Barclays may have “early bird discount” in Libor cases
By Stuart Gittleman
NEW YORK/LONDON, June 28 (Thomson Reuters Accelus) – The $453 million settlement Wednesday between Barclays and UK and U.S. officials over the manipulation of a global interest-rate setting formula may be the first in a series of big-money settlements, and those who strike a deal later may face steeper terms.
“I think additional settlements with the other [banks potentially involved in the conduct] are likely,” said Peter Henning, a former U.S. federal prosecutor and enforcement lawyer with the Securities and Exchange Commission who teaches law at Wayne State University in Detroit.“The antitrust division of the DoJ (Justice Department) has a program where the first company to come in gets a free pass, no charges … The Barclays settlement is with the fraud section of the DoJ, and there is no explicit ‘early bird discount,’ but that is the carrot dangled out there,” Henning said.
The deals with the UK Financial Services Authority, the U.S. Department of Justice and the Commodity Futures Trading Commission involved LIBOR, the London Interbank Offered Rate, which is set daily through the British Bankers Association.
LIBOR is used globally to set interest rates on commercial loans, credit cards, mortgages, futures contracts, swaps and other financial instruments, generally in the format of LIBOR plus an additional percentage that depends on the borrower’s creditworthiness.
Barclays and the other banks that contribute in setting LIBOR, including Citigroup, UBS, HSBC, RBS and JPMorgan Chase, agreed to report the rates at which they can borrow certain currencies from other banks for periods of from overnight to one year.
In a statement of facts to the Justice Department, which was filled with excerpts from emails between its derivatives traders and the unit that reported to the BBA, Barclays admitted reporting rates that would help its traders instead of the rates at which it could borrow funds.
The BBA responded vigorously to proof it had been gamed, saying the FSA sanctions have “extremely serious implications which need to be carefully considered and the investigation findings will be fully included in the current review of Libor. (The FSA statement) is the strongest possible confirmation that the Libor contributions and processes followed by the contributor banks must meet the necessary regulatory obligations and observe the highest standards in ensuring the accuracy of the rate.”
What the other banks can expect
The Justice Department said Barclays was the first bank in a long-running and continuing investigation to come forward, fix its processes, admit misconduct and agree to cooperate in the probes. The FSA has an explicit discount program for settling early. The Justice Department formally lacks a such a program, but its practices can be similar, Henning said.
“This case shows that getting in there early, and showing extensive cooperation — the ‘statement of facts’ was largely written by Barclays, I expect, based on its internal investigation — can get a fairly good deal. A non-prosecution agreement is the best one can hope for, and the payments are probably only a fraction of the benefits from rigging LIBOR,” Henning added.
Sometimes the traders wanted LIBOR set higher, which might have cost borrowers more, and other times they wanted it set lower, which might have benefitted borrowers at the expense of lenders. As a result the regulators and the bank were both challenged in establishing actual harm and in determining who might have been harmed.
“[Establishing damages] will always play a role, because prosecutors don’t want to take on a case where it’s not clear that anyone was harmed. The nice thing about a settlement is that actual harm need not be proven, so the intuition that there was harm from setting LIBOR rates can be enough,” Henning said.
“The private plaintiffs will be able to piggy-back on the settlement because it contains admissions, but they will have to prove harm. Interestingly, for those who used LIBOR, the fact that rates were held down may make it more difficult to prove harm, so the traders who had their derivatives affected are the likely claimants,” Henning added.
It is still unclear whether any of the banks conspired with other LIBOR contributors in reporting to the BBA, but the Barclays settlement may presage larger sanctions and even criminal prosecutions.
“The key question is whether individuals will be pursued, and I think that is very likely, either here or in London. LIBOR was communicated through the U.S., so there is no problem with jurisdiction, and the DoJ wants to hold individuals accountable, so I expect cases against some of the Barclays, and other, traders who were trying to manipulate the rates,” Henning said.
Other banks being investigated – the SEC and Canada, Switzerland and Japan are also reportedly looking at LIBOR reporting – may be considering the “prisoner’s dilemma”: the first to fold gets the best deal, but everyone gets a better deal if no one folds.
“If everyone holds out, no one goes to jail. But then, there’s usually no honor among thieves, and that’s why the DoJ antitrust ‘first in the door’ program works so well,” Henning said.
“Antitrust cases always require multiple players, like LIBOR price/rate fixing, and you can trust that someone will crack. Unlike drug cartels, banks tend not to maintain discipline by executing people, so at some point a player will fold, or realize that it’s time to make a deal,” Henning added.
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