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From Securities Regulation Daily, September 25, 2013

CFTC, FCA, DOJ issue fines, criminal charges against LIBOR manipulators

By Lene Powell, J.D.

In a coordinated crackdown on LIBOR manipulation, the CFTC and the UK Financial Conduct Authority (FCA) imposed penalties and the Department of Justice (DOJ) announced criminal charges against an interdealer broker and several former employees who openly discussed kickbacks and bribes in exchange for their participation in the manipulation. LIBOR is a critical benchmark interest rate used globally as the basis for trillions of dollars of transactions

The CFTC ordered ICAP Europe Limited (ICAP) to pay a $65 million civil monetary penalty to settle charges of manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ manipulation and attempted manipulation relating to the Yen London Interbank Offered Rate (Yen LIBOR) benchmark (CFTC Docket No. 13-38, September 25, 2013). The FCA fined ICAP £14 million. The DOJ charged Darrell Read of New Zealand and Daniel Wilkinson and Colin Goodman of England with conspiracy to commit wire fraud and two counts of wire fraud.

“By allegedly participating in a scheme to manipulate benchmark interest rates for financial gain, these defendants undermined the integrity of the global markets,” said Attorney General Eric Holder in a statement.

Compliance with manipulative demands. According to the CFTC order, the Yen LIBOR is one of the most important financial benchmark interest rates used around the world. The benchmark is established daily based on information submitted by banks who are members of the Yen LIBOR Panel. Three panel banks have already been found to have undermined the integrity and reliability of LIBOR and other benchmark rates.

ICAP’s role was that of a middleman between the banks. Before panel banks make their rate submissions each day, certain interdealer brokers, including ICAP, give banks their trading insight on cash-pricing trends in the market and on assessments of likely LIBOR rates. During the financial crisis of late 2007 through 2009, panel banks became increasingly reliant on such market information from ICAP brokers and others to inform their LIBOR submissions. Consequently, ICAP brokers’ market views had a significant impact on Yen LIBOR submissions, said the order.

In particular, a senior Yen derivatives trader at UBS Securities Japan Co. was a highly valued ICAP client. The Senior Yen Trader called on ICAP Yen brokers more than 400 times for assistance in manipulating Yen LIBOR to benefit his derivatives trading positions tied to the benchmark. Because he was a significant client of the ICAP Yen derivatives desk, and to ensure that the desk kept and increased its share of his business, including the commissions and bonuses he generated for the firm, the ICAP Yen brokers readily complied with his repeated demands. The brokers accommodated the requests by issuing, through a Yen cash broker, group emails to panel banks and others containing “Suggested LIBORs” for Yen LIBOR. Instead of providing an honest and objective assessment of how Yen LIBOR would fix that day, the “Suggested LIBORs” reflected the preferred rates that would benefit the Senior Yen Trader.

Kickbacks and bribes. Rewards for complying with the manipulative demands escalated over time, from “copious amounts of curry” in 2006, to champagne in 2007, to commissions specially generated by the Senior Yen Trader.

Ultimately, the ICAP cash broker requested a quarterly “performance bonus” for his “LIBOR service.” The Senior Yen Trader dispensed with euphemisms and replied that they could discuss “kickbacks” at lunch. He began paying the ICAP cash broker a quarterly payment of $9,000, totaling $72,000 by the end of the scheme.

Civil penalties and criminal charges. The CFTC settlement order found that ICAP knowingly caused panel banks to make false, misleading, or knowingly inaccurate reports concerning borrowing costs in violation of Section 9(a)(2) of the Commodity Exchange Act (CEA). The firm also manipulated Yen LIBOR at times for certain tenors, in violation of Sections 6(c), 6(d) and 9(a)(2) of the Act. Further, ICAP attempted to manipulate Yen LIBOR and aided and abetted the attempts of derivatives traders to cause false or misleading Yen LIBOR submissions to be made, in violation of Section 13(a). ICAP was liable for the acts of its agents under Section 2(a)(l)(B) and CFTC Regulation 1.2.

The CFTC ordered ICAP to cease and desist from further violations and to pay a civil monetary penalty of $65 million. In addition, the CFTC required ICAP to complete certain undertakings to strengthen internal controls.

The FCA fined ICAP £14 million for the collusion. Tracey McDermott, director of enforcement and financial crime, said: “This is our fourth penalty in relation to LIBOR and our investigations continue. The lessons however go far wider than LIBOR and we will take a very dim view of those who do not learn them.”

The DOJ charged the three brokers with conspiracy to commit wire fraud and two counts of wire fraud. They each face a maximum penalty of 30 years in prison for each count.

Connection to regulatory reform. CFTC Chairman Gary Gensler said the order shows the need to coordinate internationally to transition to an alternative to LIBOR to best restore integrity to markets. In contrast to some, Gensler has repeatedly stated the need for a LIBOR alternative, rather than reform.

Chairman Gensler also drew a connection to wider derivatives reform, saying the order highlights the importance of Dodd-Frank reforms to bring oversight to swaps trading platforms. Required registration of swap execution facilities (SEFs) begins next week, which closes exemptions that had previously allowed for unregistered, multilateral swaps trading platforms.

MainStory: TopStory Derivatives Enforcement FraudManipulation NewYorkNews

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