Monday, 24 September 2012

The Gathering Storm – an update on the LIBOR Scandal


On the eve the of Royal Bank of Scotland’s (RBS’s) multi-million dollar settlement with regulators in relation to the LIBOR scandal,[1] it seems an opportune time to provide an update on developments in the LIBOR scandal. In the August 2012 edition of the CCH Competition and Consumer Law Tracker (click here) I provided an introduction to the LIBOR rate rigging scandal as well as an update of developments since the Barclays Bank $US450 million settlement.[2] In this article, I will be providing an update of developments in the various LIBOR investigations since early August 2012 as well as some additional background information which completes the LIBOR scandal story so far.

Secret LIBOR Committee

The most significant development which has occurred in the last month has been the revelations of the existence of a “secret LIBOR committee”[3]. As reported by various news services in late August 2012, the British Banker’s Association had apparently established a Foreign Exchange and Money Markets Committee (FEMMC) some years ago which had:

…sole responsibility for all aspects of the functioning and development of Libor...Its functions include the design of the benchmark, which banks sit on the panels that determine the rate, and scrutiny of all rates submitted.[4]
The FEMMC comprised of senior executives from a number of the world’s largest banks who met every two months at an undisclosed location to discuss the LIBOR. The members of the FEMMC were secret, as was the identity of its Chairman. The FEMMC also apparently had a practice of not keeping any minutes of its meetings.

The main significance from an antitrust perspective of the existence of the FEMMC is that it will make it exceedingly difficult for the senior executives of the participating banks to claim they had no knowledge of the LIBOR manipulation. This is because the senior executives on this committee had the apparent role of scrutinising the LIBOR submissions to make sure that they accurately reflected borrowing costs.

There is little doubt that antitrust regulators such as the Antitrust Division of the Department of Justice (US DOJ) will be showing a great deal of interest in the activities of the FEMMC.

High balling the LIBOR

Much of the initial focus of the media and academic writers in relation to the LIBOR has been on the likelihood of the LIBOR being manipulated downwards or “low-balled” during the Global Financial Crisis (GFC). The view was that the participating banks wanted to “low-ball” the LIBOR to convince the markets that they were financially strong. An incidental event of this low-balling was that derivatives traders saw the opportunity of making money from “betting” on lower LIBOR rates.

A potentially unintended (but not unforeseeable) consequence of “low-balling” the LIBOR was that financial institutions, such as the Baltimore Bank, which referenced the LIBOR in their loans, ended up getting lower returns than they should have, because of the lower LIBOR interest rates.

However, recently there has been a growing amount of speculation that the participating banks may have been driving up or “high-balling” the LIBOR before the GFC [5]. The obvious consequence of “high-balling” the LIBOR is that the participating banks would have made more money as lenders of funds. The other obvious consequence of the “high-balling” of the LIBOR was that borrowers would have paid more than they should have.

It is the possibility that the LIBOR may have been overstated in the period 2005 to 2008 which is creating the most interest amongst antitrust and financial regulators. This is because one consequence of “high-balling” the LIBOR would be that “mum and dad” borrowers may have paid significantly more for their mortgages than they should have. If such consumer detriment can be proven, it will be a significant aggravating factor in the minds regulators, which will ultimately increase the size and severity of the penalties sought by anti-trust and financial regulators.

More subpoenas, more investigations

On 9 August 2012, JP Morgan Chase announced that it had received subpoenas, requests for documents and requests to interview staff from the following regulators in relation to the LIBOR scandal:[6]

  • US DOJ;
  • Commodity Futures Trading Commission (CFTC);
  • Securities and Exchange Commission (US SEC);
  • UK Financial Services Authority (FSA);
  • Canadian Competition Bureau (Bureau); and
  • Swiss Competition Commission.
Since the first article about the LIBOR scandal in the CCH Competition and Consumer Law Tracker in August 2012, a number of additional regulators now appear to be involved in the LIBOR scandal, including the US SEC, the Bureau and Swiss Competition Commission.

JP Morgan also disclosed that it had received enquiries in relation to the European and Japanese versions of the LIBOR, namely the EURIBOR and the TIBOR.

Other banks to announce that they had received subpoenas from various antitrust regulators include Deutsche Bank, HSBC, Royal Bank of Scotland, and UBS AG. Barclays Bank announced it had also received subpoenas, which shows that even after the July settlement, it is still a long way from putting this matter behind it.


The US DOJ has also empanelled a grand jury in Washington DC in relation to the LIBOR scandal. It is generally understood that this grand jury is deliberating on the likelihood that the participating banks have engaged in cartel conduct in breach of section 1 of US Sherman Act 1890 [7].

Having said that, it is likely that this grand jury is looking at a broader range of issues, than just antitrust allegations.

What should be noted is that the $US160 million settlement between the US DOJ and Barclays that was entered into on 27 June 2012 did not relate to potential antitrust concerns. Rather it was a settlement between the US DOJ’s Criminal Fraud Section and Barclays in relation to the banks fraudulent manipulation of the LIBOR.

The US DOJ's Criminal Fraud Section agreed not to criminally prosecute Barclays for any crimes relates to Barclay’s fraudulent submissions of benchmark interest rates, including LIBOR and EURIBOR. In return Barclays agreed to pay a financial penalty of $US160 million and to continue co-operating in the agency’s on-going criminal investigation of the LIBOR scandal [8].

The settlement agreement between the Fraud Section and Barclays, the agency made the following observations about Barclay’s co-operation:

Barclays's cooperation stands out as a particularly significant consideration in the Fraud Section's decision to enter into this Agreement. After government authorities began investigating allegations that banks had engaged in manipulation of benchmark interest rates, Barclays was the first bank to cooperate in a meaningful way in disclosing its conduct relating to LIBOR and EURIBOR. Its disclosure included relevant facts that at the time had not come to the government's attention. Barclays's cooperation has been of substantial value in furthering the Fraud Section's investigation of the conduct relevant to this Agreement. From the outset of the investigation to the present, Barclays's cooperation has been extraordinary and extensive, in terms of the quality and type of information and assistance provided to the Fraud Section. To date, the nature and value of Barclays's cooperation has exceeded what other entities have provided in the course of this investigation.[9]
Relevantly, despite the apparently high level of cooperation provided by Barclays to the Fraud Section it was still fined $US 160 million. This suggests that the likely fines which will be sought by regulators from non-cooperating banks will be many times larger than Barclay’s $US160 million fine.

There is also a very significant carve-out in the Barclays settlement with the Fraud Section. Namely that:

This Agreement does not provide any protection against prosecution for any crimes except as set forth above, and applies only to Barclays and not to any other entities or to any individuals, including but not limited to employees or officers of Barclays..[10]
In other words, the settlement is limited to fraud and violations of the laws governing securities and commodities markets and not to any potential antitrust violations which may have occurred.

Canadian Competition Bureau

The Bureau has also commenced an investigation into an alleged cartel in relation to the LIBOR rate in breach of section 45 of the Canadian Competition Act (1985).

This investigation was commenced after the Bureau received an immunity application in relation to cartel conduct from one of the participating banks. In documents filed by the Bureau, the Bureau states:[11]

The Bureau became aware of this matter after one of the Participant Banks in the Alleged Offences (the “Cooperating Party”) approached the Bureau pursuant to the Immunity Program.

On January 5, 2011, the Bureau granted the Cooperating Party a “first-in marker” under the Immunity Program.

While the identity of the party which has sought immunity remains confidential, the participating banks which have subsequently been ordered to produce documents in relation to the alleged cartel is public – namely:
  • HSBC Bank Canada;
  • Deutsche Bank
  • JP Morgan;
  • Royal Bank of Scotland; and
  • Citibank.
The Bureau’s court documents provide further details of the alleged cartel conduct which is the subject of their investigation:[12]
Counsel for the Cooperating Party has proffered that, during the Material Time, the Participant Banks communicated with each other and through the Cash Brokers to form agreements to fix the setting of Yen LIBOR. Counsel for the Cooperating Party proffered that this was done for the purpose of benefiting trading positions, held by the Participant Banks, on IRDs. By manipulating Yen LIBOR, the Participant Banks affected all IRDs that use Yen LIBOR as a basis for their price, including IRDs with Canadian counterparties. 

Counsel for the Coopeting Party has proffered that the alleged communications and agreements in relation to Yen LIBOR occurred outside Canada but affected IRDs based on Yen LIBOR on a worldwide basis, including in Canada.
In other words, the cooperating bank has claimed that six global banks formed a worldwide cartel to set the price of Yen LIBOR for the purpose of benefiting their respective trading positions. Furthermore, while this conduct did not occur in Canada, the Bureau claims that the cartel had an impact on Canada and as such is subject to the Competition Act.

European Commission

The EC's approach to LIBOR manipulation has been less clear. News reports indicated that the EC raided the premises of a number of participating banks as long ago as 18 October 2011, including Deutsche Bank’s London offices.[13] Since that time, there has not been a great deal of information concerning the EC’s investigations.

It appears that the EC’s first concern was that the participating banks’ conduct may not have been captured by its existing EC proposals for criminal prohibitions on insider trading and market manipulation. Accordingly, the EC’s initial focus was to take steps to amend these proposed laws to ensure that they dealt adequately with the manipulation of benchmarks.

In addition, the EC recently issued a consultation document on the “Regulation of Indices”, in which they are seeking comment from various stakeholders on finding an alternative to the LIBOR[14].

However, in a speech in July 2012, Joaquín Alumina, the Vice President of the European Commission responsible for Competition Policy made a number of comments about the EC’s current cartel investigations into the LIBOR scandal:[15]

...the most notable antitrust cases are those related to the LIBOR scandal that has recently hit the headlines.
The story is quite shocking and brings us back to the banking industry’s most irresponsible behaviour of the past.
Many public authorities around the world are taking action against the manipulation of benchmark financial rates and the first fines have already been imposed by financial regulators in the UK and the USA.
Let me clarify that these authorities fall into three different categories:
First, antitrust authorities, including the European Commission;
Second, authorities dealing with fraud and other forms of criminal conduct, such as the US Department of Justice, Fraud Division; and
Third, financial regulators, such as the Financial Services Agency in the UK and the Commodity Futures Trading Commission in the US.
The importance of transactions in financial derivative products is enormous. In 2011, interest-rate derivatives had a gross market value of $20 trillion.
These are products that are traded every day on a global basis, involving companies such as banks, pension funds, and also industrial firms seeking to hedge their exposure. They play a key role in the management of risk in our economy. The alleged rate-rigging is a major competition concern.
This is why we started investigating a number of banks last year for their possible concerted manipulation of benchmarks such as LIBOR, EURIBOR and TIBOR – the Tokyo rate – for several currencies.
We are focussing our investigations on suspected cartel arrangements involving financial derivatives related to these benchmark rates, including possible collusion over the setting of the rates.
The investigations have top priority, because this sort of collusion can seriously harm competition worldwide and on our continent in particular.
Again, if our concerns are confirmed, we will take the necessary actions to bring these practices to an end and prompt a change of culture in the banking sector.
As is apparent from Alumina’s comments, the EC’s antitrust investigations of the LIBOR scandal are a “top priority”.

Class Actions

As at 16 August 2012, a total of 30 class actions had been filed in the US against the participating banks in relation to the LIBOR scandal[16]. These class actions have alleged a variety of causes of action, including contraventions of section 1 of the Sherman Act and they are all seeking treble damages against the participating banks.

In most cases, the class action participants are lending institutions who claimed to have suffered loss from the suppression of the LIBOR. However, a number of class actions have been commenced by derivatives traders who purchased and sold exchange traded LIBOR based derivatives.



There are a number of significant challenges facing the regulators currently investigating the LIBOR scandal.

The main challenge will be to ensure that they do not get in each other’s way in their various investigations. This is a significant problem because there appears to be an almost unparalleled number of regulators in the field at the same time, investigating the same conduct and seeking to do deals with the same witnesses. At last count, the following regulators were all investigating the LIBOR:

  1. US DOJ;
  2. US SEC;
  3. US CFTC;
  4. UK FSA;
  5. Serious Fraud Office;
  6. Canadian Competition Bureau;
  7. Swiss Competition Bureau;
  8. European Commission;
  9. Swiss FINMA; and
  10. Japanese Fair Trading Commission.
It is vitally important for these regulators to attempt to coordinate their investigatory efforts so that they do not inadvertently delay or even derail another regulator’s investigation. This will involve sharing both prospective witnesses and as much documentary evidence as is permitted under various national legislative regimes.

Another issue which the regulators will have to guard against is giving immunities to the wrong participating banks. As with every cartel, there are leaders and followers. Accordingly, in their haste to build their cases, regulators will have to guard against giving an immunity to a participating bank which may have been the leader or ringleader of the cartel. If this happens, such an immunity may undermine the actions taken by other regulators against the true ringleader of the cartel.

In this regard, there is evidence that the regulators are coordinating their investigations. As stated in the Canadian Competition Bureau filing:[17]

116. The alleged conspiracy is international in nature and is currently being investigated in foreign jurisdictions that are identified in Exhibit II. The Bureau is coordinating its investigation of the alleged international conspiracy and cooperating with these foreign jurisdictions.
117. As the information in Exhibit II identifies the foreign jurisdictions and contains information relating to their ongoing investigations, the Exhibit, if disclosed, could compromise the nature and extent of these investigations. As it is anticipated that some of the evidence gathered through the investigations in one or more of the foreign jurisdictions may be shared with the Bureau to further the Bureau's investigation, the information in Exhibit II, if disclosed, could also compromise the nature and extent of the Bureau's investigation into this international cartel. The Bureau has an obligation to the foreign jurisdictions to keep any information provided by them to the Bureau confidential.
While this is good news for those who want to ensure that the LIBOR scandal is quickly and effectively investigated it is bad news for the participating banks.

Participating banks

There are an enormous number of challenges facing the participating banks. It will be all but impossible for participating banks to organise a “group settlement” with a number of regulators, as Barclays did with the US FSA, CFTC and the US DOJ Fraud Section. Such “group settlements” take a considerable amount of time to organise and one thing the participating banks do not have is time.

Therefore, the participating banks will have to make a strategic decision whether to give up or whether to fight to the end. If they decide to “give up” the strategy must be to approach the regulators which can seek the most significant penalties and try to do a deal for immunity or leniency. Clearly, in the antitrust world this means that the participating banks need to try to do a deal with the Antitrust Division of US DOJ, which can seek large criminal penalties and jail time for cartel conduct, and the EC, which can impose and regularly does impose enormous civil pecuniary penalties.

However, in the US system it is only the first through the door which gets immunity, so it is very likely that the first immunity has already been granted to one of the participating banks. Therefore, the best that the rest of the participating banks can hope for is to get leniency.

The participating banks could seek to make an application under the US DOJ’s Amnesty Plus program.[18] This program provides immunity for cartel members who are able to inform the US DOJ first of another cartel in which the applicant has been a participant.

In the EC, the approach to immunity is quite similar to the US. The main difference is that they have a sliding scale type policy in relation to the grant of leniency. The first company to inform the Commission of an undetected cartel by providing sufficient information to allow the Commission to launch an inspection at the premises of the companies allegedly involved in the cartel will obtain a full immunity.

Companies which approach the EC after immunity has been granted, can still obtain relief where the evidence they provide represents “significant added value”. As stated by the EC:[19]

Evidence is considered to be of a "significant added value" for the Commission when it reinforces its ability to prove the infringement. The first company to meet these conditions is granted 30 to 50% reduction, the second 20 to 30% and subsequent companies up to 20%.


The LIBOR scandal continues to gain momentum. It is likely that over the next two months a number of the participating banks and regulators will announce multi-million dollar settlements. However, regulators must not negotiate the same types of settlements as was accepted by the US DOJ Fraud Section. Effectively, the US DOJ Fraud Section accepted a $US160 million settlement in return for the agency agreeing not take a criminal prosecution against Barclays Bank or any of its employees for what appears to have been serious, long-running and blatant multi-million dollar fraud.

It is simply not appropriate for any regulator with criminal jurisdiction to allow any of the participating banks to “buy their way out” of fraud or cartel conduct. The only appropriate sanctions which regulators with criminal jurisdiction should be pursuing are criminal convictions, with significant jail time. Only in this way will these regulators achieve the proper goals of regulatory action – namely, specific and general deterrence. Indeed, only by seeking criminal penalties and jail time will these regulators make it clear to the world’s largest banks that compliance with laws is not simply a cost of doing business but rather a moral imperative.

[1] RBS faces Libor fine of up to $480 million – FT, Reuters, dated 8 September 2012 -
[2] Michael Terceiro, Low-balling the LIBOR – the LIBOR rate rigging scandal, CCH Competition and Consumer Law Tracker, Issue 8, 23 August 2012 -
[3] This is Actually Real: The First Rule of Libor Club is You Do Not Talk About LIBOR Club, Business Insider, 21 August 2012 -
[4] Secret Libor committee clings to anonymity after rigging scandal, Bloomberg, 21 August 2012 -
[5] Matthew Jensen, The Uses of LIBOR and the Victims of its Manipulation: A Primer, The American, dated 23 August 2012 -
[6] JPMorgan Chase Libor Subpoenas Coming from Everybody in the World, Huff Post, 9 August 2012 -
[7] Libor price fixing case is getting work for lawyers, Reuters, 11 July 2012 -
[8] Letter from US Department of Justice, Criminal Division to Barclays Bank PLC, US DOJ, dated 26 June 2012 -
[9] Ibid., pp. 1-2.
[10] Ibid. p. 2.
[11] Affidavit of Brian Elliott in the Matter of the Competition Act, R.S.C. 1985, c. C-34, as amended, dated 19 May 2012 at
[12] Ibid., p. 11.
[13] Deutsche Bank’s London Offices Were Raided Yesterday in an Euribor Investigation, Business Insider, 19 October 2011 -
[14] Consultation Document on the Regulation of Indices, European Commission, 5 September 2012 -
[15] Speech by Joaquín Alumina, the Vice President of the European Commission responsible for Competition Policy ,The New Portuguese Competition Law, European Commission, 13 July 2012 -
[16] LIBOR-Based Financial Instruments Antirust Litigation: Some Complaints of Possible Reading Interest, Legal Research Plus, Stamford Law School, 16 August 2012 -
[17] Op. cit., footnote 12, p. 33.
[18] Speech by Scott Hammond, Measuring the Value of Second-In Cooperation in Corporate Plea Negotiations, Antitrust Division, US DOJ, at
[19] Leniency Policy, European Commission -

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