Libor manipulation and defining dishonesty

Briefly, can you describe the background to and the result of the Libor trial?

This was the third criminal trial for Libor manipulation in the UK. The other two (R v Tom Hayes and R v Reed and others) occurred between May 2015 and January 2016. Those trials both related to the manipulation of Yen Libor between 2006 and 2010, covering periods when Hayes, a Tokyo based derivatives dealer, worked for UBS and then Citibank.

This trial related to the manipulation of Dollar Libor between 2005 and 2007. Although not directly linked to the Hayes or Reed trial, it arose, as they did, from a decision taken by the Serious Fraud Office (SFO) in 2012 to make Libor manipulation the subject of criminal prosecution in addition to regulatory sanctions. This decision was announced days after Barclays had agreed to pay regulatory fines of £59.5m imposed by the Financial Services Authority. (Barclays was also fined the equivalent of approximately £230m by the US Department of Justice and Commodities Futures Trading Commission).

Five defendants stood trial in these proceedings: Jonathan Mathew was a junior and subordinate Dollar Libor setter at Barclays and Jay Merchant, Alex Pabon, Ryan Reich and Stylianos Contogoulas were traders.

Merchant, Mathew and Pabon were convicted. They received prison sentences of six and a half years, four years and two years nine months respectively.

The jury could not reach verdicts in the cases of Contogoulas or Reich and the SFO has announced that they are to face a retrial in February 2016.

A more senior Barclays setter, Peter Johnson, had pleaded guilty in October 2014. He was sentenced to four years imprisonment. All the sentences were discounted to reflect personal mitigation and the fact that some defendants would serve sentences away from their home country.

Based on your understanding of the case, what is your view of the issues encountered by both sides leading up to the trial?

Libor was the benchmark against which a vast quantity of financial contracts and loans were referenced. Many derivatives traders were, in effect, speculating against rises or falls in Libor at a fixed future date. These three trials each involved allegations of collusion between traders and Libor setters to manipulate the settings so as to assist trading positions which depended upon the Libor rate.

Libor was fixed daily in each of ten tenors or currencies. A panel of twelve banks were required to answer this question: At what rate could you borrow funds in a reasonably sized market at around 11 am today? The panel banks submitted their settings to Thomson Reuters who calculated Libor as an average of the mid-range settings.

The fundamental issue in each of the trials was similar. Did the defendants act dishonestly in the sense defined by the criminal law? Dishonesty is a requisite ingredient of the offence of conspiracy to defraud with which the defendants in all three trials were charged. A defendant must act in a way which is dishonest by the standards of ordinary people (first objective limb of the test) and which he knows is dishonest by those standards (second subjective limb).

The issue in each trial was largely defined by a ruling of law made by Cooke J in R v Hayes which was upheld on interlocutory appeal and was binding on the judges in R v Reed and the Barclays trial. By that ruling, the objective limb of the test was satisfied by evidence which showed that Libor submissions were made other than as an honest answer to ‘the Libor question’.

So, if a submission was made that was not a proper answer to that question, for whatever reason, it was objectively dishonest. That meant that, in reality, all the defendants in each of the trials were left to argue that they did not know that their actions would be regarded as dishonest by ordinary people.

In practice, the defendants framed their cases in slightly different ways and with very different outcomes.

Hayes argued that the practice of banks setting Libor so as to assist their own derivatives traders was endemic at this time. He said he was positively encouraged by the banks he worked for and had been scapegoated as part of a politically motivated prosecution. Hayes had at one stage entered into a Serious Organised Crime and Police Act 2005 (SOCPA 2005) agreement in which he admitted his guilt at length in a series of recorded interviews. At trial he repudiated these admissions, contending that he had made them to avoid extradition to the US where he faced a massive sentence. (Ironically, in the only Libor manipulation trial in the US so far, traders and setters from Rabobank received comparatively light sentences.)

Hayes was convicted and sentenced to fourteen years imprisonment (reduced to eleven years on appeal).

He had manipulated Yen Libor through a group of brokers or interbank dealers who advised banks daily with Libor predictions based on their own knowledge of the cash market.

Six brokers (from ICAP, RP Martins and Tullets) stood trial for conspiring with Hayes (R v Reed and others). All were acquitted. The jury clearly took the view that real responsibility for Libor manipulation lay with the banks not the intermediary agents.

In the Barclays trial, the defendants were all traders or setters and more directly responsible for the acts of manipulation. They argued that they operated within an aggressive and competitive culture in which they did no more than was expected of them. They said they did what they had been trained to do and their emails and internal communications were visible to their managers and compliance officers who did nothing to intervene. Merchant told the jury he would be very surprised if senior executives at Barclays were unaware that rates were being adjusted to suit the bank’s trading book.

Having regard to the state of banking practice at the time, at least some of these assertions by the Barclays defendants were likely to be true. The convictions of three of them suggests the jury thought they knew that their conduct was dishonest whatever the prevailing climate. The failure to reach verdicts on two other defendants shows that the jury’s conclusions were case specific rather than a reflection of their feeling about Libor manipulation in general.

Considering the media coverage of the trial itself, what interesting issues did it throw up?

The most interesting—and unresolved—issue is the extent to which the manipulation of Libor and other financial benchmarks was part of unspoken banking policy at the time. It is striking that in every derivatives contract (usually an interest rate swap or forward rate agreement) that is manipulated to the advantage of one party, there is a loser. There is little evidence that any of these losers have sought to recover their losses in civil proceedings. This suggests to some that there was widespread collusion in the practice of fixing Libor to suit bank’s trading positions.

In the Barclays trial, senior officials denied knowledge of the manipulation. In each trial, representatives of the British Banking Association asserted that the only institutional collusion occurred during the post 2008 financial crisis when it might have destabilised markets if it were known that a reputable bank had to pay above a market rate to borrow.

The evidence in the Barclays trial—as in the other two—showed that the manipulation of rates was almost casually done. The communications were off-hand and laconic. As one observer said, it was bewildering to think that the biggest financial benchmark in the world was being rigged in this matter of fact way.

What lessons can practitioners take away from this?

The three Libor trials—with their different results—are a partial vindication of the SFO’s decision to bring criminal prosecutions in a field which might otherwise have been left to regulators and the civil law. The jury’s verdicts suggest that bankers and traders who follow dubious but commonplace practices, even when encouraged by their employers, cannot always rely on defences provided by the criminal law to protect them. On the other hand, the verdicts as a whole show that juries will approach these cases in a discriminating way and not allow general feelings or prejudice against a class of people to undermine their sense of justice in an individual case. On the whole, the outcomes may reflect well on trial by jury in serious fraud.

What's next for the convicted and unconvicted Libor defendants?

The convicted defendants in the Barclays trial are likely to appeal. Those upon whom the jury could not agree are to face a retrial in February 2017. Tom Hayes has appealed against his conviction unsuccessfully but continues to protest his innocence.

What are the potential implications of the verdicts on prosecution policy in relation to similar offences in the future?

The results will probably encourage prosecutors to believe that cases of this type can be pursued profitably. A large case involving the alleged manipulation of Euribor is in the pipeline. The abuse of foreign exchange markets has been the subject of less conclusive investigations. Libor may be yesterday’s subject, however, and—as the phone hacking and public corruption cases showed—there comes a time when the public’s interest moves on to newer scandals and the criminal law needs to draw a line.

Charles Bott QC specialises in cases of serious fraud, money laundering and revenue evasion. He is regularly instructed in serious criminal cases and regulatory cases of all kinds. A recognised authority on financial crime and regulation, Charles has appeared in more than 80 serious fraud trials including some of the leading cases of recent years and advised many other clients under investigation. He was leading counsel for James Gilmour, a broker at RP Martin and one of the defendants acquitted in the second Libor trial.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.