March 26, 2023

DealBook: In UBS Convictions, Parallels to the Libor Investigation

Above, a branch of UBS in Zurich. Three former bank executives were found guilty last week of rigging bids to invest municipal bond proceeds.Arnd Wiegmann/ReutersAbove, a branch of UBS in Zurich. Three former bank executives were found guilty last week of rigging bids to invest municipal bond proceeds.

The conviction on Friday of three former UBS executives on conspiracy and wire fraud charges for rigging bids in the municipal bond market may serve as a template for how prosecutors can pursue cases in the manipulation of the London interbank offered rate, or Libor.

In the UBS case, federal prosecutors were able to obtain the convictions involving an arcane area of the financial markets. The accusations involve various bankers colluding in setting interest rates at the expense of investors and borrowers.

That certainly has parallels to the Libor inquiry as more banks are investigated in the submission of false information for the benchmark rate used in trillions of dollars of loans and bonds worldwide.

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In the UBS case, three of the bank’s former executives were accused of working with brokers at other firms to rig bids submitted to local governments and agencies to invest the proceeds of their bond offerings. By lowering the interest rate paid on the investment contracts, the firms were able to generate higher returns.

The defendants were also charged with accepting kickbacks from firms in exchange for steering business their way. The government relied on recordings and e-mails to establish its case, along with cooperating witnesses who had entered guilty pleas.

In the recent UBS case, United States Judge Kimba M. Wood took a broad view of what affects a financial institution.In the recent UBS case, United States Judge Kimba M. Wood took a broad view of wire fraud violations that affect financial institutions.

Although this type of collusion can violate the antitrust laws, federal prosecutors centered their case on the wire fraud statute because it provides a longer prison term and has a longer statute of limitations to pursue charges. A defendant convicted of an antitrust violation can receive a sentence of up to 10 years, while wire fraud that affects a financial institution authorizes a maximum 30-year prison term.

The defendants raised the statute of limitations issue in trying to get their case dismissed; the transactions occurred primarily from 2001 to 2004, and the defendants were not charged until late 2010.

Under federal law, most charges must be filed within five years of the conduct. The UBS defendants asked the United States District Court in Manhattan to dismiss some counts on those grounds. A law adopted in 1990 during the savings and loan crisis, however, expanded the statute of limitations to 10 years for banking crimes and any violation of the wire fraud statute that affects a financial institution.

An opinion by Judge Kimba M. Wood, who presided over the case, took a broad view of what affects a financial institution. As a result, she concluded that the longer limitations period applied to the UBS case.

Although the victims were state and local governments — which do not qualify as financial institutions — she found that settlements affected UBS and other banks because they paid fines and civil penalties to resolve their cases. Although it was the defendants’ own conduct that impacted the financial institutions, their violations were enough to extend the limitations period to 10 years.

The case against the three former UBS executives has a number of interesting parallels to the Libor investigation, providing the framework for prosecutions that might emerge.

One of the defendants, Peter Ghavami, a Belgian who had been head of an investment bank in Moscow, was arrested in December 2010 at Kennedy Airport. In the Libor case, a number of banks are outside the United States, so individuals who might be involved should be wary about traveling to this country because of the risk that they could be detained.

The $450 million settlement by Barclays in the Libor investigation means that a financial institution was affected by the submission of false interest rates for setting Libor. The Justice Department and the Commodity Futures Trading Commission are investigating other banks for their role in manipulating Libor, so we can expect additional settlements that are likely to include substantial monetary penalties.

That means federal prosecutors can rely on the 10-year limitations period because manipulation of Libor affected a financial institution, opening a much wider window for charging individuals for violations.

The Barclays settlement details a number of communications in 2005 and 2006 by traders at the bank seeking to have its Libor submissions manipulated to benefit their investment positions. Among the statements was one in which a person responsible for submitting information for Libor told a trader “Always happy to help, leave it with me, Sir,” and another saying “Done . . . for you big boy.”

The settlement outlining the violations notes that the Barclays traders also colluded with counterparts at other banks to manipulate the Libor submissions, and that they “made the requests in person, via e-mail, and through electronic ‘chats’.” As in the UBS case, prosecutors can pursue charges for violating the wire fraud statute at the banks because e-mail and instant messaging almost always involve interstate transmissions via the Internet.

The definition of an interstate wire transmission has also been broadly construed by the federal courts, making wire fraud particularly useful in cases involving manipulation of information. The communication does not have to be important to the execution of the fraud so long as it was a step in the process, which can include a confirmation like telling “big boy” that the false information had been submitted. A defendant need not even be the one sending or receiving the interstate wire for a violation, or have any knowledge that the communication crossed state lines.

The federal sentencing guidelines recommend substantial penalties for fraud convictions based on the amount of the loss suffered by victims. Because Libor is so important to the loan and debt markets, the potential impact of even a small variation in the rate could trigger enormous losses. Federal judges do not have to make precise calculations when assessing the loss, or even a potential loss. A recommended sentence for manipulating Libor could easily reach 20 years or more.

The conviction of the former UBS executives shows that prosecutors can win a case involving complex transactions and sophisticated financial issues under the wire fraud statute. That is likely to encourage the Justice Department to pursue cases from the manipulation of Libor against individuals for conduct that took place in the last 10 years.

US v Ghavami Statute of Limitations Opinion July 2012

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

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2 U.S. Agencies, 2 Different Accords With Wachovia

The two law enforcement agencies, together with other federal and state regulators, announced Thursday that they had wrested a $148 million settlement from Wachovia Bank, now part of Wells Fargo, on charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market.

The settlements are curious because they seem diametrically opposed. In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004.

But in fashioning a settlement with the S.E.C. for the same actions, based on the same facts, Wachovia agreed to settle the charges “without admitting or denying the allegations.”

Why the S.E.C. would allow a company to avoid admitting conduct that it has already admitted elsewhere is at the center of a continuing debate over how the agency polices Wall Street. The S.E.C. has settled three previous cases involving municipal bond bid-rigging in the same way over the last year. Other federal and state agencies, including the Office of the Comptroller of the Currency and a group of state attorneys general, settled cases on Thursday with Wachovia on the same terms.

The “neither admit nor deny” practice, which has been in use for years, has attracted renewed criticism recently. A federal judge in New York last month rejected an S.E.C. settlement with Citigroup over securities fraud charges, saying that the “neither admit nor deny” language deprived him of the facts necessary to determine if the punishment was adequate.

Wachovia’s settlement, like Citigroup’s and dozens of other S.E.C. agreements with Wall Street firms in recent years, also includes an injunction against future violations of the antifraud provisions of federal securities laws. Wachovia has agreed not to violate the same law three times in the last seven years, including in April of this year.

The failure to admit conduct that has already been admitted has some legal experts baffled. “It just doesn’t compute,” said Cornelius Hurley, the director of the Boston University Center for Finance, Law Policy and a former counsel to the Federal Reserve’s board of governors. “I think an explanation is deserved from the S.E.C. as to why there is this apparent discrepancy.”

John Nester, an S.E.C. spokesman, said these settlements should be viewed as a package, not separately. “This is a joint state and federal resolution that includes an admission and compensates victims.”

Robert Khuzami, the commission’s director of enforcement, said in a recent interview that the S.E.C. fashions its settlements using the “neither admit nor deny” language because it believes it often results in the same penalties it thinks it would achieve in a lengthy, expensive court trial.

In addition, he said, companies demand the language for fear that an admission of securities fraud could then be used against them in class action or shareholder lawsuits seeking damages.

Yet that could be the case for Wells Fargo, according to three former S.E.C. lawyers, who spoke on the condition of anonymity because they now represent clients before the S.E.C. In interviews, the lawyers said that the admission in the settlement with the Justice Department could probably be used to support evidence of fraud in private civil lawsuits against Wells Fargo.

Wells Fargo, which said the case involved employees who were no longer at the company, declined to comment on the discrepancies between the two settlements.

The differences between the two settlements include a nonprosecution agreement signed by the Justice Department with Wells Fargo in which the bank admitted that several former employees had committed criminal violations of the Sherman Antitrust Act.

The Justice settlement says simply that Wachovia “entered into unlawful agreements to manipulate the bidding process and rig bids.”

The S.E.C., which has the authority to bring only civil charges, forged an agreement in which Wachovia neither admits nor denies that it violated Section 17(a) of the Securities Act of 1933, which forbids fraud in securities offerings.

The S.E.C. complaint gives six pages of detail on “representative fraudulent transactions” — implying it could supply much more.

Mr. Khuzami, the S.E.C.’s enforcement director, defends the “neither admit nor deny” settlements in part by saying that because the S.E.C. lays out such detail in its complaints, there can be no doubt what occurred.

“I think that people looking at the entirety of that package,” he said, “would be hard-pressed to come away with a conclusion other than, ‘They did something wrong here.’ ”

Judge Jed S. Rakoff of the United States District Court in Manhattan disagrees. He rejected the S.E.C.’s recent settlement with Citigroup, saying it “is neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court “with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”

Judge Rakoff will not rule on the adequacy of the Wachovia settlement, which the S.E.C. filed in federal district court in New Jersey.

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