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From Antitrust Law Daily, July 28, 2014

Authorities crack down on Lloyds over LIBOR manipulation

By Matthew Garza, J.D.

Lloyds Banking Group will pay almost $370 million to three regulators to avoid further criminal and civil litigation over its attempts to manipulate the London Interbank Offered Rate (LIBOR) from 2006 to 2009. Lloyds will pay £105 million (approximately $178 million) to settle charges brought by the UK’s Financial Conduct Authority, $105 million to settle CFTC proceedings, and $86 million as part of a deferred prosecution agreement with the U.S. Department of Justice.

The CFTC’s Order Instituting Proceedings pointed out that LIBOR is the most widely-used benchmark interest rate in the world. It is used to set interest rates in products having an approximate notional value of $500 trillion, including mortgages, student loans, credit cards, over-the-counter-swaps, exchange-traded interest rate futures, and options contracts. It is seen as critical to the operation of global markets because it serves as a measure of strain in money markets and a gauge of the market’s expectation of future central bank interest rates.

The LIBOR is calculated daily after several banks answer the question, “At what rate could you borrow funds, were you able to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” Lloyds manipulated its answers to benefit cash and trading positions held by the bank, according to the regulators.

CFTC settlement. The CFTC charged Lloyds for acts of false reporting and attempted manipulation of the LIBOR for Sterling, U.S. Dollar, and Yen committed by employees of Lloyds and HBOS plc, a bank acquired by Lloyds in 2009. HBOS plc was motivated to submit artificially low LIBOR rates in order to make its finances appear healthier prior to its acquisition by Lloyds, according to the agency.

The CFTC said that from mid-2006 into the beginning of the global financial crisis, the Lloyds employee who submitted the bank’s Yen LIBOR rate colluded with the Yen LIBOR submitter at Rabobank to benefit the trading positions of the two banks. The CFTC also said HBOS did not want to stand out from the rest of the submitting banks, which could have hurt its reputation in difficult market conditions, so it ordered rates to be submitted at the rate of the expected published LIBOR.

One communication between the Lloyds TSB Yen submitter and his counterpart at Rabobank was highlighted by the CFTC in its press release announcing the settlement:

  • Lloyds Yen Submitter: “mrng mate...my turn today...what u going 3s libor...hoping for a higher one....0.35 or u think that is pushing it a bit?

  • Rabobank Yen Submitter: nope - fine with me mate - will set 35 for you.”

  • Lloyds Yen Submitter: “cheers dude.”

Another written communication from an HBOS manager on August 8, 2008, quoted the manager as saying the bank was extremely careful about the rates it paid in different markets for different types of funds, because “importantly in this climate,” paying too much “may give the impression of HBOS being a desperate borrower.”

The CFTC said the bank’s actions violated Commodity Exchange Act Sections 6(c), 6(d) and 9(a)(2). In addition to paying the fine, the settlement requires Lloyds to cease and desist from violating the CEA and to put in place compliance and supervisory controls to ensure the integrity of its future LIBOR submissions.

“By today’s action, Lloyds is being held accountable for serious misconduct,” said Aitan Goelman, CFTC Director of Enforcement. “The CFTC remains committed to taking all actions necessary to ensure the integrity of the markets we oversee.”

FCA settlement. The FCA stated that the fine it levied against Lloyds related to the manipulation of LIBOR and also the bank’s manipulation of temporary Repo Rate submissions used by the Bank of England’s Special Liquidity Scheme (SLS), which was a tax-payer financed liquidity program introduced during the financial crisis to help stabilize UK banks. By inflating their Repo Rate submissions, the UK regulator said, Lloyds narrowed the Repo Rate-LIBOR spread and thereby reduced the fees it owed to the Bank of England for participation in the SLS.

The FCA said 16 individuals at the firms were involved in the scheme, including seven managers. The bank was given a 30 percent discount for settling at an early stage, avoiding a fine of £150 million.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said the abuse of the SLS was a novel feature of this case. “The firms were a significant beneficiary of financial assistance from the Bank of England through the SLS. Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable. This falls well short of the standards the FCA and the market is entitled to expect from regulated firms.”

DOJ settlement. U.S. Department of Justice (DOJ) wire fraud charges were also settled by the bank today. In addition to the $86 million penalty, Lloyds will admit and accept responsibility for the misconduct, according to a press release. Criminal information will be filed in federal district court in Connecticut as part of the deferred prosecution agreement reached with the bank, said the DOJ, noting that its investigation is continuing.

“Lloyds manipulated benchmark rates, allowing its traders to increase their profits unfairly and fraudulently,” said Deputy Assistant Attorney General Brent Snyder of the Justice Department Antitrust Division. “Lloyd’s conduct undermined financial markets domestically and abroad, and today’s charges send a clear message that we will continue to bring those responsible to justice.”

Valerie Parlave, Assistant Director of the FBI’s Washington Field Office, said “Today’s agreement further underscores the FBI’s ability to investigate complex international financial crimes and bring the perpetrators to justice. The Washington Field Office has committed significant time and resources including the expertise of Special Agents, forensic accountants and analysts to investigate this case along with our Department of Justice colleagues.”

Companies: Lloyds Banking Group; Rabobank

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