarriages of justice, that the law was wrongly applied in his UK case, as in the US, and has filed new submissions this week. The CCRC has already been weighing his case for almost six years.

If successful, Hayes could undermine the whole premise of UK Libor convictions.

“A lot of us have deep misgivings about these convictions,” says Sara George, a defence lawyer at Sidley Austin who has represented a number of ex-traders in Libor probes, and is advising Hayes on an appeal to the UK financial regulator. “The witch hunt, the fact it was the junior traders were punished. The mood music has changed . . . ”

Born in Shepherds Bush, Hayes joined UBS as an intern and, after stints at other lenders, shot up the ranks at the Swiss bank to become a star derivatives trader in Tokyo, where he claims to have made the bank around $300mn in profits between 2006 and 2009.

Tom Hayes, a former trader at UBS, leaves after appearing at Westminster Magistrates Court in London, 2013 © Matthew Lloyd/Bloomberg

Hayes, who has Asperger’s syndrome, was nicknamed “Rain Man” and “Tommy Chocolate” by colleagues, the latter because he drank hot chocolate instead of beer when out socialising with brokers.

He was handed one of the longest-ever sentences for a white collar crime — 14 years in prison, reduced to 11 on appeal — and spent several years in a high security prison where he shared a cell with a convicted murderer.

Hayes says he has “lost a quarter of my life” fighting his conviction, and maintains he is innocent.

UK prosecutors had originally decided against pursuing criminal prosecutions for Libor “rigging” but following intensifying calls from members of parliament, David Green, Serious Fraud Office director at the time, launched an investigation in 2012.

The probe became known for the colourful messages shared by traders. “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”, read one. “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible”, read another.

The SFO ultimately secured five convictions, including a guilty plea from Barclays’ main Libor submitter Peter Johnson, while eight people were acquitted, including Hayes’s alleged co-conspirators. The agency also secured four convictions against ex-bankers accused of conspiring to rig Libor’s European equivalent, Euribor. But it was forced to abandon four others after French and German courts ruled the conduct was not unlawful and refused to extradite them.

At trial Hayes argued that his conduct was not dishonest but standard practice among bankers, and encouraged by his bosses. Hayes, who was convicted of conspiracy to defraud, argued he had been made a “scapegoat” for his managers and the banks themselves.

There have also been suggestions that senior bankers were under pressure from the Bank of England to “lowball” their Libor submissions, to appear healthier than they really were during a time of intense market stress. The BoE has always denied the accusation and the SFO opened an investigation into “lowballing” but ultimately brought no charges.

Hayes initially admitted dishonesty to UK prosecutors in many hours of interviews, but later took back the confession, arguing he had been trying to avoid extradition to the US. Hayes says he had a “nervous breakdown” when he was told he could face a 30-year prison sentence in America, something he avoided due to time-served in the UK.

But his admissions formed a large volume of evidence at trial.

In a series of hearings running up to Hayes’s 2015 trial, Mr Justice Jeremy Cooke said it was clear that Libor rules prevented any consideration of commercial interests when submitting Libor rates. But Hayes has disputed that definition in evidence to the CCRC.

“Independence of the rate never happened, it’s a fallacy,” said Hayes.

In an unusual move, the CCRC has asked Hayes to make submissions about the US court decisions. But the issue for Hayes is that the two legal systems are entirely separate, and he faces an uphill battle to persuade the CCRC to send his case back to an English court. The panel provisionally refused to do so last year and must believe Hayes’s new evidence could realistically lead to the appeals court overturning his conviction, if it is to send his case back there.

The Court of Appeal has already sided with the court’s original judgment of how Libor rules worked, and has also dismissed a series of appeals from other ex-traders.

“He was undoubtedly a fall guy and it’s ridiculously unfair that he was the one that got pinned for this,” said one defence lawyer who is not working on the case. “The prison sentence was really harsh . . . But the bar to getting [cases overturned] is really high.”

Others are less forgiving, even if they say the real blame lies higher up the food chain. “The real shame is that the banks themselves and those at the helm who either allowed or turned a blind eye to this behaviour couldn’t be held to account properly in the UK,” said Hawley.

Additional reporting by Philip Stafford


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