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UK Watchdog Looks For A Comeback At Barclays Libor Trial

The trial opening Monday of several former Barclays bankers charged with rigging Libor poses a crucial test for the U.K.’s Serious Fraud Office after it suffered a courtroom loss in its marquee prosecution of benchmark manipulation earlier this year.

Prosecutors have charged six former Barclays PLC traders and rate submitters with plotting to manipulate the U.S. dollar version of the London Interbank Offered Rate — a key benchmark used in interest rates for everything from mortgages to derivative contracts — to benefit the bank’s trading position to the detriment of others.

Now, two years after those charges were originally filed, the case is set to go to trial for three months in London’s Southwark Crown Court. Jury selection is expected to begin Monday before Judge Anthony James Leonard QC.

The case is a key one for an agency whose director, David Green, effectively told lawmakers more than three years ago to judge the SFO based on its prosecutions stemming from the Libor scandal, which has led to billions of dollars in fines against some of the world’s biggest banks. Barclays, for its part, kicked off the penalties in 2012 by paying $450 million in total to U.S. and U.K. authorities.

But despite the big ticket fines for the banks themselves, the SFO has had mixed success prosecuting individual bankers. In August, it won its first criminal trial and ultimately an 11-year sentence against former UBS AG and Citigroup trader Tom Hayes, who had originally cooperated with the agency to stave off extradition to the U.S. A senior banker at a “leading British bank” also plead guilty to Libor charges in late 2014, though the individual and his former employer cannot be named under court-ordered reporting restrictions.

The watchdog failed in January, however, to convince a second jury to convict six brokers it claimed had conspired with Hayes to manipulate the Yen-denominated version of the benchmark.

Many observers believe that another big loss could raise questions about the future of the SFO, which already is dogged by recurring speculation that the government may try to fold the SFO’s investigators and prosecutors into the National Crime Agency and the Crown Prosecution Service.

“This is arguably a watershed trial for the SFO,” said Osborne Clarke LLP partner Jeremy Summers, who heads the firm’s business crime and regulation practice. “There is a growing school of thought … that the home secretary, Theresa May, would like to disband the SFO and bring it within her remit at the CPS, and undoubtedly another setback on Libor won’t assist the SFO’s cause.”

The SFO originally charged Peter Johnson, Jonathan Mathew, Stylianos Contogoulas, Jay Merchant, Alex Pabon and Ryan Reich in two batches in 2014, accusing the six former Barclays employees of plotting with one another and other co-workers from mid-2005 to mid-2007 to manipulate the bank’s Libor rate submissions.

At the time, the British Bankers’ Association calculated Libor rates for multiple currencies, including the U.S. dollar, by asking a panel of several banks to estimate the rate at which they could borrow from one another in the London market. The highest and lowest quarter of the submissions are tossed and the rest are averaged to find the rate. Intercontinental Exchange Inc. has since taken over the management of Libor in the wake of the scandal.

According to the charge sheet in the case, the SFO maintains that the bankers knew or believed Barclays was involved in trades that referenced dollar Libor and “dishonestly agreed” to either submit false or misleading rates for the bank or to persuade others to do so. The goal, according to the charges, was to give the bank’s traders an advantageous position while “deliberately disregard[ing] the proper basis” on which Barclays was supposed to be making its Libor submissions.

The question of dishonesty is likely to loom as large at the upcoming trial as it has in the last two, attorneys said, as it is one of the key elements the SFO must prove to succeed on the conspiracy to defraud offense the Barclays traders are facing.

Under what is known as the Ghosh test, prosecutors must first convince a jury whether what was done would be considered dishonest “according to the ordinary standards of reasonable and honest people.” Then the jury has to consider whether the defendants themselves realized what they were doing was dishonest, the U.K. Court of Appeal wrote in the 1982 decision.

The appeals court at the time gave Robin Hood as an example of someone who would be considered dishonest under that test, but experts said in reality the bar can sometimes be a hard one to clear in more complex cases like Libor. And that may be further complicated by the fact that public perception about banks has “started to move on” and the SFO doesn’t have especially senior officials from the bank on trial, according to Kathleen Harris, co-chair of Arnold & Porter LLP’s anti-corruption practice.

On the other hand, the SFO “will clearly have learnt lessons from the recent acquittals,” said Signature Litigation LLP partner Abdulali Jiwaji, where the dishonesty issue also played a major role.

“The defense case will clearly be centered around whether there was any dishonesty, whether there was any sort of agreement among the participants and those, I think, battlegrounds were quite significant in the cases that have already gone before the courts,” Jiwaji said. “So I think we can really expect to see the SFO working hard to close any gaps in the evidence on those points.”

If the SFO can’t persuade the jury, however, to convict the Barclays bankers, it could face significant problems down the line, the biggest of which is the possibility of being divvied up and merged into other crime-fighting authorities.

Observers disagreed on how likely it was that the government would actually consider folding the SFO into the crown’s main prosecution operations. But Home Secretary May has eyed reconfiguring the SFO more than once over the years, forcing Green to address the issue in late 2014 when he said that “any thoughts of putting the SFO into the NCA are just not sensible.”

And the government has shown a willingness to re-arrange its enforcement structures in the past, for example, dicing up the Financial Services Authority after the financial crisis and splicing its former bits into the Financial Conduct Authority and the Bank of England’s Prudential Regulatory Authority.

Nonetheless, even if the threat doesn’t rise to such existential levels, the SFO could face questions over whether Libor manipulation is the kind of offense that should lead to criminal charges for individuals, attorneys said.

“They might change their focus if they get to the stage where they really feel juries don’t like these cases, and these are not cases where they’re ultimately going to to succeed,” Harris said. “Ultimately they are spending taxpayer money, so they do have to consider those issues as they relate to the public interest test and what is appropriate in the circumstances.”

At the same time, however, Harris noted that the SFO will have done its job as long as the judge doesn’t dismiss the case out of hand.

The case also comes as the SFO is touting its first-ever deferred prosecution agreement with Standard Bank PLC in a bribery case and trying to convince more companies to come forward. SFO General Counsel Alun Milford gave a speech Tuesday explaining how the watchdog “welcome[s]” the kind of proactive approach Standard Bank took to alert the watchdog to the matter.

While companies commonly take that route in the U.S. with the Department of Justice, it’s less common in the U.K., attorneys said.

“There’s a view within the corporate sector saying, ‘Well, actually what’s the benefit of reporting and if we don’t report, will the SFO find out and take any action?'” Summers said. “The SFO is saying ‘We will find out, we will take action,’ but obviously every time they’re unsuccessful in taking action the perception, however wrongly, is that they’re an enforcement agency that doesn’t actually have the teeth that it claims to have.”

The SFO is represented by James Hines QC of Three Raymond Buildings and by Emma Deacon QC and Dominic Lewis of of 5 Paper Buildings.

Contogoulas is represented by Steve Sharp and Roland Ellis of Bivonas Law LLP. Mathew is represented by Emma Brooks and Matthew Frankland of Byrne and Partners LLP and by William Clegg QC, Jacqueline Carey and Vedrana Pehar from 2 Bedford Row. Merchant is represented by Hugh Davies QC of Three Raymond Buildings and by Brian Spiro of Burton Copeland. Johnson is represented by Hugo Keith QC of Three Raymond Buildings. Reich is represented by Adrian Darbishire QC of QEB Hollis Whiteman and by Ben Rose and Charles Kuhn of Hickman & Rose. Counsel information for Pabon was not immediately available.

The case is R v. Stylianos Contogoulas, Jonathan Mathew, Jay Merchant, Peter Johnson, Alex Pabon and Ryan Reich,  case numbers T20147114, T20147116 and T20147239, in Southwark Crown Court.

This article was originally published in Law 360 and can be read here.