It would look awfully strange if the U.S. government wound up targeting only foreign banks as part of its investigation into the manipulation of the London interbank offered rate. It’s too soon to say if that will be the end result. But time is marching quickly.
A year ago this week, London-based Barclays Plc cut a $160 million nonprosecution agreement with the U.S. Justice Department and became the first bank to admit to falsifying its Libor submissions. Two other European banks -- Zurich-based UBS AG and Edinburgh-based Royal Bank of Scotland Group Plc -- have reached Libor-related settlements with U.S. prosecutors since then, each with much harsher penalties than Barclays got.
Libor is the interest-rate benchmark used in hundreds of trillions of dollars’ worth of financial contracts, from derivatives to mortgage loans. It is based on daily surveys of large banks about their borrowing costs. That it was rigged for years by large banks is well-established. Still unclear is which other lenders will be held accountable, or when.
Will the feds go after any U.S. banks? Last week’s criminal charges in the U.K. against Tom Hayes, a former derivatives trader at UBS and Citigroup Inc., only add to the curiosity. They came six months after U.S. prosecutors filed their own criminal complaint against Hayes and another former UBS trader. A comparison of the allegations in the two cases yields some noteworthy differences.
The eight criminal counts filed by U.K. prosecutors include the period of time that Hayes worked for Citigroup in late 2009 and into 2010, as well as the three years he worked at UBS before then. U.K. officials said he conspired with employees of at least five other banks and three interdealer brokers to manipulate yen Libor rates. The U.K. court documents identified all the companies allegedly involved, including JPMorgan Chase & Co. (Hayes, 33, appeared in a London court last week and hasn’t indicated how he will plead.)
In the U.S., by comparison, the complaint against Hayes listed three criminal counts, the timeline for which ended in September 2009, when Hayes left UBS. The complaint cited UBS by name but not Citigroup or other companies.
Put another way, the criminal counts against Hayes in the U.K. include conduct while he worked at both UBS and Citigroup. The three counts against him in the U.S. refer to the time he worked at UBS but not at Citigroup.
A separate section in the U.S. complaint does cite illegal acts that Hayes allegedly committed in 2010, when he was a Citigroup employee. However, those weren’t referred to in the fraud, conspiracy and antitrust counts that Hayes was specifically charged with. The Justice Department’s Dec. 19 news release about the charges against Hayes didn’t mention Citigroup, either.
Might U.S. officials have carefully crafted the counts against Hayes to avoid calling attention to Citigroup? There’s no way to know from the outside looking in. A Citigroup spokeswoman, Shannon Bell, declined to comment. So did a Justice Department spokesman, Michael Passman.
The U.S. complaint against Hayes was unsealed on the same day as a $1.5 billion settlement with UBS, under which its Japanese subsidiary pleaded guilty in the U.S. to wire fraud. The allegations against the company and the individuals went hand in hand. That UBS admitted to criminal behavior was consistent with charges that certain UBS employees broke the law, too.
On the flip side, the notion that Citigroup didn’t violate U.S. laws makes more sense if the criminal counts against Hayes don’t mention any conduct while he worked there. It’s also possible, of course, that prosecutors had other, perfectly good reasons for structuring the complaint against Hayes as they did.
You won’t find much useful information about the probes in the companies’ disclosures. JPMorgan and Citigroup noted the existence of the Justice Department’s Libor investigation in recent securities filings. However, neither company specified whether the probe is civil or criminal in nature -- even though it’s pretty clearly the latter.
There are indications that foreign corporations may face stricter penalties than domestic companies have in U.S. criminal cases. Brandon Garrett, a law professor at the University of Virginia who is working on a book about corporate prosecutions, said he examined more than 2,250 corporate convictions and criminal settlements from 2001 to 2012 and found that foreign firms were fined an average of $35 million, compared with $4.7 million for domestic firms.
Even when Garrett made adjustments to control for the type of crime and whether a company was publicly held, foreign corporations still paid far larger fines on average. To be sure, the numbers don’t tell us whether prosecutors unfairly single out foreign companies, Garrett said.
In a speech last month, Mythili Raman, the acting head of the Justice Department’s criminal division, said U.S. authorities aren’t done with their Libor probe, which also resulted in a guilty plea to wire fraud by Royal Bank of Scotland’s Japanese unit. “Banks will be held to account through public admissions of guilt, payment of significant monetary penalties and, as seen with RBS and UBS, criminal convictions,” she said.
Whether those include U.S. banks remains to be seen.
(Jonathan Weil is a Bloomberg View columnist.)
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