Worldwide: Professional & Financial Lines (August 2012)

Last Updated: 20 August 2012
Article by James Cooper

LIBOR Manipulation Coverage

Criminal Investigations

The Wall Street Journal has reported that U.S Prosecutors have offered several former junior UBS AG employees protection from criminal charges in exchange for their cooperation with the expanding probe into alleged interest-rate manipulation. The paper said that a few UBS employees under investigation still work at the Swiss bank, which fired or suspended about 20 managers and traders during the four-year investigation. U.S antitrust officials have been investigating alleged interest rate manipulation by at least 16 banks, including Libor, and UBS is said to be one of the main targets of the regulators. UBS has disclosed that it has received leniency deals from antitrust regulators in the U.S, Switzerland and Canada, but still faces potential enforcement action from the U.S Justice Department's fraud section, the U.S Commodity Futures Trading Commission and the U.K's FSA.

The Serious Fraud Office ("SFO") has begun a criminal investigation into the Libor scandal, but the Treasury has not given it a fixed budget and will make money available to the SFO in instalments based upon how the investigation is progressing. This comes after Sir John Thomas, president of the Queen's Bench Division, said that the SFO lacked the resources to do its job effectively. The SFO agreed to take on the Libor case last month, in the wake of disclosures that the rate at which banks lend to each other had been manipulated. Danny Alexander, Chief Secretary to the Treasury, has said "I want the SFO to follow the evidence wherever it goes to bring prosecutions if it possibly can".

Regulatory Investigations

Mitsubishi UFL Financial Group has said its banking unit suspended a London-based employee, the third worker in a month, as UK authorities investigate suspected manipulation of Libor rates. Hironori Imafuku said that the worker had been asked to stay at home, without naming the employee or giving further details. A source commented that the employee was being questioned by the FSA after allegedly being contacted by others to participate in the rate manipulation after 2008. This comes after the Bank of Tokyo-Mitsubishi ("BTMU") said on 10 July that it had suspended two traders in London in relation to the Libor investigation. At that time, the bank said their suspension was not connected with their conduct at the Japanese bank. According to the FSA register, the traders worked together at the Dutch bank Rabobank before joining BTMU.

The Financial Times has reported that a trader at the centre of rate-manipulation allegations levelled at Barclays communicated with counterparts at the Dutch bank Rabobank. Barclays was the first bank to settle its part in the Libor and Euribor probe. The Dutch central bank is currently examining submissions to Euribor, the Brussels inter-bank lending rate. The Dutch involvement adds to at least 10 other regulators and criminal prosecutions across three continents that are probing as many as 20 financial institutions. Barclays and Rabobank are among seven defendants names in a class action alleging Euribor manipulation filed in New York.

Regulatory News

Martin Wheatley, chair of the government's independent review on the regulation of Libor, has launched a discussion paper which examines how Libor is set and regulated. The paper sets out a range of initial proposals for reform including pegging the rate to actual market data rather than subjective submissions from Banks and introducing criminal sanctions for those attempting to manipulate Libor. Wheatley, the Managing Director of the Financial Services Authority, said that the aim of the review is to ensure that Libor is reformed in a way which fully restores credibility and trust. Wheatley explained that whilst there will be change it will not be changed so far so that millions of contracts are put at risk and that the medium term goal is to fix Libor and then see "whether there are better rates going forward". Wheatley added that the review may also have implications for other financial benchmarks including, oil, gold and other commodity prices in the future. Interested parties have four weeks to respond to the paper, with Wheatley scheduled to deliver his findings by the end of September. Wheatley's report will form the basis for amendments to legislation currently being discussed in the House of Lords.

South Korean regulators are set to overhaul the system used to calculate loan rates, prompted by a high-profile probe which has been locally named "Korea's Libor scandal". The domestic competition watchdog is currently investigating 19 financial institutions, including a subsidiary of Standard Chartered, over suspicions they may have colluded to manipulate the benchmark rate. The regulator has launched a taskforce to overhaul the certificates of deposit rate benchmark system. The rate calculates the interest paid on $300bn of household and business loans, and had hardly moved over the previous three months as other rates fell. Banks under investigation include leading names such as Woori and Shinhan.

Commercial News

Bank of England Governor Mervyn King has commented on the future of Libor, and said that the financial crisis has meant that there was no longer a common interbank lending rate as funding costs were now being determined by the credit risk associated with individual banks. King said that "the fundamental question that people need to face is, 'Does it makes sense to place hundreds of billions of dollars and pounds of transactions on linking to something that doesn't actually exist?'. "That may lead people to think about the overnight policy rate, a rate which always does exist". King also criticised New York regulator Benjamin Lawsky for failing to coordinate the announcement of the probe into Standard Chartered Plc over alleged violation of money laundering laws. King compared the Standard Chartered investigation to the Libor investigation and fine levied on Barclays by U.S and U.K authorities, which saw the coordinated publication of reports which came out after the investigation was completed.

The Bank of Japan has announced that it will delay lending U.S dollars under a scheme to support growth industries because of expected changes to the Libor. Authorities in the U.K and the U.S are formulating proposals that could change the way interbank rates are calculated. The funds were originally due to be lent at a rate equal to six-month dollar Libor. The BoJ has said that it aims to start funding the scheme as soon as possible, but the timing will depend on the progress of Libor reforms this autumn.

The potential amount of industry settlement related to the Libor scandal has been estimated to be US$35bn, across the European panel banks. This is in comparison to direct damages such as fines levied against the banks, which Keefe, Bruyette & Woods ("KBW") estimate to be manageable in their report of 16 July 2012. KBW have noted that large class action lawsuits commonly take between 5 to 8 years from filing to settlement, which would provide time for even the most impacted banks to increase their capital ratios prior to any potential settlement.

Litigation & Costs

A Manhattan federal judge has ruled that investors suing banks over Libor rate manipulation may refer to last month's settlement involving Barclays Plc as they seek to fend off the bank's requests to dismiss the claims. U.S District Judge, Naomi Reice Buchwald, has also suspended several new lawsuits that allege banks rigged key interest rates, saying that "while parties are free to file new complaints - and, indeed, are encouraged by the court to do so if they do so promptly...I am imposing a stay on any action that is not the subject of a pending motion to dismiss...this stay will last until the current motions to dismiss are resolved". The current class action claims are consolidated under In Re: Libor-Based Financial Instruments Antitrust Litigation, U.S District Court for the Southern District of New York.

Barclays coverage

Investigations

Barclays has failed in an attempt to delay a legal claim over allegations it mis-sold an interest rate hedge to Guardian Care Homes. Barclays had requested that the case be delayed until Guardian's claim had been investigated as part of a FSA compensation scheme. Judge Simon Brown QC rejected the request, describing it as an "impossible arguments". Guardian's claim is being heard at Birmingham Mercantile Court, and is seen as an important test case for the thousands of businesses that have potentially been mis-sold complex interest rate derivatives by banks including Barclays, HSBS, Lloyds and RBS. The claim also contains specific allegations that Barclay's attempts to manipulate Libor cost it thousands of pounds in extra payments.

In response to the decision, Gary Hartland, chief executive of Guardian Care Homes, said that "today was a cynical attempt by Barclays to avoid responding to the allegations they face both with swap mis-selling, but also Libor. To say that the FSA redress scheme is in a position to provide us with fair justice is laughable and I am delighted the Court has recognised that".

A spokesman for Barclays said "at the current time it is unclear whether Guardian Care would be within the parameters of the FSA review. As a result, whilst the bank has a claim against Guardian Care Homes which is of greater value than their claim against us and normally these claims would run together, because of the FSA agreement we are unable to do this. Therefore we were seeking to pause these proceedings whilst Guardian Care's eligibility is determined so that the claims could run in tandem if Guardian Care were not eligible. Therefore a pause in proceedings would have saved the court's time".

Business News

Barclays has named former Bank of England executive director David Walker as Chairman. Walker replaces Marcus Aguis who resigned as a result of the Libor scandal. Walker is a senior adviser to Morgan Stanley and oversaw the 2009 government inquiry into the rules governing how banks are run for former Prime Minster Gordon Brown. Walker, who is due to start on 1 November 2012, said that he wants to review the way Barclays operates and that he agrees in principle with customers paying to use current accounts. Walker said that he will start searching for a new Chief Executive within days. Gary Hoffman, the former Chief Executive of Northern Rock, has been linked to the position. Walker and Hoffman worked closely together at NBNK.

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Authors
James Cooper
 
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