The Great LIBOR Divide
Market Insight 19 July 2022 19 July 2022
Energy & Natural Resources
The findings of the US Court of Appeal suggest that, what was a massive crime in the UK leading to initial sentences of 14 years for Tom Hayes, was not a crime in the US.
As the dust settles on the LIBOR transition as a reference benchmark, leaving not just a few headaches for transactional lawyers, a lookback at various investigations reveals a great divide between how defendants or respondents in Libor and Euribor proceedings fared in the UK, and globally.
The banks received large fines across the globe, but similar to SFO´s Deferred Prosecution Agreements chose to settle in the interests of shareholder value and expediency.
In the UK a criminal court imposed a 14 year sentence on Tom Hayes, a trader diagnosed with autism, which was later reduced to 11 years by the Criminal Court of Appeal. Other bankers received sentences between 3-9 years and substantial costs awarded against them and confiscation orders ranging from £2,300 to £2.5million.
The FCA´s RDC, its decision-making body, dealing with the same subject material as the criminal courts and later applying the same test of dishonesty acquitted a number of bankers contesting the proceedings of dishonesty.
The US, famed for its global reach and achieving hard-hitting results in white-collar cases imposed initial sentences of 1 -2 two years on two Rabobank defendants after trial, which were later overturned on appeal resulting in complete acquittals. Paul Thompson of Rabobank received a three month prison sentence. Others gave evidence in trials and were sentenced to time served.
The sentencing of Gavin Black and Matt Connolly of Deutsche Bank resulted in house arrest of up to nine months and fines up to $300,000. In a stunning decision a US appeals court ruled on 28 January 2022 that what was considered a crime in the UK is not a crime in the US and acquitted both Black and Connolly.
Ironically Tom Hayes stated that he confessed on tape to the SFO to avoid going to the US out of fear of the prison conditions and length of sentence and presumably in the hope of triggering the sympathy and of the English jury. Had he gone to the US it appears unlikely that he would ever have seen jail.
Both France and Germany refused to extradite a number of suspects to the UK as the SFO could not point to comparable offences satisfying the tests for extradition. German prosecutors did not indict a single banker for Libor/Euribor, although according to the UK´s SFO Frankfurt was a hotbed of Euribor manipulation and the Euribor setting protocols were recognised international norms. Again, in contrast, in current cum-ex proceedings, over 100 individuals are being investigated in Frankfurt and other cities with initial cases resulting in criminal convictions.
An employment court in Frankfurt even ordered the reinstatement of 4 Euribor traders stating their training in Euribor and consequently their understanding of Euribor had been insufficient as a fault of the bank.
In the Netherlands, Rabobank traders got regulatory fines of around €750 for benchmark manipulation. There were no criminal convictions.
In civil proceedings in the UK no findings of fraud were made, and some banks settled presumably for nuisance value reasons.
Why were the results so inconsistent or divergent?
In the US, when sentencing Black and Connolly, the judge criticised US prosecutors for treating the defendants as “proxy wrongdoers” for a much larger scheme. When sentencing US judges appeared to show leniency where they could. Now the US appeals court´s finding in Black and Connolly is completely at odds with the Criminal Court of Appeal in England and Wales for Hayes, Merchant, Pabon and others as it allows the so-called “range argument”, i.e. the traders had some discretion as to what rates they reasonably could submit, even if it benefitted their positions.
In the UK Libor/Euribor manipulation was put as a conspiracy offence in the UK criminal courts. The offence of conspiracy to defraud has rightfully been criticised as too being broad. In the Libor and Euribor proceedings the prosecution only needed to show that the defendants asked for a higher or lower rate. They did not need to show whether the submitted rate had actually moved the LIBOR/Euribor rate or what it should have been. No counterparties to the trades were called to say they relied on the bank´s representations. No counterparties were called to say they had suffered damages nor had an attempt at such damages been calculated. The allegations verged on thought crime.
Strangely the judge in Tom Hayes trial sentenced on the basis that the damage must have been more than £1 million even though no such calculations had been made with the FCA admitting for example in Deutsche Bank´s case that they could not calculate damages.
The regulators and civil courts undertook a much a deeper dive into the actual matter. In particular, the RDC appreciated that the calculation of Libor was extremely subjective and that traders would have numerous datapoints which they could consider, including possibly their own positions. They were able to understand the ambiguities of the market and the Libor setting procedures.
What would take a long time to explain to criminal judges and the jury took a fraction of the time to explain to the RDC, the decisions-making body of the FCA, which was made up of experienced capital markets professionals, commercial lawyers and accountants. The actual hearing time for the RDC for one defendant, who was acquitted took two days. For one particular criminal defendant in LIBOR it took five months of trial to reach an acquittal following a hung jury. The FCA also had a lower burden of proof than the criminal courts but still managed to acquit any defendants contesting proceedings.
In civil proceedings, the judges looked much more closely at the ISDA agreements concluded, heard evidence from counterparties, and had it got so far, the claimants would have had to demonstrate damages. No bank was found in those proceedings liable for fraud, although there were a number of settlements, the contents of which are not public knowledge.
In addition, strict criminal rules of putting evidence before a jury meant that criminal judges excluded exculpatory evidence, which the RDC, Upper Tribunal and the civil courts were more willing to consider.
Much has been made of the independence, collective wisdom and common sense of the jury system in the wake of the Colston four, who even if convicted would most likely have only received a conditional discharge. In contrast, a decade of convictions inconsistent with regulatory and civil findings in the UK and abroad and resulting in severe custodial sentences reveals the danger of trial by jury in complex fraud matters and brings the accuracy of jury convictions seriously into question.
Time to move away from trial by peers and actually have trial by peers?