Partner Abdulali Jiwaji comments in Law 360 regarding the Serious Fraud Office’s prosecution activities following the Libor cases.
The Serious Fraud Office has prosecuted a number of low-level traders for Libor rigging, but so far it hasn’t targeted individual bankers involved in submitting artificially low benchmark rates on the eve of the financial crisis. One reason, experts say, is the evidential and political complexity of such so-called lowballing cases.
The billions of dollars in fines the world’s biggest banks have paid for rigging the London interbank offered rate have resulted from two kinds of manipulation: junior bankers tweaking rate submissions to suit their own trading books, and banks putting in lowballed borrowing estimates to make themselves look healthier. But while U.S. and U.K. authorities have prosecuted traders over rate-rigging, they haven’t gone after individuals over lowballing.
That might be changing. The SFO has now begun questioning Barclays PLC executives over lowballing, the Financial Times reported earlier in October.
If they lead to prosecution, however, attorneys say the cases could still prove tough for the SFO to mount with less straightforward evidence available, and the added difficulty of dealing with cases that go to the heart of how banks struggled to stay afloat amid the financial crisis.
“The investigation is almost looking at the fallout from the financial crisis as a whole, which makes it somewhat more complicated because of the parties that were involved, the Bank of England, etc., rather than being an investigation of a bank for activities related to internal trading,” said Pinsent Masons LLP’s Michael Ruck.
When the U.S. Department of Justice and what is now the U.K. Financial Conduct Authority fined Barclays a total of $450 million in 2012 in the first settlement over the rate-rigging scandal, both watchdogs cited the bank for two kinds of manipulation.
They targeted Barclays for alleged plots where swaps traders pushed the bank’s Libor submitters to adjust the bank’s filings higher or lower to suit their own trading books. These claims focus on the period before liquidity began to get tight in 2007 in the run-up to the financial crisis, for example the SFO’s recent trial of five exBarclays traders and rate submitters in London’s Southwark Crown Court.
But as the traders defended the case with mixed success — the jury convicted three, and the other two are set for retrial in February — they argued that any of their efforts to move the rate paled in comparison to lowballing.
And indeed, the civil U.K. enforcement decision against Barclays pointed out that liquidity concerns were a key focus for banks during the financial crisis as the media looked to each bank’s rate submission as a measure of its health. Libor submissions are supposed to estimate how much it costs a bank to borrow cash from its peers, so in theory higher borrowing estimates would point to a bank being considered a bigger risk to lend to.
High-level management within Barclays voiced concerns within the bank about the negative publicity at the time, and that led to less senior managers instructing submitters to reduce the bank’s Libor submissions, according to the enforcement notice. The U.K. watchdog noted in 2012 that it was unclear exactly where those instructions had originated.
That lack of clarity, and the difficulty unearthing hard and fast evidence that it points to, is likely one reason the SFO hasn’t charged any individuals over lowballing yet, attorneys say.
“To actually pin real knowledge on people is evidentially challenging,” said Clive Zietman, the head of commercial litigation at Stewarts Law LLP. “You can surmise all you like, but the criminal authorities here only go forward if they’re absolutely convinced they can win.”
And that evidence can be tougher to come by the higher up the chain the SFO looks, experts say. Whereas the cases against the traders have involved lots of emails, Bloomberg chats and phone call transcripts, when it comes to lowballing the documents might include more meeting minutes and fewer off-the-cuff chats.
“It certainly can be harder in the sense that conversations are rarely documented and similarly people’s recollections obviously vary over a period of time,” Ruck said. “It’s not verbatim, it’s often more of a summary and in terms of attribution, in terms of who said what, it can be unclear.”
SFO Director David Green has largely deflected criticism that the watchdog has focused too heavily on low-level traders, telling lawmakers Tuesday that the SFO doesn’t “go after people, we go after the evidence and the people to whom the evidence points.”
But to some extent, those complaints may have encouraged the SFO to take a closer look at the lowballing issue, according to Signature Litigation LLP partner Abdulali Jiwaji.
“There’s a momentum to look again at what happened and look at the extent to which it had spread through various banks and to look at the actions of people higher up the chain,” Jiwaji said. “Some of that momentum has come from arguments being put forward by some of the more juniorlevel individuals who have been targeted by the SFO and the regulators.”
“Perhaps it’s a coincidence of timing and it’s completely unconnected, but one wonders why if the evidence was there, it wasn’t pursued earlier,” Jiwaji added.
At the same time, having succeeded in some of its cases against the swaps traders so far may have given the SFO the base it needs to go after more complex cases — particularly if the convicted traders continue to lose on appeal.
“Who knows whether it was a deliberate strategy by the SFO to approach it that way, but having gone through that process they’re now prepared to take it on further,” Jiwaji said. “If these lower level traders are unsuccessful in their appeal arguments … then the foundation is more solid to take it even further.”
To a certain extent, the fact that lowballing probes would likely pull in more senior individuals may be appealing to regulators looking to send a strong message to deter future market abuse, Ruck says. But the higher the SFO goes up the chain, the more likely it would have to charge the banks themselves.
“The conversations which are allegedly occurring are between relatively senior individuals at both banks and the Bank of England, and therefore if you, the SFO, or anybody else investigating this conduct, you start at that higher level of management automatically,” Ruck said.
“They are much closer to the possibility of the controlling mind of a bank being aware of the activities taking place or conversations taking place — and that gets the SFO closer to having to take action against the entity as a whole as a result,” he said.
Investigations into lowballing also start to edge into more politically sensitive territory involving conversations with government authorities trying to manage the liquidity crisis.
For example, the Barclays decision notice refers to a call between the Bank of England and a senior bank official that eventually led the bank’s Libor submitters to have the mistaken belief that the Bank of England had instructed Barclays to reduce its submissions.
Indeed, the SFO has been investigating concerns about the Bank of England’s liquidity auctions on referral from the central bank itself since 2015.
“It certainly raises the stakes, doesn’t it,” Jiwaji said. “It becomes very sensitive, and that’s where we’ll see the full implications of the previous rulings really being tested against different fact patterns.”
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