Libor-rigging – a divide as wide as the Atlantic

In a stunning decision in late January, the US appeals court ruled that what was considered a crime in the UK is not a crime in the states.

US judges overturned the convictions of two former Deutsche Bank traders, Gavin Black and Matthew Connolly, who had been prosecuted for rigging the Libor (London Interbank Offered Rate) benchmark interest rate, ruling that their conduct was not against the rules.

This appears to go against developments in the UK. Here, in 2015, a criminal court imposed a 14-year sentence on Tom Hayes (later reduced to 11 years by the Criminal Court of Appeal), a trader diagnosed with autism. Other bankers received sentences of between three and nine years, with substantial costs awarded against them and confiscation orders ranging from £2,300 to £2.5m.

And as the dust settles on the Libor transition as a reference benchmark, leaving not just a few headaches for transactional lawyers, a look back at these and other investigations reveals a great divide between how defendants or respondents in Libor and Euribor proceedings fared in the UK and globally, particularly the contrast between criminal regulatory and civil proceedings.

The banks received large fines across the globe but, as with the UK Serious Fraud Office’s deferred prosecution agreements, chose to settle in the interests of shareholder value and expediency. The UK Regulatory Decisions Committee, the Financial Conduct Authority’s decision-making body, dealing with the same subject material as the criminal courts but on a regulatory basis (and later applying the same test of dishonesty), acquitted a number of bankers contesting the proceedings of dishonesty.

In addition to the Black and Connolly example, the US, famed for its global reach and achieving hard-hitting results in white-collar cases, imposed initial sentences of one to two years on two Rabobank defendants after trial. These 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.

Ironically, Hayes stated that he confessed on tape to the SFO to avoid going to the US for fear of the prison conditions and length of sentence, and presumably in the hope of triggering the sympathy of the English jury. Had he gone to the US it appears unlikely 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. In cum-ex proceedings that resulted from a scheme where traders wrongfully reclaimed withholding tax twice, 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 four 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 €750 for benchmark manipulation. There were no criminal convictions.

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, and they appeared to show leniency where they could.

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 being too broad. In the Libor and Euribor proceedings, the prosecution only needed to show 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 nor suffered damages – and nor had an attempt at such damages been calculated. The allegations verged on thought-crime.

We can draw a clear contrast with civil and regulatory proceedings in the UK. Here, the regulators and civil courts undertook a much a deeper dive into the actual matter. In particular, the FCA’s RDC appreciated that the calculation of Libor was extremely subjective and that traders would have numerous datapoints to consider, possibly including their own positions. They were able to understand the ambiguities of the market and of 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, which was made up of capital markets professionals, commercial lawyers and accountants. The actual hearing time for the RDC for one defendant (who was acquitted) was just two days. For one particular criminal defendant in Libor it took five months of trial to reach an acquittal following a hung jury. The RDC 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 ISDA agreements governing the swap trades between counterparties, 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 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?

Charles Kuhn is a partner and Aisha Hirani a trainee at Clyde & Co