Prosecuting Bankers Proves Exercise In Frustration (#GotBitcoin?)
Federal prosecutors have run into trouble trying to get convictions of individual traders and bankers charged with rate-rigging and other practices. Prosecuting Bankers Proves Exercise In Frustration (#GotBitcoin?)
The Justice Department is having more success at prosecuting banks than going after the bankers who work for them.
A judge’s expected ruling Monday on a request to throw out a case against a senior Barclays PLC trader will turn on an issue that has prompted previous cases to run into trouble: whether individuals can be held to account for activity consistent with the bank’s practices.
It is a “massive due-process problem,” U.S. District Judge Charles Breyer, who is presiding over the case of Barclays trader Robert Bogucki, said in court last week. When prosecutors charge an individual with a crime, “it has to be fairly obvious it’s a crime.”
Big global institutions including JPMorgan Chase & Co., Citigroup Inc., and UBS Group AG pleaded guilty in related 2015 cases to crimes including foreign-currency manipulation and rigging benchmark interest rates. Multiple probes resulted in nine banks paying penalties in the U.S. totaling more than $6 billion, based on chat-room records and other evidence in which traders colluded to move rates and even referred to themselves as the “mafia” or a “cartel.”
DOJ Losing Streak
Out of 27 traders prosecuted for allegedly manipulating benchmark interest or foreign exchange rates, nine have successfully challenged charges. Eight pleaded guilty.
Yet, prosecutors have been far less successful at convicting the people who engaged in this behavior. The three traders who made up the alleged currency-manipulating cartel were acquitted. In a separate case, two others convicted of manipulating benchmark interest rates had their convictions overturned on appeal. A federal judge has postponed sentencing two more traders convicted of manipulating benchmark lending rates pending a review of the prosecution’s tactics.
The cases have stumbled for multiple reasons. Some defendants have successfully argued their actions were encouraged by their employers, leading juries to decide their conduct was unseemly rather than illegal and vote for acquittal. Appeals courts have also overturned cases after finding problems with the evidence used at trial.
“There is a Greek chorus telling prosecutors to put people in jail,” said Aitan Goelman, a former federal prosecutor who ran the enforcement division of the Commodity Futures Trading Commission and is now in private practice as a defense lawyer. “But cases are harder to make against individuals.”
A Justice Department spokeswoman said the agency is “firmly committed to holding individuals and companies accountable for the roles they play in complex financial crimes,” adding that criminal penalties are subject to review by courts.
The 2008 crisis prompted reflection in public, Congress and the government over banks and how prosecutors could hold them accountable for misdeeds. By 2009, when the Justice Department began finding evidence that many top global banks had manipulated interest-rate benchmarks, prosecutors launched criminal investigations into traders’ role in setting those rates. By 2013, probes were also looking into allegations of traders manipulating currencies.
After banks conceded wrongdoing and shelled out huge penalties, roughly two dozen of their senior traders were charged in U.S. federal courts with trying to manipulate currency prices and interest-rate benchmarks. Prosecutors signaled a new, tougher approach that aimed to subject traders at big banks to justice. The campaign culminated in a series of indictments, including a high-profile 2017 case alleging three traders manipulated the exchange rates for U.S. dollars and euros.
“Whether a crime is committed on the street corner or in the corner office, no one gets a free pass simply because they were working for a corporation when they broke the law,” then-Deputy Attorney General Sally Yates said.
Two years later, prosecutors are still struggling to make charges stick. The cases tend to follow a pattern: First comes an indictment that says a banker or trader has been caught in damning and often profane dialogue with colleagues; then come either acquittals or convictions that are overturned on appeal.
The case of Mr. Bogucki, the Barclays trader, has so far appeared to be following that script. He was charged last year with illegally trading in anticipation of an HP Inc. deal that involved selling £6 billion ($8 billion) worth of U.S. dollar and British pound exchange-rate options. The indictment, filed in January 2018, quotes Mr. Bogucki telling a colleague he would “bash the shit out of” selling those options before executing the HP transaction to push down the price, and warned another to stay quiet about what they were doing or “your ass will be in a f— frying pan.”
Sean Hecker, a defense attorney for Mr. Bogucki, has argued prosecutors are improperly using an insider-trading theory to go after lawful transactions. Some of Judge Breyer’s courtroom comments suggest he is skeptical that individuals can be held accountable for activity that is at least implicitly condoned by the bank and doesn’t involve a conspiracy with others.
The Justice Department has been dogged for years by the challenge of proving allegations that individuals instigated corporate misconduct. Responsibility is often difficult to pin on individual employees, who often blame a corporate culture that enabled and encouraged their actions. Cases against multiple BP PLC employees over the 2010 Gulf oil spill, for example, led to multiple acquittals and were largely unsuccessful. Before that, multiple New York Stock Exchange floor traders beat charges related to alleged trading abuses.
Such ambiguity haunted the government’s headline-grabbing 2017 case alleging price manipulation in the $500 billion-a-day market for U.S. dollars and euros. The prosecution relied on Matthew Gardiner, a UBS trader who had agreed to testify in exchange for immunity. The prosecution centered around Mr. Gardiner admitting wrongdoing to the jury, and thus implicating his three alleged co-conspirators, traders at the Royal Bank of Scotland , Citigroup, and Barclays.
Many in the Justice Department knew the case would be difficult because Mr. Gardiner, the government’s star witness, didn’t believe, at the time of the alleged conspiracy, that he had done anything wrong. Those fears were realized at trial, when Mr. Gardiner said the traders believed they were executing widely accepted practices in the industry.
“You didn’t think you were cheating any customers?” an attorney for one of the traders asked Mr. Gardiner. “I didn’t think I was cheating anyone,” he responded.
After four hours of deliberation, the jury acquitted all three traders.
The case marked the failure of a multiyear effort to crack down on alleged wrongdoing by individuals in finance. The Obama Justice Department announced several policy changes to encourage more charges against individuals, including instructing prosecutors to focus on individuals from the start of any white-collar investigation.
In a September 2015 memo outlining the new approach, Ms. Yates told prosecutors that companies needed to provide the Justice Department with “all relevant facts” about their employees involved in misconduct to get credit for cooperating.
The Trump administration has pursued the same policy, describing companies as their partners in fighting corporate wrongdoing. Critics say the policy effectively turns banks into an arm of the prosecution and incentivizes them to seek leniency by throwing their own employees under the bus.
Bank executives have said that trading and interest-rate misdeeds reflected the actions of only a handful of employees. Matthew Axelrod, a former deputy of Ms. Yates who is now a lawyer with the law firm Linklaters, said the policy was “never intended to deputize [bank] defense attorneys as government investigators.”
That is what some defense attorneys are arguing is happening, and some judges have been sympathetic. In a prosecution in Manhattan federal court related to alleged manipulation of the London interbank offered rate, or Libor, two former Deutsche Bank employees, Matthew Connolly and Gavin Campbell Black, were convicted in October of participating in a scheme to manipulate the benchmark rate. The bank in 2015 paid $2.5 billion to resolve related civil and criminal charges, and several of its employees pleaded guilty.
But Chief Judge Colleen McMahon has yet to sentence the traders, pending a review of allegations prosecutors relied too heavily on the bank’s law firm to make their case. The judge has signaled she may hold a hearing on the issue in the coming months.
FASB Advances Toward Easing Accounting Burden For Libor Phaseout
U.S. accounting standard-setter is examining how accounting rules need to change to accommodate global reference rate reforms.
The Financial Accounting Standards Board on Wednesday took a major step toward removing a potentially costly accounting burden facing companies and organizations affected by global reference rate reforms, including a planned shift away from the London interbank offered rate.
FASB, which sets U.S. accounting standards, tentatively decided that changes in a contract’s reference rate, such as Libor, would be accounted for as a continuation of that contract, provided it met certain criteria.
As a result, many companies won’t need to go through a complex evaluation process or costly administrative adjustments to change how they account for the shift to a new reference rate, such as the Secured Overnight Financing Rate, which is the benchmark preferred by the Federal Reserve.
Companies currently must assess whether a contract modification such as shifting to a new reference rate will change future cash flows of that contract by 10% or more, and, in that case, account for it as if it were a new contract.
The board’s decision would apply to loans, debt, leases and other arrangements. It must still be incorporated in a proposal to amend existing rules, which would undergo a public comment period before being finalized and approved. FASB expects to change the rule in time for the transition away from the Libor at the end of 2021.
Libor underpins an estimated $200 trillion of transactions, including short-term loans, derivatives and other contracts. But after a series of market-rigging scandals, global financial regulators moved to phase out the benchmark as part of wider reforms.
FASB’s decision is part of a series of deliberations planned by the board to examine how accounting standards need to change to accommodate the transition away from Libor. The project is expected to culminate in several modifications to U.S. accounting standards.
“Today’s decisions will ease, from an accounting standpoint, the transition to a new reference rate for all organizations, thereby reducing accounting cost and complexity,” FASB Chairman Russell G. Golden said in a statement.
The FASB last year added SOFR to its list of interest rates permitted for the application of hedge accounting.
As the deadline for Libor’s phaseout draws closer, companies have started to share with investors some of the potential fallout from moving to a new interest rate benchmark. These include a potential jump in borrowing costs and challenges around hedging interest and currency rate risk, among others.
And while some companies have sold SOFR-linked debt, the pace of adoption has been slow as companies wait for the market around the new tool to be developed further.
Rep. Chris Collins, Charged in Insider-Trading Case, Resigns
Republican congressman from New York faces federal charges involving his son and a pharmaceutical company.
U.S. Rep. Christopher Collins of New York resigned Monday ahead of his expected guilty plea to charges related to an insider-trading case involving his son and an Australian biotechnology company.
“I hereby submit my resignation effective immediately, September 30, 2019,” Mr. Collins, a Republican, wrote in a letter to New York Gov. Andrew Cuomo.
A spokesman for House Speaker Nancy Pelosi (D., Calif.) said her office had received Mr. Collins’s letter of resignation, which would become effective Tuesday during a House session.
It wasn’t immediately clear exactly what charges Mr. Collins would plead guilty to Tuesday. Earlier this month, the representative from western New York pleaded not guilty to a revised set of insider-trading charges, including conspiracy to commit securities fraud.
Prosecutors accused him of passing a confidential tip to his son, Cameron Collins, so he could sell shares in the biotechnology company before the public disclosure of a failed drug trial.
Mr. Collins is scheduled to enter his plea on Tuesday at 3 p.m. in federal court in Manhattan, the court filings says.
A spokesman for the U.S. attorney’s office in Manhattan declined to comment. A spokeswoman for Mr. Collins referred a request for comment to his lawyer, who didn’t respond.
Mr. Collins, who represents New York’s 27th congressional district, was an early supporter of President Trump during the 2016 presidential campaign.
After his arrest last year, Mr. Collins announced that he would suspend his re-election campaign, only to reverse course and then win re-election. The seat is considered safe for Republicans, though Democrats sought to make it competitive last year.
Because of the indictment, Mr. Collins wasn’t placed on any congressional committees by the Republican leadership, giving him little power.
The case against Mr. Collins related to his position on the board of directors of Innate Immunotherapeutics Ltd., a biotechnology company based in Sydney. He also held nearly 17% of the company’s stock, according to an indictment.
In June 2017, Mr. Collins gave information about a failed trial for a multiple-sclerosis drug that hadn’t been made public to his son Cameron, so that Cameron and others could sell stock before the results were announced, according to prosecutors.
Prosecutors said that because of the tip, the younger Mr. Collins and others avoided a total of approximately $768,000 in losses.
According to another court filing, Rep. Collins’s two co-defendants—his son and Stephen Zarsky, who at the time of his arrest was the father of Cameron’s then-fiancee—are expected to plead guilty Thursday afternoon.
A lawyer for Cameron Collins didn’t respond to a request for comment. A lawyer for Mr. Zarsky declined to comment.
Cash-Market Volatility Adds to Worries Facing Libor Replacement
Turmoil in short-term money markets has rattled a protracted effort to phase in a new borrowing benchmark meant to eventually underpin trillions of dollars in lending contracts.
Issuance of floating-rate debt linked to the secured overnight financing rate, or SOFR, has slipped to $24.5 billion this month as of Oct. 28, according to TD Securities USA. That’s down from $43.4 billion in September and $56.1 billion in August. The pullback comes after September’s turmoil in short-term cash markets prompted the Federal Reserve to intervene, renewing questions about whether SOFR will be ready to replace its predecessor by 2021.
The decline highlights the difficulties faced by banks, policy makers and companies as they try to replace the London interbank offered rate. That rate, known as Libor, underpins trillions of dollars in financial contracts world-wide but was slated for replacement after a manipulation scandal.
Created by a Federal Reserve committee of regulators, banks and asset managers, SOFR was designed to be more reliable than Libor and impervious to manipulation because it is based on actual rates in short-term cash markets. Libor, by contrast, is an “indicative rate” based on the rates banks say they can get.
The challenges posed by the new structure became apparent in recent weeks, when a shortage of available cash caused rates to spike in an obscure but crucial part of financial system—the market for Treasury repurchase agreements, or repos. Repo rates climbed as high as 10% from around 2%, traders said, pushing SOFR to a record 5.25%, about 3 percentage points above its previous range.
“It was a shock to the system,” said Jason Granet, who heads Libor transition efforts at Goldman Sachs Group Inc. Companies will be more likely to look past the volatility as they become more informed about how SOFR performs over time, he said.
The disruption led the Fed to inject cash into money markets for the first time since the financial crisis. Officials began by offering billions of dollars of overnight loans in the repo market. Then they added two-week loans and increased the amount of both offerings, committing to continuing them well into next year. Fed officials also said they would buy $60 billion a month in Treasury bills.
While policy makers’ actions have lowered repo rates and damped volatility, banks have been borrowing in larger amounts from the Fed. The need for such strong measures to calm a market that would help set borrowing costs on trillions of dollars of mortgages, corporate loans and financial derivatives has unsettled many.
Treasury Secretary Steven Mnuchin said Tuesday he might consider loosening crisis-era regulations, such as capital charges for repo investments that banks said have made it difficult to increase their participation in the market without crimping profits.
That contrasts with a letter written to Mr. Mnuchin by Democratic presidential hopeful Sen. Elizabeth Warren saying the Treasury Department shouldn’t use the rise in volatility as “an excuse to further loosen rules that protect the economy.”
The Fed is scheduled to conclude its two-day policy meeting Wednesday, and Chairman Jerome Powell is expected to face questions about the central bank’s response to the recent turmoil at a post-meeting news conference.
By lowering repo rates, the Fed’s interventions have cooled some investors’ demand for SOFR-linked debt. Kevin Kennedy, head of U.S. liquidity at Western Asset Management, said he has been buying floating-rate debt linked to Libor rather than SOFR for its better relative value. The yield on three-month Libor has recently been about 0.1 percentage point above SOFR, compared with roughly the same amount lower in the weeks before repo rates surged.
“With the Fed coming in so aggressively, it changed the outlook for the rest of the year,” Mr. Kennedy said.
Some bankers said with SOFR’s limited history and falling Fed interest rates, there also could be other factors affecting issuance.
Banks, investors and regulators have struggled with the challenge of finding a Libor replacement. All parties want a benchmark that reflects the risks from short-term lending and is supported by a liquid market that behaves in a predictable manner. Properly setting the rates on business and consumer loans can determine whether such loans are affordable for borrowers and profitable for lenders.
Advocates of the new rate point to a $1.5 billion sale of SOFR-linked debt by Toyota Motor Credit Corp. earlier this month as a sign that repo volatility isn’t a fatal flaw.
“We view the recent volatility in the repo market as a manageable risk,” Adam Stam, Toyota’s national manager of secured funding, said in an emailed statement.