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From Antitrust Law Daily, October 29, 2013

Rabobank to pay $1.06 billion to settle LIBOR charges with CFTC, DOJ, global regulators

By Mark S. Nelson, J.D.

The Commodity Futures Trading Commission said today that Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) has agreed to pay $475 million to settle civil charges that it allegedly manipulated or tried to manipulate LIBOR and Euribor benchmarks. Rabobank also admitted its role in LIBOR- and Euribor-linked criminal wire fraud charges brought by the U.S. Department of Justice (DOJ), which will file a deferred prosecution agreement (DPA) that requires the bank to pay $325 million in penalties (In The Matter of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., October 29, 2013).

The U.S. civil and criminal actions against Rabobank track similar enforcement actions by global regulators. The U.K. Financial Conduct Authority imposed £105 million ($170 million) in penalties against Rabobank while the Dutch Public Prosecutor’s Office imposed €70 million ($96.5 million) in penalties. TheJapanese Financial Services Agency and De Nederlandsche Bank (the Dutch National Bank) also have taken administrative actions to curb Rabobank’s allegedly improper LIBOR practices, which these regulators say were rooted in lax internal controls. All told, Rabobank will pay over $1.06 billion to resolve global LIBOR and Euribor charges.

Acting Assistant U.S. Attorney General Mythili Raman, said that the Rabobank criminal penalty is the second-largest imposed by the DOJ as part of its ongoing investigation of global benchmark manipulation. “For years, employees at Rabobank, often working with traders at other banks around the globe, illegally manipulated four different interest rates—Euribor and LIBOR for the U.S. dollar, the yen, and the pound sterling—in the hopes of fraudulently moving the market to generate profits for their traders at the expense of the bank’s counterparties.”

DOJ said that figures kept by the Bank for International Settlements show outstanding interest rate contracts linked to benchmark rates in late 2009 amounted to $450 trillion. LIBOR and Euribor are key rates used by banks globally to set the terms of lending agreements.

In an April 2013 speech cheering the International Organization of Securities Commissions benchmark proposal, CFTC Chairman Gary Gensler warned that financial market benchmarks need to be based on observable inputs and the keepers of these standards must improve their corporate governance.

Gensler reiterated his concerns today regarding Rabobank: “I wish I could say that this won’t happen again, but I can’t. LIBOR and Euribor are not sufficiently anchored in observable transactions. Thus, they are basically more akin to fiction than fact. That’s the fundamental challenge so sharply revealed by Rabobank and our prior cases.” Gensler reprised this theme later today in remarks to attendees at the 2013 Annual Glauber Lecture at Harvard University.

Rabobank chairman quits. In the wake of global regulators’ LIBOR and Euribor charges, Rabobank announced that Piet Moerland, Chairman of Rabobank Group’s Executive Board had resigned. Moerland said he grasped how the charges against Rabobank may fuel a “sense of indignation” and said the alleged misconduct is against Rabobank policy.

Said Moerland, “I wish to send a strong message on behalf of the Bank and on behalf of the Executive Board: we sincerely apologize for, and strongly condemn, this inappropriate behavior.” Rinus Minderhoud, a member of Rabobank Group’s Supervisory Board since 2002, has replaced Moerland as interim chairman.

Last week, Rabobank announced that it would soon resolve LIBOR and Euribor charges with global regulators and that any penalties imposed on the bank would not have a “downward effect” on its financial health. The bank also acknowledged today that 30 of its employees allegedly engaged in the misconduct charged by global regulators, but that “top management” played no role.

Said Wout Dekker, Chairman of Rabobank Group’s Supervisory Board, “I am deeply disappointed that a number of Rabobank employees engaged in unacceptable conduct and that our systems and controls were not sufficient to prevent this.” Dekker said he wanted Moerland to stay and that Moerland was not involved in the alleged misconduct. Dekker added that “Rabobank is a strong and financially stable institution; the payment of these significant settlement amounts does not change that.”

CFTC charges. Rabobank neither admitted nor denied the CFTC’s findings that its employees and agents had manipulated or tried to manipulate LIBOR and Euribor rates, although the bank admitted its role in the parallel criminal DPA. The CFTC’s order noted Rabobank’s “significant cooperation.”

According to the CFTC’s order, Rabobank’s traders and managers jeopardized the “integrity” of LIBOR and Euribor rates via “hundreds” of alleged manipulations from 2005 to 2011. Specifically, Rabobank’s derivatives and cash traders allegedly submitted preferential rate requests to the select bank panel that sets LIBOR and Euribor instead of giving the panel an “honest assessment” of interbank borrowing rates.

The CFTC further alleged that Rabobank overlooked the potential conflicts of interest of its traders who held trading positions in the financial instruments for which they submitted LIBOR and Euribor rate requests. According to the CFTC, one Rabobank derivatives trader “shouted” rate requests to bank rate submitters who were within earshot.

The CFTC began its investigation of Rabobank’s U.S. Dollar LIBOR rate submissions in April 2010. The CFTC said Rabobank’s allegedly improper practices continued after the CFTC’s investigation. Rabobank’s U.S. Dollar LIBOR submissions between mid-2005 and late 2008 allegedly used false reports to hide preferential rate requests. These trades often involved a senior derivatives trader in the bank’s London office known as the “Ambassador” or “Ambass.”

In one of many written exchanges cited by the CFTC, a U.S. Dollar Trader said to another: “HEY [U.S. Dollar Trader-Submitter 1] LONG TIME NO SPEAK … USUAL FAVOURS, CAN U KEEP 3S LIBORAT 39 FOR THE NEXT FEW DAYS PLS MATE, CHEERS SPK 2 U SOON.” The U.S. Dollar Trader-Submitter replied “will do mate.”

Another exchange cited by the CFTC showed the Ambassador’s influence. Said a U.S. Dollar Trader: “HI MATE, LOW lS HIGH 3S LIBORPLS !!! DONT TELL THE AMBASS HAA HAAAAAAA. SOLD THE MARKET TODAY DOOOOOOHHHH!” Senior Manager 1 initially replied “OK MATE, WILL DO MY BEST … SPEAK LATER.” The U.S. Dollar Trader acknowledged the reply by stating: “CHEERS GEEZ, BANG ON THE MONEY!” Senior Manger 1 later said: “NO WORRIES , I HAD TO WORK MY WAY OUT OF AN AMBASS HEADLOCK TO GET THOSE IN!”

On this basis, the CFTC alleged that Rabobank violated CEA Section 9(a)(2) by making false reports about interbank borrowing costs. The CFTC further alleged that Rabobank ran afoul of CEA Sections 6(c), 6(d), and 9(a)(2) by manipulating or attempting to manipulate Yen LIBOR. The CFTC said Rabobank’s attempted manipulation of U.S. Dollar, Yen, and Sterling LIBOR and Euribor benchmarks likewise violated CEA Sections 6(c), 6(d), and 9(a)(2). Here, the CFTC alleged that Rabobank’s traders and mangers allegedly intended for their rate submissions to alter benchmark rates.

Moreover, the CFTC alleged that Rabobank aided and abetted attempts by other banks’ traders to manipulate Yen LIBOR and Euribor rates. This, said the CFTC, violated CEA Section 13(a). The CFTC also sought to hold Rabobank liable for its employees and agents alleged violations under CEA Section 2 and CFTC Regulation 2.1. Rabobank also is ordered to cease and desist from engaging in the alleged CEA violations, and it must pay a civil monetary penalty of $475 million.

DOJ case. Rabobank must comply with the terms of a DPA negotiated with DOJ’s criminal and antitrust divisions. Specifically, the DPA says Rabobank agreed that DOJ will file a one-count criminal information in the U.S. District Court for Connecticut alleging that the bank committed wire fraud. Rabobank admitted the facts recited in an attachment to the DPA. The DPA will last for two years starting on the date the criminal information is filed, and DOJ may extend the DPA for one year if Rabobank knowingly violates it (U.S. v. Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., October 29, 2013).

According to the DPA, Rabobank did not self-report the alleged LIBOR and Euribor violations, but later “fully cooperated” with DOJ and other regulators upon learning of DOJ’s investigation. The DPA also requires Rabobank’s New York branch to pay a monetary penalty of $325 million. The penalty is not a maximum amount and DOJ can seek a higher penalty in a future prosecution subject to likely offset by the amount of today’s penalty. If Rabobank is later sold or merged, its successor must abide by the DPA.

The CFTC order is No. 14-02.

Attorneys: Jeffrey H. Knox, Chief, Fraud Section, Criminal Division, and Marc Seigel, Chief, New York Office, Antitrust Division, U.S. Department of Justice. David R. Gelfand (Milbank, Tweed, Hadley & McCloy, LLP) for Rabobank.

Companies: Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.

MainStory: TopStory Antitrust

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