The US Justice Department is preparing to file charges this fall against traders from several banks in the global probe of interest rate-rigging. Meanwhile, UK prosecutors haven’t even decided whether they have a case.
The UK Serious Fraud Office opened a criminal investigation this month after Barclays Plc was fined a record GBP290 million (US$450 million) by UK and US authorities. Politicians including UK Chancellor of the Exchequer George Osborne and Ed Miliband, leader of the opposition Labour Party, called for a criminal probe, and the agency was told it would be given a budget to take on the case.
The SFO had declined to get involved in the investigation for more than a year, despite briefings with the UK Financial Services Authority and a compilation of findings from US enforcement agents. The US evidence was provided as early as late last year, according to a person familiar with the case who wasn’t authorized to discuss it.
“It’s partly the difference in culture,” said Andrew Haynes, a law professor at the University of Wolverhampton in England. “In America, economic crime is something that is regarded as desperately serious. In this country it is regarded as a problem, but there is sometimes a slothful response.”
The UK joins the US in criminally investigating how derivatives traders and rate submitters colluded to rig the London Interbank Offered Rate, or Libor, and other interest rates. At least a dozen banks are being probed by regulators worldwide.
Royal Bank of Scotland Group Plc, UBS AG, Deutsche Bank AG and Credit Suisse Group AG are among banks awaiting their fate as regulators from Tokyo to London to New York investigate.
“Now the priority is to come to an assessment whether the available offenses are there for us to prosecute in a criminal court,” SFO spokesman David Jones said. If “the answer to that is yes we can, then we start going hell for leather and putting together a formal investigation team,” he said.
Regardless of the detailed findings involving manipulation of Libor, the SFO didn’t express any interest in the matter until recently, the person said. The agency appointed a new director, David Green, in late April.
“We were in constant liaison with the SFO, and have been throughout, but ultimately the SFO’s decisions as to what they do are matters for the SFO,” Tracey McDermott, the FSA’s acting head of enforcement, told British lawmakers July 16.
Barclays employees tried to manipulate Euribor and Libor for profit, while managers instructed rate-setters to make artificially low submissions to avoid the perception the lender was under stress amid turmoil in credit markets in 2007 and 2008, according to the settlement.
As part of the US and UK settlements, Barclays admitted rigging rates as early as 2005. Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier resigned over the scandal.
The US charges against individuals, which would probably be filed by October, centre on alleged rate-fixing activity that goes beyond the conduct described in last month’s settlement between Barclays and regulators, according to the person familiar with the case.
Initially prosecutors aimed to bring charges as soon as Labour Day, the US holiday on Sept 3, against traders who illegally manipulated Libor rates. The eruption of political and public anger following the Barclays settlement captured the attention of other regulators in the US and UK, as well as lawmakers in Congress and Parliament.
The wider interest in the Libor case in turn has altered the trajectory of the criminal probe, changing the timetable of criminal charges, the person said.
The Justice Department investigation of criminal activity related to Libor is moving on a parallel course with civil probes of the banks being conducted by the US Commodity Futures Trading Commission, the US Securities and Exchange Commission and UK regulators, including the Serious Fraud Office.
The Barclays settlement required approval of the CFTC, the Justice Department and the UK’s Financial Services Authority. Future civil settlements will also require agreement from the SEC and the Serious Fraud Office.
US prosecutors have been criticized for failing to bring any “meaningful” cases against individuals stemming from the financial crisis, said Michael Perino, a law professor at St. John’s University in New York.
“A lot of what led to the financial crisis was reckless behaviour that might not have been criminal,” Perino said. “There is this remaining pent-up anger that a different set of rules seems to apply to banks and Wall Street.”
Barclays is assisting the investigation into other firms and individuals and was the first to provide “extensive and meaningful cooperation,” the Justice Department said.
The SFO is likely to hire outside investigators to assist with the case if they decide it is likely they’ll be able to bring charges, Jones said. They may ask the FSA for two or three secondees to help them, and the Treasury may provide more than 3 million pounds.
The case is currently being handled by division heads Satnam Tumani and Jane de Lozey, and the agency has hired the senior barrister Mukul Chawla to be their lead external lawyer on the investigation.
“Has the Serious Fraud Office got the message loud and clear that if it is possible to get a charge on these people, the public want that?” Andrew Tyrie, the chair of the UK Parliament’s Treasury Select Committee, asked the FSA’s McDermott at the hearing on the Libor case.
The SFO was criticized under its previous director, Richard Alderman, for taking on high-profile investigations, including ones into American International Group Inc’s Financial Products unit and convicted swindler Bernard Madoff’s London operations, only to close them later without charges, citing a lack of evidence. The agency has also faced a shrinking budget, a fight with the Home Office to save it from dissolution, and a staff exodus prior to Green’s arrival.
“They don’t have a glorious history in terms of getting on top of these things,” Wolverhampton’s Haynes said. “It could be partly that it falls into the cracks between the SFO and the FSA, and doesn’t clearly land on anyone’s lap.”