Thursday, 27 December 2012

Banks Behaving Badly


This article was recently reproduced in CCH's Australian Competition and Consumer Law Tracker, Issue 3, March 2013.

Introduction
While there has been a great deal of publicity recently about various global investigations into alleged LIBOR manipulation by up to 16 major banks, this is not the only scandal which is plaguing the banking industry. Indeed, there are an ever increasing number of scandals involving most of the world’s largest banks.  For example, quite recently, in December 2012, HSBC was fined $US1.9 billion for failing to put measures in place to prevent money laundering in its US and Mexican operations.[1]  The DOJ’s investigation found that HSBC accounts in both of these locations were being used by drug dealers to hide millions of dollars from the sale of drugs.  The DOJ also found evidence of the bank being used to transfer money to criminals and suspected terrorists in other countries such as Russia, Iran and Saudi Arabia

The HSBC settlement was followed in mid-December 2012 by the announcement of UBS’s $1.5 billion settlement with various regulators over its role in manipulating the LIBOR.[2] I will be discussing this settlement in more detail in an upcoming post.  In the meantime, I will be discussing yet another banking scandal, which stars UBS as one of the main protagonists– namely the criminal prosecution of three former UBS executives for big rigging in the US municipal bond market.[3] 

The question raised by this particular case and many other banking settlements is – “Why are regulators taking such a soft approach with the banks in relation such serious, institutionalised, blatant and continuing criminal conduct?”

Background[4]
In the US, municipal bonds are issued by various government entities, such as states counties and cities or public authorities, such as schools, utilities, for the purpose of assisting these entities to raise money for a variety of purposes such as special projects or to refinance debt.

In 2007 and 2008 the combined, the value of the municipal bond market in the US was approximately $800 billion.

In some cases, the money raised from such bond issues is used for not-for-profit purposes such as the construction of low cost housing, school buildings or public roads. 

As municipal bonds are often used for not-for-profit purposes, they have tax-exempt status under US tax laws. However, in order to obtain and maintain this tax exempt status municipal bond issuers are required to follow specific rules set down by the Internal Revenue Service (IRS) and the US Treasury.

Issuers will often seek to invest some or all of the bond proceeds in investment products, which are sold by banks, insurance companies and other financial service providers.

Issuers will generally select the investment product for the proceeds of the bond issue through a competitive tendering process. In other words, the issuer will seek a number of competing bids from sellers of investment products, and select the bid which they believe is most attractive. This competitive bid process is one of the requirements for claiming tax exempt status.

This is where UBS comes into the picture.  Issuers will often hire third parties or brokers to act as their agents in conducting the competitive bidding process for the investment products.  These brokers, including UBS, are then responsible for distributing the bid packages, answering questions about the bid specifications, assessing the competing bids and then advising the issuer of the outcome of the bid process.

The Defendants
The defendants in the DOJ case were Mr Peter Ghavami, Mr Garry Heinz and Mr Michael Welty. 

At the relevant time of the offences, Ghavami was Managing Director and the co-Head of the Municipal Bond Reinvestment and Derivatives (MBRD) desk at UBS. Heinz and Welty were both Vice-Presidents and Marketers on the MBRD desk at UBS.

Somewhat surprisingly, UBS itself was not a defendant in the case, despite the fact that the illegal conduct was engaged in by three of its senior executives and whatsmore, UBS reaped the financial benefits of the fraud.

The reason UBS was not a defendant in the case was because it had entered into a non-prosecution agreement with the Antitrust Division of the US Department of Justice in April 2011.  Under this agreement, the DOJ agreed not to prosecute UBS in return for its full cooperation in the DOJ’s ongoing municipal bond derivatives industry investigation and a payment of $160 million in restitution, penalties and disgorgement.[5]

The Offences
The relevant indictment describes the offences as follows:[6]

25. From at least as early as August 2001 until at least July 2002…PETER GHAVAMI, GARY HEINZ and MICHAEL WELTY, the defendants (collectively, the "FSC Defendants"), and co-conspirators, including Financial Institution A, FSC (UBS), Financial Institution C, Financial Institution D, and others known and unknown, unlawfully, willfully, and knowingly did combine, conspire, confederate, and agree together and with each other to commit offenses against the United States of America, to wit, to violate Title 18, United States Code, Section 1343 all in violation of Title 18, United States Code, Section 371.

26. It was a part and an object of the conspiracy that the FSC Defendants, and co-conspirators, including Financial Institution A, FSC (UBS), Financial Institution C, Financial Institution D, and others known and unknown, unlawfully, willfully and knowingly, would and did devise and intend to devise a scheme and artifice to defraud, and to obtain money and property by means of false and fraudulent pretenses, representations, and promises, namely, a scheme to defraud municipal issuers and the United States Department of the Treasury and the IRS by manipulating the bidding process for investment agreements and other municipal finance contracts by colluding with each other, and further to deprive the municipal issuers of the property right to control their assets by causing them to make economic decisions based on misleading and false information, and for the purpose of executing such scheme and artifice, and attempting to do so, would and did transmit and cause to be transmitted by means of wire, radio or television communication in interstate or foreign commerce any writings, signs, signals, pictures or sounds, in violation of Title 18, United States Code, Section 1343.

In other words, the three defendants manipulated the competitive bidding process for investment products in order to defraud the issuers who had retained UBS as their broker, as well as both the US Treasury and the IRS. 

The indictment provides specific details of how the three defendants went about defrauding both their clients and the government agencies:[7]

a. the FSC (read UBS) Defendants increased the number and profitability of investment agreements and other municipal finance contracts awarded to Financial Institution A and FSC (UBS) by telling co-conspirators at Financial Institution C and Financial Institution D what price or price level FSC (UBS) intended to bid, discussing in advance the price at which Financial Institution C or Financial Institution D would bid for an investment agreement or municipal finance contract, and agreeing that Financial Institution A and FSC would be allocated the investment agreement or municipal finance contract;

b. on at least one occasion, the FSC (UBS) Defendants agreed with a co-conspirator at Financial Institution D that Financial Institution D would not bid against Financial Institution A and FSC (UBS) in exchange for Financial Institution A and FSC (UBS) purchasing securities from Financial Institution D;

c.  from time to time, the FSC (UBS) Defendants would and did submit intentionally losing bids for investment agreements or other municipal finance contracts for which Financial Institution C was competing, in order to create the appearance that Financial Institution A and FSC (UBS) were competing for agreements or contracts when, in fact, they were not;

d.  the FSC (UBS)Defendants falsely certified and aided and abetted the false certification that the bids submitted by Financial Institution A and FSC (UBS) complied with relevant Treasury regulations or were otherwise competitive, and aided and abetted the submission of corresponding false certifications by co-conspirators at Financial Institution C that the bidding process was bona fide and complied with relevant Treasury regulations or was otherwise competitive;

e.  the FSC (UBS) Defendants caused municipal issuers to award investment agreements and other municipal finance contracts to Financial Institution A and FSC (UBS), or to Financial Institution C, which agreements and contracts the municipal issuers would not have awarded to Financial Institution A and FSC (UBS), or Financial Institution C, if they had true and accurate information regarding the bidding process;

f.  by manipulating the bidding for investment agreements and other municipal finance contracts, the FSC (UBS) Defendants caused municipalities not to file required reports with the IRS or to file inaccurate reports with the IRS, and to fail to give the IRS or the Treasury money to which it was entitled as a condition of the tax-exempt status of the underlying bonds. This conduct jeopardized the tax-exempt status of the underlying bonds.

Despite the obvious implication that the three defendants had in fact facilitated a cartel amongst three sellers of investment products (described above as Financial Institution A, Financial Institution C and Financial Institution D), the Antitrust Division of the US Department of Justice decided to prosecute the three defendants for wire fraud.

It is also apparent from the indictment that the defendants engaged in fraud by submitting inaccurate reports to both the IRS and the US Treasury about the bona fides of the competitive bidding process.

The Antitrust Division provided further details in the indictment about the defendant’s illegal conduct in colluding with another broker – namely, that they had engaged in wire fraud by:[8]

  1. discussing and agreeing with CDR (another broker) which of Financial Institution A's competitors should and should not be solicited to submit bids for a particular investment agreement or municipal finance contract;
  1. obtaining from CDR information about the prices, price levels, rates, conditions or other information related to competing providers' bids, including, in some instances, the exact price, price level, or rate of competing providers' bids;
  1. determining Financial Institution A and FSC's (UBS’s) bids after obtaining information from CDR about the prices, price levels, rates, conditions, or other information related to competing providers' bids;
  1. submitting intentionally losing bids for certain investment agreements and other municipal finance contracts brokered by CDR to make it appear that Financial Institution A and FSC (UBS) had competed for those agreements or contracts when, in fact, they had not;
  1. agreeing to pay and arranging for kickback payments to be made to CDR in the form of fees that were inflated, relative to the services performed, or unearned. These payments were made in exchange for CDR's assistance in controlling and manipulating the competitive bidding process and were not disclosed to the municipal issuers that hired CDR, or to the IRS…
Finally, Heinz was also prosecuted for witness tampering:[9]

65. On or about November 24, 2006…GARY HEINZ, the defendant, unlawfully, willfully, and knowingly did attempt to corruptly persuade another person, with intent to influence the testimony of a person in an official proceeding, and to hinder, delay, or prevent the communication to a law enforcement officer information relating to the commission or possible commission of a Federal offense, to wit, HEINZ, after becoming aware of the grand jury investigation, directed cooperating witness one (CW1) to "forget that [brokered investment agreement] deal," and for CW1 to meet with cooperating witness two (CW2) so that they could get their story straight regarding a payment CW2 caused Financial Institution D to make to Financial Institution A and FSC (UBS) in exchange for FSC (UBS) steering an investment agreement to Financial Institution D.

It appears that the DOJ decided to pursue conspiracy to commit wire fraud and wire fraud charges against the three defendants, rather than Sherman Act offences, due to statute of limitations issues.  The relevant conduct occurred between 2001 and 2006, however the statute of limitations for criminal conspiracies, including antitrust conspiracies is five years (18 U.S.C. § 3282).

While the statute of limitations for mail fraud and wire fraud prosecutions is also five years, this period is extended to 10 years for mail and wire fraud scheme which affects a financial institution (18 U.S.C § 3293).

Outcome
Each of Ghavami, Heinz and Welty were found guilty by the jury of conspiracy to commit wire fraud, as well as a number of substantive wire fraud charges.  Heinz was found not guilty of the witness tampering offence. 

The conspiracy wire fraud and substantive wire fraud charges each carry a maximum penalty per count of 30 years in prison and a $1 million fine.

Ghavami, Heinz and Welty will be sentenced in the New Year.

Analysis
Following the jury’s verdict Scott Hammond, the Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program stated:[10]

For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects. Today’s convictions demonstrate that the division is committed to holding accountable those who seek to unfairly and illegally undermine competitive markets.

However, one has to ask the question why the DOJ decided to enter into a non-prosecution agreement with UBS given the extremely serious nature of the fraud which was carried out by three very senior UBS executives.  One would have expected that the DOJ would have appreciated the importance of taking a criminal prosecution against both the corporate entity as well as the three senior executives.

Indeed, there appears to be a disturbing and growing trend amongst regulators around to the world to go soft on the major banks in relation to their criminal activities, by agreeing to non-prosecution agreements in return for very large dollar settlements.

It is clear that from an enforcement perspective these settlements are entirely inappropriate.

First, unless criminal prosecutions are taken against banks, the specific deterrence message will not get through.  Banks will start to see such conduct as fraud, price fixing, and bid rigging as simply as a cost of doing business if they can simply pay a fine and move one.  Indeed, there are signs that many of the major banks have already formed the view that they can avoid being held criminally liable for their actions if they simply offer the regulator enough money.

Second, by allowing banks to settle serious fraud and antitrust offences with the payment of a large fine, regulators will be failing to achieve another fundamental goal of any enforcement action – namely to achieve general deterrence. Other banks will not be deterred from engaging in illegal conduct because they will get the message from these financial settlements that the only sanction they will exposed to (if they are caught) is a large fine, which may or may not exceed the financial gains from the illegal conduct.

Third, there is a strong suspicion that the DOJ and other regulators are entering into such lenient settlements with banks for the sole reason that they are banks.  There is strong support for the view that regulators have been reluctant to pursue criminal prosecutions against large banks because to do so may jeopardise their banking licences.  If any of these banks were to lose their banking licence this would put them out of business, which would in turn have negative effects on the stability of financial markets.

Regulators have to start realising that their approach to bank settlements is seriously flawed.  They should not be taking a more lenient approach to criminal conduct by the major banks because they are concerned about the potential effects on the financial system of a bank failing because it has lost its banking licence.  Rather, regulators should be treating banks in the same way they would treat any other company which had engaged in blatant price fixing and big rigging behaviour.

Interestingly, the DOJ’s recent practice in relation to bank settlements seems completely out of step with its own statements about the value of establishing corporate criminal liability. As stated by Mr Gregory Werden, Scott Hammond and Belinda Barnett of the Antitrust Division in a recent speech to the National Institute on White Collar Crime:[11]     

In our view, eliminating corporate criminal liability would significantly undermine cartel deterrence in several distinct ways. First, corporate criminal liability has a deterrent effect independent of that from monetary sanctions because a criminal conviction stigmatizes a corporation.  Second, the deterrent effect of monetary sanctions  imposed through civil damages actions would be greatly diminished without assistance from criminal enforcement.  As elaborated below, criminal enforcement against corporations detects the cartels, establishes the liability of the defendants, and provides valuable evidence for proving damages.  Third, corporate criminal liability and substantial fines are essential in the operation of the Antitrust Division’s leniency program. 

Conclusion
There is still time for regulators such as the Antitrust Division to start taking principled and appropriate enforcement responses to banking malfeasance.  For example, the remaining LIBOR settlements appear to offer the Antitrust Division numerous opportunities to pursue criminal prosecutions in relation to the serious and highly detrimental collusive activity which was engaged in by a number of the major banks. As only two of the likely 16 LIBOR settlements with major banks have as yet been finalised, the Antitrust Division appears to have at least 14 opportunities to do the right thing from an enforcement perspective and pursue criminal prosecutions.

Unfortunately, from an enforcement perspective even a criminal prosecution may not be sufficient to achieve specific and general deterrence in the banking sector.  Rather, what may be necessary is for one of the major banks to actually lose their banking licence following a successful criminal prosecution. It is probably the case that the major banks will only start to take due notice of the deep-seated and institutionalised culture of corruption in their organisations if one of their number pays the ultimate price for its criminal activities by losing its banking licence.  Only through such an extreme outcome will banks start realising that they cannot continue behaving badly on the assumption that they will be able to buy their way out of the consequences of their actions.  



[1] HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement, Department of Justice News, 11 December 2012 – at http://www.justice.gov/opa/pr/2012/December/12-crm-1478.html
[2] UBS Securities Japan Co. Ltd. to Plead Guilty to Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates, Department of Justice News, 19 December 2012 - http://www.justice.gov/opa/pr/2012/December/12-ag-1522.html
[3] Three Former UBS Executives Convicted for Frauds Involving Contracts Related to the Investment of Municipal Bond Proceeds, Department of Justice News, 31 August 2012 - http://www.justice.gov/opa/pr/2012/August/10-at-1071.html
[4] See Indictment in USA v Peter Ghavami (aka Peter Ghavamilahidi), Gary Heinz and Michael Welty at http://www.justice.gov/atr/cases/f265300/265389.htm
[5] Non-Prosecution Agreement between US Department of Justice and UBS AG, dated 5 April 2011 – at http://www.justice.gov/atr/public/press_releases/2011/270720a.pdf
[6] Indictment, op. cit., pp. 9-10.
[7] Ibid, pp. 10-11.
[8] Ibid, pp. 19-20.
[9] Ibid., p. 38.
[10]  DOJ News, op.cit., footnote 3.
[11]  Gregory Werden, Scott Hammond and Belinda Barnett, Deterrence and Detection of Cartels: Using all the Tools and Sanctions, The 26th Annual National Institute on White Collar Crime, 1 March 2012, p. 9 - http://www.justice.gov/atr/public/speeches/283738.pdf

Saturday, 13 October 2012

Competition and Consumer Law Blog - Index


Introduction
I realised the other day that navigating this site was becoming increasingly difficult given its size.  There are current 71 blog posts on this site with an average word count of 2000 words  or over 140 000 words of posts.

Therefore, I thought it might be worthwhile to do an index of all the posts with hot links to the various articles so that readers will be able to go straight to any post that they may be interested in reading by clicking the hyper-linked title.   

In coming weeks I will do a second index for The Untold Story: The ACCC’s Role in the Waterfront Dispute posts and the Unfinished Business posts.

Index

The Gathering Storm – an update on the LIBOR Scandal

Update on the unfolding LIBOR scandal from an anti-trust / competition law perspective.

Low balling the LIBOR – the LIBOR rate-rigging scandal

Introduction to the LIBOR scandal, including an explanation of what the LIBOR is and how the scandal was first uncovered.

Blast from the Past Case Summary

Analysis of Tuttle v Buck 107 Minn. 145, 119 N.W. 946 (1909) from a modern Australian perspective

United States v Apple – the E-book case

Outline of the US Department of Justice’s case against Apple and five leading publishers for an alleged cartel in the E-book market.

ACCC’s investigation of Woolworths and Coles: A Blueprint for Action

Outline of Woolworths' and Coles' poor records in contravening Australian competition laws (and what the ACCC should be doing now to catch them!)

ACCC v Ticketek: A non-event?

Critical analysis of ACCC v Ticketek and the true story about the ACCC’s record in pursuing section 46 misuse or market power cases.

Manufacturing Chaos: Country of Origin laws under the Australian Consumer Law

Critical analysis of the many and varied problems with Australia’s country of origin laws.

The ACCC’s Carbon price claims Guide falls short of the mark

The article which forced the ACCC to change its carbon price guidance for small business.

Stocktake of the ACCC’s new powers and remedies under the Australian Consumer Law – the first 18 months

Part 3: Pecuniary penalties, disqualification orders and non-party redress.

Stocktake of the ACCC’s new powers and remedies under the Australian Consumer Law – the first 18 months

Part 2: Infringement notices.

Stocktake of the ACCC’s new powers and remedies under the Australian Consumer Law – the first 18 months

Part 1: substantiation notices and public warning notices.

Messcash: A Comedy of Errors

Critical analysis of ACCC v Metcash and the way both the ACCC and the Court approached the case.

Warranties Against Defects: Coming to grips with Regulation 90 of the Competition and Consumer Regulations 2010

In-depth discussion of the new warranties against defects legislation.

Sims needs to fix ACCC Enforcement

The most significant problems with the ACCC’s enforcement approach (and some practical advice on how to fix them!).

Carbon tax price gouging – understanding the pitfalls

Introduction to carbon price representations and the ACCC.

ACCC search warrants —plan for the worst
A practical guide about how to respond to an ACCC search warrant.

Sims in the hot seat with the Foxtel / Austar merger following Metcash loss
Discussion of the ACCC’s concerns about the Foxtel / Austar merger.

ACCC and the Max Brenner Boycotts
Are the Max Brenner Boycott’s illegal secondary boycotts?


Monsters Inc - No Headhunting Allowed Analysis of the US Department of Justice’s civil settlement with Google, Apple, Intel, Adobe and Lucasfilm for an employee cartel.

Stopping Generic Drug Competition Introduction to reverse pay for delay settlements in generic drug markets.

ACCC Investigatory Insights - Part 3
Section 155 Notices

ACCC Investigatory Insights – Part 2
The Investigatory Process

ACCC Investigatory Insights – Part 1
Introduction


No privilege for in-house counsel
An analysis of Akzo Nobel Chemicals Ltd v Commissio
n

Price signalling for dummies.

Woolworths and Children's Safety
Introduction to the ACCC news powers and remedies.

Restrictive supermarket leases: going, going...gone?
ACCC’s administrative settlement with Coles and Woolworths in relation to restrictive supermarket covenants.

Does the ACCC need Public Warning Powers?
Introduction to the ACCC's new public warning powers.

Clarity in Pricing: TPA changes may muddy the waters
New laws requiring businesses to show the full cash price.

Blast from the Past Case Summary
Case note: American Banana Co. v United Fruit Co. 213 US 347 (1909)

Clarifying the Publishers’ Defence – Bond v Barry [2007] FCA 1484
Do’s and don’ts of dealing with the ACCC.

Largest ever fine of $2.7 billion imposed for glass cartel
European car glass cartel settlement.

ACCC to target tardy traders
ACCC's proposed enforcement action in relation to slow payers.

High Court clarifies remedies under Franchising Code
Case note: Master Education Services Pty Limited v Ketchell [2008] HCA 38

Is the ACCC the new anti-counterfeiting cop?
Intersection of consumer law and intellectual property law.
Will Senator’s Joyce’s new law work.

The Relationship between Competition Law and Labour Law
In-depth discussion of the intersection of competition law and labour law.

Samuel still to prove himself on market power cases
Analysis of Graeme Samuel’s record on section 46 cases.


Monday, 24 September 2012

The Gathering Storm – an update on the LIBOR Scandal


Introduction
On the eve the of Royal Bank of Scotland’s (RBS’s) multi-million dollar settlement with regulators in relation to the LIBOR scandal,[1] it seems an opportune time to provide an update on developments in the LIBOR scandal. In the August 2012 edition of the CCH Competition and Consumer Law Tracker (click hereI provided an introduction to the LIBOR rate rigging scandal as well as an update of developments since the Barclays Bank $US450 million settlement.[2] In this article, I will be providing an update of developments in the various LIBOR investigations since early August 2012 as well as some additional background information which completes the LIBOR scandal story so far.

Secret LIBOR Committee
The most significant development which has occurred in the last month has been the revelations of the existence of a “secret LIBOR committee”[3]. As reported by various news services in late August 2012, the British Banker’s Association had apparently established a Foreign Exchange and Money Markets Committee (FEMMC) some years ago which had:

…sole responsibility for all aspects of the functioning and development of Libor...Its functions include the design of the benchmark, which banks sit on the panels that determine the rate, and scrutiny of all rates submitted.[4]

The FEMMC comprised of senior executives from a number of the world’s largest banks who met every two months at an undisclosed location to discuss the LIBOR.  The members of the FEMMC were secret, as was the identity of its Chairman.  The FEMMC also apparently had a practice of not keeping any minutes of its meetings.

The main significance from an antitrust perspective of the existence of the FEMMC is that it will make it exceedingly difficult for the senior executives of the participating banks to claim they had no knowledge of the LIBOR manipulation. This is because the senior executives on this committee had the apparent role of scrutinising the LIBOR submissions to make sure that they accurately reflected borrowing costs.

There is little doubt that antitrust regulators such as the Antitrust Division of the Department of Justice (US DOJ) will be showing a great deal of interest in the activities of the FEMMC.

High balling the LIBOR
Much of the initial focus of the media and academic writers in relation to the LIBOR has been on the likelihood of the LIBOR being manipulated downwards or “low-balled” during the Global Financial Crisis (GFC).  The view was that the participating banks wanted to “low-ball” the LIBOR to convince the markets that they were financially strong. An incidental event of this low-balling was that derivatives traders saw the opportunity of making money from “betting” on lower LIBOR rates.

A potentially unintended (but not unforeseeable) consequence of “low-balling” the LIBOR was that financial institutions, such as the Baltimore Bank, which referenced the LIBOR in their loans, ended up getting lower returns than they should have, because of the lower LIBOR interest rates.

However, recently there has been a growing amount of speculation that the participating banks may have been driving up or “high-balling” the LIBOR before the GFC [5].  The obvious consequence of “high-balling” the LIBOR is that the participating banks would have made more money as lenders of funds. The other obvious consequence of the “high-balling” of the LIBOR was that borrowers would have paid more than they should have.

It is the possibility that the LIBOR may have been overstated in the period 2005 to 2008 which is creating the most interest amongst antitrust and financial regulators.  This is because one consequence of “high-balling” the LIBOR would be that “mum and dad” borrowers may have paid significantly more for their mortgages than they should have. If such consumer detriment can be proven, it will be a significant aggravating factor in the minds regulators, which will ultimately increase the size and severity of the penalties sought by anti-trust and financial regulators.

More subpoenas, more investigations
On 9 August 2012, JP Morgan Chase announced that it had received subpoenas, requests for documents and requests to interview staff from the following regulators in relation to the LIBOR scandal:[6]

·   US DOJ;
·   Commodity Futures Trading Commission (CFTC);
·   Securities and Exchange Commission (US SEC);
·   UK Financial Services Authority (FSA);
·   Canadian Competition Bureau (Bureau); and
·   Swiss Competition Commission.

Since the first article about the LIBOR scandal in the CCH Competition and Consumer Law Tracker in August 2012, a number of additional regulators now appear to be involved in the LIBOR scandal, including the US SEC, the Bureau and Swiss Competition Commission.

JP Morgan also disclosed that it had received enquiries in relation to the European and Japanese versions of the LIBOR, namely the EURIBOR and the TIBOR

Other banks to announce that they had received subpoenas from various antitrust regulators include Deutsche Bank, HSBC, Royal Bank of Scotland, and UBS AG. Barclays Bank announced it had also received subpoenas, which shows that even after the July settlement, it is still a long way from putting this matter behind it.

US DOJ
The US DOJ has also empanelled a grand jury in Washington DC in relation to the LIBOR scandal.  It is generally understood that this grand jury is deliberating on the likelihood that the participating banks have engaged in cartel conduct in breach of section 1 of US Sherman Act 1890 [7].

Having said that, it is likely that this grand jury is looking at a broader range of issues, than just antitrust allegations.

What should be noted is that the $US160 million settlement between the US DOJ and Barclays that was entered into on 27 June 2012 did not relate to potential antitrust concerns. Rather it was a settlement between the US DOJ’s Criminal Fraud Section and Barclays in relation to the banks fraudulent manipulation of the LIBOR.

The US DOJ's Criminal Fraud Section agreed not to criminally prosecute Barclays for any crimes relates to Barclay’s fraudulent submissions of benchmark interest rates, including LIBOR and EURIBOR. In return Barclays agreed to pay a financial penalty of $US160 million and to continue co-operating in the agency’s on-going criminal investigation of the LIBOR scandal [8].

The settlement agreement between the Fraud Section and Barclays, the agency made the following observations about Barclay’s co-operation:

Barclays's cooperation stands out as a particularly significant consideration in the Fraud Section's decision to enter into this Agreement. After government authorities began investigating allegations that banks had engaged in manipulation of benchmark interest rates, Barclays was the first bank to cooperate in a meaningful way in disclosing its conduct relating to LIBOR and EURIBOR. Its disclosure included relevant facts that at the time had not come to the government's attention. Barclays's cooperation has been of substantial value in furthering the Fraud Section's investigation of the conduct relevant to this Agreement. From the outset of the investigation to the present, Barclays's cooperation has been extraordinary and extensive, in terms of the quality and type of information and assistance provided to the Fraud Section. To date, the nature and value of Barclays's cooperation has exceeded what other entities have provided in the course of this investigation.[9]

Relevantly, despite the apparently high level of cooperation provided by Barclays to the Fraud Section it was still fined $US 160 million.  This suggests that the likely fines which will be sought by regulators from non-cooperating banks will be many times larger than Barclay’s $US160 million fine.

There is also a very significant carve-out in the Barclays settlement with the Fraud Section.  Namely that:

This Agreement does not provide any protection against prosecution for any crimes except as set forth above, and applies only to Barclays and not to any other entities or to any individuals, including but not limited to employees or officers of Barclays..[10]

In other words, the settlement is limited to fraud and violations of the laws governing securities and commodities markets and not to any potential antitrust violations which may have occurred.

Canadian Competition Bureau
The Bureau has also commenced an investigation into an alleged cartel in relation to the LIBOR rate in breach of section 45 of the Canadian Competition Act (1985).

This investigation was commenced after the Bureau received an immunity application in relation to cartel conduct from one of the participating banks.  In documents filed by the Bureau, the Bureau states:[11]

The Bureau became aware of this matter after one of the Participant Banks in the Alleged Offences (the “Cooperating Party”) approached the Bureau pursuant to the Immunity Program.

On January 5, 2011, the Bureau granted the Cooperating Party a “first-in marker” under the Immunity Program.

While the identity of the party which has sought immunity remains confidential, the participating banks which have subsequently been ordered to produce documents in relation to the alleged cartel is public – namely:

·       HSBC Bank Canada;
·       Deutsche Bank
·       JP Morgan;
·       Royal Bank of Scotland; and
·       Citibank.

The Bureau’s court documents provide further details of the alleged cartel conduct which is the subject of their investigation:[12]

Counsel for the Cooperating Party has proffered that, during the Material Time, the Participant Banks communicated with each other and through the Cash Brokers to form agreements to fix the setting of Yen LIBOR. Counsel for the Cooperating Party proffered that this was done for the purpose of benefiting trading positions, held by the Participant Banks, on IRDs. By manipulating Yen LIBOR, the Participant Banks affected all IRDs that use Yen LIBOR as a basis for their price, including IRDs with Canadian counterparties.

Counsel for the Cooperating Party has proffered that the alleged communications and agreements in relation to Yen LIBOR occurred outside Canada but affected IRDs based on Yen LIBOR on a worldwide basis, including in Canada.

In other words, the cooperating bank has claimed that six global banks formed a worldwide cartel to set the price of Yen LIBOR for the purpose of benefiting their respective trading positions. Furthermore, while this conduct did not occur in Canada, the Bureau claims that the cartel had an impact on Canada and as such is subject to the Competition Act.

European Commission
The EC's approach to LIBOR manipulation has been less clear. News reports indicated that the EC raided the premises of a number of participating banks as long ago as 18 October 2011, including Deutsche Bank’s London offices.[13]  Since that time, there has not been a great deal of information concerning the EC’s investigations.

It appears that the EC’s first concern was that the participating banks’ conduct may not have been captured by its existing EC proposals for criminal prohibitions on insider trading and market manipulation. Accordingly, the EC’s initial focus was to take steps to amend these proposed laws to ensure that they dealt adequately with the manipulation of benchmarks.

In addition, the EC recently issued a consultation document on the “Regulation of Indices”, in which they are seeking comment from various stakeholders on finding an alternative to the LIBOR[14].

However, in a speech in July 2012, Joaquín Alumina, the Vice President of the European Commission responsible for Competition Policy made a number of comments about the EC’s current cartel investigations into the LIBOR scandal:[15]

...the most notable antitrust cases are those related to the LIBOR scandal that has recently hit the headlines.

The story is quite shocking and brings us back to the banking industry’s most irresponsible behaviour of the past.

Many public authorities around the world are taking action against the manipulation of benchmark financial rates and the first fines have already been imposed by financial regulators in the UK and the USA.

Let me clarify that these authorities fall into three different categories:

First, antitrust authorities, including the European Commission;

Second, authorities dealing with fraud and other forms of criminal conduct, such as the US Department of Justice, Fraud Division; and

Third, financial regulators, such as the Financial Services Agency in the UK and the Commodity Futures Trading Commission in the US.

The importance of transactions in financial derivative products is enormous. In 2011, interest-rate derivatives had a gross market value of $20 trillion.

These are products that are traded every day on a global basis, involving companies such as banks, pension funds, and also industrial firms seeking to hedge their exposure. They play a key role in the management of risk in our economy. The alleged rate-rigging is a major competition concern.

This is why we started investigating a number of banks last year for their possible concerted manipulation of benchmarks such as LIBOR, EURIBOR and TIBOR – the Tokyo rate – for several currencies.

We are focussing our investigations on suspected cartel arrangements involving financial derivatives related to these benchmark rates, including possible collusion over the setting of the rates.

The investigations have top priority, because this sort of collusion can seriously harm competition worldwide and on our continent in particular.

Again, if our concerns are confirmed, we will take the necessary actions to bring these practices to an end and prompt a change of culture in the banking sector.

As is apparent from Alumina’s comments, the EC’s antitrust investigations of the LIBOR scandal are a “top priority”.

Class Actions
As at 16 August 2012, a total of 30 class actions had been filed in the US against the participating banks in relation to the LIBOR scandal[16].  These class actions have alleged a variety of causes of action, including contraventions of section 1 of the Sherman Act and they are all seeking treble damages against the participating banks. 

In most cases, the class action participants are lending institutions who claimed to have suffered loss from the suppression of the LIBOR.   However, a number of class actions have been commenced by derivatives traders who purchased and sold exchange traded LIBOR based derivatives.

Challenges
Regulators
There are a number of significant challenges facing the regulators currently investigating the LIBOR scandal. 

The main challenge will be to ensure that they do not get in each other’s way in their various investigations.  This is a significant problem because there appears to be an almost unparalleled number of regulators in the field at the same time, investigating the same conduct and seeking to do deals with the same witnesses.  At last count, the following regulators were all investigating the LIBOR:

1.      US DOJ;
2.      US SEC;
3.      US CFTC;
4.      UK FSA;
5.      Serious Fraud Office;
6.      Canadian Competition Bureau;
7.      Swiss Competition Bureau;
8.      European Commission;
9.      Swiss FINMA; and
10.    Japanese Fair Trading Commission.

It is vitally important for these regulators to attempt to coordinate their investigatory efforts so that they do not inadvertently delay or even derail another regulator’s investigation.  This will involve sharing both prospective witnesses and as much documentary evidence as is permitted under various national legislative regimes.

Another issue which the regulators will have to guard against is giving immunities to the wrong participating banks. As with every cartel, there are leaders and followers. Accordingly, in their haste to build their cases, regulators will have to guard against giving an immunity to a participating bank which may have been the leader or ringleader of the cartel.  If this happens, such an immunity may undermine the actions taken by other regulators against the true ringleader of the cartel.

In this regard, there is evidence that the regulators are coordinating their investigations. As stated in the Canadian Competition Bureau filing:[17]

116. The alleged conspiracy is international in nature and is currently being investigated in foreign jurisdictions that are identified in Exhibit II. The Bureau is coordinating its investigation of the alleged international conspiracy and cooperating with these foreign jurisdictions.

117. As the information in Exhibit II identifies the foreign jurisdictions and contains information relating to their ongoing investigations, the Exhibit, if disclosed, could compromise the nature and extent of these investigations. As it is anticipated that some of the evidence gathered through the investigations in one or more of the foreign jurisdictions may be shared with the Bureau to further the Bureau's investigation, the information in Exhibit II, if disclosed, could also compromise the nature and extent of the Bureau's investigation into this international cartel. The Bureau has an obligation to the foreign jurisdictions to keep any information provided by them to the Bureau confidential.

While this is good news for those who want to ensure that the LIBOR scandal is quickly and effectively investigated it is bad news for the participating banks.

Participating banks
There are an enormous number of challenges facing the participating banks.  It will be all but impossible for participating banks to organise a “group settlement” with a number of regulators, as Barclays did with the US FSA, CFTC and the US DOJ Fraud Section. Such “group settlements” take a considerable amount of time to organise and one thing the participating banks do not have is time.

Therefore, the participating banks will have to make a strategic decision whether to give up or whether to fight to the end. If they decide to “give up” the strategy must be to approach the regulators which can seek the most significant penalties and try to do a deal for immunity or leniency.  Clearly, in the antitrust world this means that the participating banks need to try to do a deal with the Antitrust Division of US DOJ, which can seek large criminal penalties and jail time for cartel conduct, and the EC, which can impose and regularly does impose enormous civil pecuniary penalties. 

However, in the US system it is only the first through the door which gets immunity, so it is very likely that the first immunity has already been granted to one of the participating banks. Therefore, the best that the rest of the participating banks can hope for is to get leniency. 

The participating banks could seek to make an application under the US DOJ’s Amnesty Plus program.[18] This program provides immunity for cartel members who are able to inform the US DOJ first of another cartel in which the applicant has been a participant.

In the EC, the approach to immunity is quite similar to the US.  The main difference is that they have a sliding scale type policy in relation to the grant of leniency. The first company to inform the Commission of an undetected cartel by providing sufficient information to allow the Commission to launch an inspection at the premises of the companies allegedly involved in the cartel will obtain a full immunity. 

Companies which approach the EC after immunity has been granted, can still obtain relief where the evidence they provide represents “significant added value”. As stated by the EC:[19]

 Evidence is considered to be of a "significant added value" for the Commission when it reinforces its ability to prove the infringement. The first company to meet these conditions is granted 30 to 50% reduction, the second 20 to 30% and subsequent companies up to 20%.

Conclusions
The LIBOR scandal continues to gain momentum.  It is likely that over the next two months a number of the participating banks and regulators will announce multi-million dollar settlements.  However, regulators must not negotiate the same types of settlements as was accepted by the US DOJ Fraud Section. Effectively, the US DOJ Fraud Section accepted a $US160 million settlement in return for the agency agreeing not take a criminal prosecution against Barclays Bank or any of its employees for what appears to have been serious, long-running and blatant multi-million dollar fraud.

It is simply not appropriate for any regulator with criminal jurisdiction to allow any of the participating banks to “buy their way out” of fraud or cartel conduct.  The only appropriate sanctions which regulators with criminal jurisdiction should be pursuing are criminal convictions, with significant jail time.  Only in this way will these regulators achieve the proper goals of regulatory action – namely, specific and general deterrence. Indeed, only by seeking criminal penalties and jail time will these regulators make it clear to the world’s largest banks that compliance with laws is not simply a cost of doing business but rather a moral imperative.



[1] RBS faces Libor fine of up to $480 million – FT, Reuters, dated 8 September 2012 - http://uk.reuters.com/article/2012/09/08/uk-rbs-libor-idUKBRE88708N20120908
[2] Michael Terceiro, Low-balling the LIBOR – the LIBOR rate rigging scandal, CCH Competition and Consumer Law Tracker, Issue 8, 23 August 2012 - http://competitionandconsumerprotectionlaw.blogspot.com.au/2012/08/low-balling-libor-libor-rate-rigging.html
[3] This is Actually Real: The First Rule of Libor Club is You Do Not Talk About LIBOR Club, Business Insider, 21 August 2012 - http://www.businessinsider.com/the-secret-british-bankers-associations-foreign-exchange-and-money-markets-libor-committee-2012-8
[4] Secret Libor committee clings to anonymity after rigging scandal, Bloomberg, 21 August 2012 - http://www.northjersey.com/news/166934256_Secret_Libor_committee_clings_to_anonymity_after_rigging_scandal.html
[5] Matthew Jensen, The Uses of LIBOR and the Victims of its Manipulation: A Primer, The American, dated 23 August 2012 - http://www.american.com/archive/2012/august/the-uses-of-libor-and-the-victims-of-its-manipulation-a-primer
[6] JPMorgan Chase Libor Subpoenas Coming from Everybody in the World, Huff Post, 9 August 2012 - http://www.huffingtonpost.com/2012/08/09/jpmorgan-chase-libor-subpoenas_n_1760015.html
[7] Libor price fixing case is getting work for lawyers, Reuters, 11 July 2012 - http://www.reuters.com/article/2012/07/11/us-usa-crime-libor-idUSBRE86A19P20120711
[8] Letter from US Department of Justice, Criminal Division to Barclays Bank PLC, US DOJ, dated 26 June 2012 - http://online.wsj.com/public/resources/documents/Barclays_agreement.pdf
[9] Ibid., pp. 1-2.
[10] Ibid. p. 2.
[11] Affidavit of Brian Elliott in the Matter of the Competition Act, R.S.C. 1985, c. C-34, as amended, dated 19 May 2012 at http://wallstreetonparade.com/wp-content/uploads/2012/07/AffidavitofBrianElliott-May182011.pdf
[12] Ibid., p. 11.
[13] Deutsche Bank’s London Offices Were Raided Yesterday in an Euribor Investigation, Business Insider, 19 October 2011 - http://articles.businessinsider.com/2011-10-19/wall_street/30296755_1_libor-interest-rates-banks
[14] Consultation Document on the Regulation of Indices, European Commission, 5 September 2012 - http://ec.europa.eu/internal_market/consultations/docs/2012/benchmarks/consultation-document_en.pdf
[15] Speech by Joaquín Alumina, the Vice President of the European Commission responsible for Competition Policy ,The New Portuguese Competition Law, European Commission, 13 July 2012 - http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/558
[16] LIBOR-Based Financial Instruments Antirust Litigation: Some Complaints of Possible Reading Interest, Legal Research Plus, Stamford Law School, 16 August 2012 - http://legalresearchplus.com/2012/08/16/libor-based-financial-instruments-antitust-litigation-some-complaints-of-possible-reading-interest/
[17] Op. cit., footnote 12, p. 33.
[18] Speech by Scott Hammond, Measuring the Value of Second-In Cooperation in Corporate Plea Negotiations, Antitrust Division, US DOJ, at http://www.justice.gov/atr/public/speeches/215514.htm
[19] Leniency Policy, European Commission - http://ec.europa.eu/competition/cartels/leniency/leniency.html