The FT has reported that five former traders from Barclays will stand trial in criminal proceedings on charges of fraud relating to the alleged manipulation of the London Inter-Bank Offered Rate (LIBOR). Ajay Malhotra of Herbert Smith Freehills explains the story…
The issues related to LIBOR and benchmark manipulation have been in the news for several years now and have involved regulatory investigations, civil commercial litigation and criminal proceedings. This is the latest chapter in the story and it is highly unlikely to be the last.
What is LIBOR and why is it important?
LIBOR is an acronym for the London Inter-Bank Offered Rate. It is a benchmark interest rate which represents the rate at which the Banks on the relevant LIBOR panel provide short-term loans to one another. LIBOR is important to the operation of the financial system because it is used as a reference rate to determine the interest rate payable under loans and financial instruments worth approximately US$450 trillion.
Until 31 January 2014, the determination of LIBOR was administered by the British Banker’s Association (BBA) which would ask the panel Banks for the rate at which each of them was able to borrow from other Banks. LIBOR is determined by discarding the highest and lowest quartiles and then taking an average of the rates submitted by the remaining Banks.
Why is LIBOR in the news?
UK and overseas financial regulators commenced investigations into various financial institutions’ LIBOR submissions. Since June 2012, eight financial services firms have been fined a total of over £750m by the UK Financial Conduct Authority (FCA) and its predecessor the Financial Services Authority (FSA). The FCA has also taken regulatory action against several individuals in order to restrict or ban them from working in certain functions within the financial services industry. There have also been financial settlements with overseas regulators such as the US Commodities Futures Trading Commission (CFTC) and the US Department of Justice (DoJ).
The FCA and FSA’s findings were, broadly, that the financial institutions had failed to have adequate systems or effective controls to prevent their LIBOR submissions from being influenced by requests made by interest rate derivatives traders, and therefore that the LIBOR submissions did not accurately reflect the borrowing rates of the relevant Banks.
What is the background to the criminal prosecutions?
The Serious Fraud Office (SFO), the UK body which investigates and prosecutes serious and complex fraud (as well as bribery and corruption) opened a criminal investigation into the alleged manipulation of LIBOR in 2012.
The SFO’s track record in prosecuting individuals for the alleged manipulation of LIBOR has so far been mixed. A senior banker (who could not be named) pleaded guilty to conspiracy to defraud in October 2014. In the most high profile trial relating to LIBOR manipulation to date, Tom Hayes, a former derivatives trader at UBS and Citigroup, was found guilty by a jury of eight charges of conspiracy to defraud. He was originally given a sentence of 14 years imprisonment, although this was later reduced to 11 years on appeal.
However, in January 2016, six individuals were found by a jury to be not guilty of conspiring with Tom Hayes to defraud the LIBOR setting process.
In addition, US authorities have convicted five individuals in relation to the setting of LIBOR so far.
What will happen next?
As reported in the FT, five traders who formerly worked at Barclays will stand trial for conspiracy to defraud in front of a jury at Southwark Crown Court and the trial is expected to last 12 weeks. The SFO intends to prosecute more individuals irrespective of the outcome of this trial so this is unlikely to be the end of the story.
In addition, banks which have allegedly been involved in the manipulation of LIBOR have faced civil litigation claims from claimants who have suffered losses on investments, such as interest rate hedging products. These claimants allege that the banks made implied representations as to the integrity of LIBOR which were false (and therefore that there was a contractual misrepresentation). This is an example of how regulatory action can lead to follow-on commercial litigation claims being brought against financial firms.
The issues relating to the LIBOR investigations are therefore likely to remain topical in the news and keep both criminal and commercial litigation lawyers busy for some time to come.
Ajay Malhotra is a senior associate in the dispute resolution division at Herbert Smith Freehills. He specialises in banking litigation and financial services investigations.