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Part 2: The Litigation
Commencement of proceedings
We commenced legal proceedings against the MUA and three senior MUA officials on 17 April 2000: The MUA officers were:
- Mr Derrick Newlyn, the South Australian Branch Secretary of the MUA;
- Mr James Boyle, Branch Secretary of the Northern New South Wales Branch of the MUA; and
- Mr Michael O’Leary, National Organiser of the MUA.
It had taken us about 18 months to prepare and file the case, which was very quick given we had also been running the Sydney Mergers and Asset Sales Branch for most of that time.
In about March 2000, I moved from the Sydney Mergers and Asset Sales Branch to GST Operations after being asked to head up the ACCC’s GST enforcement. Even though I became the National GST Enforcement Coordinator in about April 2000, I kept working on the MUA hold cleaning case, which I considered as my pet project.
On the institution of legal proceedings, the ACCC issued the following news release:
ACCC institutes legal proceedings against MUA for hold cleaning demands[1]
The Australian Competition and Consumer Commission has instituted legal proceedings against the Maritime Union of Australia and three senior MUA officials in relation to primary boycott conduct, ACCC Chairman, Professor Allan Fels, said today.
The ACCC has alleged the MUA, and a number of its officials and members, have been engaged in a pattern of conduct whereby they unlawfully hindered and prevented, or attempted to hinder and prevent, vessels from sailing from various Australian ports unless the ship owner agreed to use MUA labour to clean the hold of the vessel.
The practice of hold cleaning has a long history. Demands for hold cleaning work were considered by Justice Sweeney in the 1976 Final Report of the Royal Commission into Alleged Payments to Maritime Unions and again by Mr Frank Costigan in the 1984 Final Report of the Royal Commission into the Activities of the Federated Ship Painters and Dockers Union.
The ACCC concerns relate to the means by which hold cleaning work is demanded by the MUA.
The practice of making a hold cleaning demand involves a union official or officials and members demanding that hold cleaning work which may be required by a ship operator be performed by particular union labour. In the past, such demands were made by officials and members of the Painters and Dockers Union.
The ACCC alleges that in recent times officials and members of the MUA have made unlawful demands for hold cleaning work. The ACCC alleges that on a number of occasions when a demand was not acceded to it was followed by various forms of unlawful action to prevent the vessel from sailing. In some instances, it has been alleged that persons have unlawfully sat on the bollards where the vessel was tied to the wharf so as to prevent the linesmen from releasing the lines.
After an extensive investigation the ACCC formed the view that there had been a number of contraventions of 45DB(1) of the Trade Practice Act 1974. Accordingly, on 2 December 1999 the ACCC wrote to John Coombs, National Secretary of the MUA, to raise its concerns about hold cleaning in accordance with the clause 1 of the Alternative Dispute Resolution Procedure established by the ACCC and the MUA on 7 September 1998. (Mr Coombs is not one of the three senior officials of the union against whom proceedings have been instituted).
The ACCC proposed to the MUA, pursuant to clause 2 of the ADRP, that a meeting be held as soon as practicable to discuss the allegations in more detail and to explore practical steps to cease or otherwise remedy any breach of the Act by the MUA or to otherwise satisfy the ACCC that legal proceedings are not appropriate.
After some preliminary discussions, the MUA rejected the ACCC's settlement proposal. Accordingly, the ACCC believed it had no option but to institute legal proceedings under section 45DB and section 60 of the Act. In general terms, section 45DB prohibits persons from hindering or preventing the movement of goods between Australia and places outside Australia whilst section 60 prohibits the use of physical force or undue harassment or coercion in connection with the supply or possible supply of goods or services to a consumer.
The ACCC will be seeking injunctions, declarations, findings of fact, the implementation of a trade practices compliance program, penalties and costs.
A notable aspect of the ACCC’s news release was the reference to the ACCC’s attempts to resolve the matter by invoking the clause 1 of the Alternative Dispute Resolution Procedure which had been established by the ACCC and the MUA as part of the Waterfront Dispute settlement. We found these meetings with the MUA to be quite pointless in terms of having any constructive dialogue with them about the ACCC’s concerns. Unfortunately, the MUA’s attitude throughout the lead up to the commencement of litigation was that they were “bullet proof”.
No sooner had we instituted legal proceedings than the MUA launched a media campaign accusing the ACCC of being part of yet another grand conspiracy. The MUA claimed that the ACCC’s case had been commenced to coincide with the recent release of particular documents about the Waterfront Dispute to the Opposition transport spokesman.
While the claim was laughable, given the time it takes to prepare complex Part IV cases cases, the ACCC was so incensed by the allegations that it decided to issue the following news release in response:
Maritime Union of Australia case innuendo[2]
The Maritime Union of Australia has accused the Australian Competition and Consumer Commission of conducting a political exercise against the union in regard to the ACCC's legal proceedings against the MUA yesterday (Australian Financial Review, p3).
"There is no justification, no skerrick of a reason for this innuendo", ACCC Chairman, Professor Allan Fels, said today. "We are simply, as always, upholding the law of the land, a law passed by Parliament, without fear or favour.
"There is a suggestion, for example, that the timing of this case is connected to the apparent release of documents to the Opposition transport spokesman regarding the 1998 dispute.
"I, and so far as I know others at the ACCC, were not aware that the Opposition was obtaining these documents and, in any case, it would not have had any effect on the ACCC's decision to institute legal proceedings nor any effect on timing.
"The ACCC's timing was driven by the breakdown of talks with the MUA. In particular, the MUA wrote to the ACCC in a letter received on 6 April advising that it rejected the ACCC's proposals for settlement that had been under discussion since last year. The ACCC instituted proceedings as soon as legally practicable after this date, ie 17 April.
"The ACCC does not generally propose to engage in ongoing public exchanges with the MUA about the litigation. However, the MUA claims that its actions in extracting money from shipowners are really to protect the environment and that the ACCC is placing the environment at risk in a political exercise.
"The ACCC's role is to uphold the law. If there is unlawful action taken then the ACCC 's role is to take appropriate legal action. It regards the actions of the union as unlawful and negotiations to resolve the matter failed.
"Whilst the ACCC regards the union's boycott motives as economic, the ACCC notes the union's claims of environmental justification. It would have been open to the union to seek authorisation for its actions on environmental grounds and this was put to the union.
"Authorisation of unlawful or anti-competitive action is permitted under the Trade Practices Act 1974 if there is a benefit to public that outweighs any anti-competitive effect of the conduct.
"Moreover the MUA is not above the law. If it wants to play a law enforcement role by establishing and enforcing its own environmental protection safeguards by means which may be unlawful, it needs authorisation rather to take the law into its own hands.
"The ACCC understands that there are environmental laws and regulations that relate to the issues raised by the MUA. If these do not work well, as the union claims, the proper course is to get them improved. Alternatively, if private enforcement of the environment law by the MUA is the true and only aim of the boycott, authorisation should have been sought.
As is apparent from the above news release, the ACCC also took the opportunity to attack the MUA’s claims that their hold cleaning demands were somehow linked to a desire to protect the environment. Indeed, one senior MUA official said to me shortly after we had commenced legal proceedings that by the end of the trial he would have “greenies climbing over the roof of the courthouse” (which surprised me somewhat given the MUA’s long held concern about safety issues.).
The reality was that most of the MUA businesses which were engaged in hold cleaning were highly unprofessional in the way they carried out the work. They also had a much worse track-record than their non-MUA competitors in terms of discharging cleaning effluent from the holds into the harbour.
We had established an excellent legal team to run the litigation. We had briefed the Australian Government Solicitor as the lawyers on the case and retained David Yates SC, Peter Renehan and David Godwin as our counsel. This proved to be a very good team which the ACCC used again in its liquor cases against Liquorland Australia Limited and Woolworths Limited a few years later.[3]
While the case was ultimately transferred from me to the Sydney Enforcement Branch, I continued to work with a small enforcement team in a consultancy-type role.
This arrangement continued for some time until I had a run in with the Enforcement Director who had “notional” control of the case. I had been unhappy about a couple strategic decisions which he had made in relation to the case, which I believed were wrong and demonstrated his total lack of understanding of the case. I told him my views in no uncertain terms.
Unfortunately, this individual complained about my allegedly disrespectful conduct to the then Regional Director, who decided, in the best traditions of a “Dirty” Harry Callaghan B-Grade flick to “take me off the case due to my failure to respect authority”. However, in true “Dirty” Harry Callaghan tradition I kept working on the case for some time “behind the scenes” and “on my own time”.
Having said that, the two enforcement staff who had carriage of the hold cleaning case on a day-to-day basis were exceptionally capable and hard-working officers. They did a fantastic job in preparing the case and most importantly winning over the confidence of the various industry witnesses who the ACCC needed to give evidence if the ACCC was going to win the case.
Part 1: The Investigation
Introduction
As stated in the final post of the Untold Story: The ACCC’s Role in the Waterfront Dispute,[1] some ACCC staff, primarily me, were quite unhappy with the settlement reached with the MUA in the Waterfront Dispute. We believed that the MUA had more or less gotten off scot-free, considering that it had engaged in a large number of blatant breaches of the TPA.
Accordingly, the first thing we did once the settlement with the MUA in relation to the Waterfront Dispute had been signed off, was pick up our pens and recommence work on our hold cleaning investigation.
Background
As stated in an earlier Untold Story post,[2] the practice of demanding payment for cleaning out the holds of vessels had been around for a very long time. The practice started in Sydney’s Balmain in 1900 with the establishment of the Balmain Labourers Union whose members were engaged primarily in painting, cleaning, docking and undocking of vessels.
The Painters and Dockers came to prominence in 1980 when it became the subject of the Royal Commission on the Activities of the Federated Ship Painters and Dockers Union, better known as the Costigan Royal Commission.
We were very surprised to discover that this illegal practice, which had been exposed by the Costigan Royal Commission in 1984, was still continuing unabated in a number of Australian ports in 1997. The practice of either forcing vessel owners to use MUA labour to carry out necessary or unnecessary hold cleaning work or demanding payment for hold cleaning work already carried out by another cleaning company was occurring quite regularly in the bulk cargo ports in Western Australia, South Australia, Newcastle and Port Kembla.
The Investigation
Once the Waterfront Dispute was over, my Waterfront team (which by that stage consisted of my Assistant Director and me) went back to our usual job of running the Sydney Mergers and Asset Sales Branch. However, we also dug out the hundreds of pages of section 155 documents we had obtained a year before from various market participants. We resumed our painstaking review of these documents in an attempt to identify potential contraventions of the TPA.
We were quite understaffed in Mergers, so finding the time to investigate and prepare the hold cleaning case against the MUA was very difficult. The only way we could conduct our mergers work and the hold cleaning investigation at the same time, was to work on mergers until about 6pm or 7pm and then to commence the hold cleaning investigation at about 7pm each night. We would continue to work on this investigation until 11 or 12pm.
The first task was to review hundreds of pages of section 155 documents, consisting primarily of telexes and facsimiles from shipping agents and ship owners. We would try to match up the documentary evidence provided by a ship owner with the documents generated by the shipping agent in relation to the same hold cleaning demand.
The second task was to re-engage with the industry. This involved contacting various potential witnesses and explaining to them that the ACCC had decided to reopen its hold cleaning investigation. Some industry participants were unwilling to help as they suspected that our case would only result in a slap on the wrist for the MUA. Other industry participants had a higher opinion of the ACCC after the Waterfront Dispute as they had been impressed by our determination in holding out for an outcome for small business victims of the dispute.
Obviously, winning over market participants is a very important part of running any case, as you will be relying on these market participants to be your witnesses in any future litigation.
Framing the contraventions
The focus of our investigation had been on instances of primary boycotts in breach of section 45DB of the TPA. As explained in the Untold Story, this provision stated:
(1) A person must not, in concert with another person, engage in conduct for the purpose, and having or likely to have the effect, of preventing or substantially hindering a third person (who is not an employer of the first person) from engaging in trade or commerce involving the movement of goods between Australia and places outside Australia.
Our argument was that the MUA had engaged in conduct which had prevented and substantially hindered ship owners from engaging in trade or commerce involving the movement of bulk goods between Australia and places outside Australia.
While this contravention was generally quite easy to prove, the main difficulty arose in relation to proving that two MUA officers or employees had acted in concert. Often the ship owner would simply capitulate once they had received a threat from a single local MUA official. Unfortunately, we could not pursue these types of allegations because:
- we could not prove that two MUA officials or employees had acted in concert and
- we could not prove that the movement of goods had been hindered or prevented.
Therefore, we had to focus our case on incidents where:
- we could clearly identify at least two MUA officials or employees acting in concert; and
- we could show the vessel carrying the relevant goods had been prevented or significantly hindered from sailing by the conduct of the MUA officials or employees.
ACCC staff were also keen to explore whether other provisions of the TPA could be applied to the conduct. The main section of the TPA which ACCC staff we were keen to pursue was section 60 which provided (at that time):
A corporation shall not use physical force or undue harassment or coercion in connection with the supply or possible supply of goods or services to a consumer or the payment for goods and services by a consumer.
The reasons ACCC staff were keen to use section 60 was because:
- the section seemed to more accurately reflect the conduct which the MUA was engaging in, which was thuggish and threatening behaviour; and
- section 45DB had only been in the TPA since 1996 so we were unable to use it in relation to hold cleaning demands which had occurred prior to that date. However, section 60 had been in the TPA for a long time so we were able to use the section in relation to demands which had occurred prior to 1996.
However, there were a few obstacles to using section 60 in relation to hold cleaning conduct.
The first obstacle was that the supply had to be “to a consumer”. On first glance, this did not seem to be a proper characterisation of the “transaction” between the MUA and a ship owner. However, this ended up not being a problem where the value of the transaction was less than $40,000 as such transactions were deemed to be "consumer transactions" under section 4B of the TPA. This did mean that we had to abandon potential section 60 claims in relation to hold cleaning demands where the MUA had demanded or been paid more than $40,000.
The second obstacle was that under section 60 the entity contravening the provision had to be a corporation, which the MUA was not. Therefore, the only way we could use section 60 was to rely on the extended operation of the TPA as set out in section 6.
We sought to use section 6(2)(b)(i), which extended the operation of the TPA to conduct involving trade and commerce between Australia and places outside Australia.
We also believed we could use section 6(3), which extended the operation of section 60 to conduct involving the use of postal, telegraphic or telephonic services, as long as we could prove that an MUA official or employee had used a relevant "service" to make the hold cleaning demand. In other words, we could only pursue section 60 cases where the MUA officer or employee had engaged in some part of the conduct by sending a letter through the mail, making a telephone call or even sending a facsimile.
While it took a great deal of argument to convince the ACCC’s counsel that section 60 could and should be used, they ultimately agreed to include some section 60 claims in the case against the MUA.
ACCC staff had also wanted to explore the use of section 58 of the TPA in relation to the MUA’s hold cleaning conduct. Section 58 prohibits blowing or accepting payment for a good or service when the party accepting the payment does not intend to supply that good or service.
The reason that the ACCC was interested in this provision was because of instances of the MUA demanding payment from ship owners for hold cleaning where the service had already been provided by another cleaning company. In other words, there were instances of the MUA seeking to extract payment from a ship owner even though they had used another company rather than MUA labour to clean their holds.
ACCC staff believed that as it was impossible in these circumstances for the MUA to provide the service of hold cleaning for the vessel (as the holds had already been cleaned) the MUA were accepting payment in circumstances where they knew they could not carry out the hold cleaning work. While such conduct is more appropriately described as “extortion”, we believed that we could attack this conduct under section 58 because the MUA were accepting payment for hold cleaning services when it clearly had no intention of supplying hold cleaning services.
Despite the best efforts of the ACCC to convince counsel to include a section 58 claim in our case, we were not successful. In hindsight, this was probably a good decision, as such a claim may have been seen by the court as stretching the purpose of section 58 to absolute breaking -point.
This article first appeared in the CCH Australian Competition & Consumer Law Tracker, Issue 8, August 2012.
Introduction
The LIBOR scandal appears to be gaining momentum. Each week we are gaining more insights into the likely scale and scope of the LIBOR rate rigging scandal. Most recently, there have been reports that the Antitrust Division of the US Department of Justice has offered several former UBS AG employees immunity from criminal prosecution in return for their cooperation in the investigation of suspected LIBOR rate manipulation.[1] The UK Serious Fraud Office has also been quite vocal about its ability to prosecute and jail any banking executives who can be proven to have been involved in the LIBOR rate rigging.[2] In addition, many of the banks at the centre of the allegations have been conducting their own internal investigations and have started dismissing employees who they have found to be involved in rigging the LIBOR.
In this article, I will be seeking to provide a summary of the relevant background to the LIBOR scandal and then outlining the rapid developments which have been occurring over the last month since Barclay’s settlement with US and US regulators. Finally, I will be briefly discussing the level of penalties and civil damages which the alleged cartel members may ultimately have to pay to regulators and to the victims of the cartel.
What is the LIBOR?
The LIBOR (or London Interbank Offered Rate) is the main reference point for calculating global short-term interest rates. As explained by Abrantes-Metz:
The LIBOR has been called “world's most important number”. It is a primary benchmark for global short-term interest rates; the LIBOR is used as a basis for the settlement of interest rate contracts on many of the world's major futures and options exchanges as well most over-the-counter and lending transactions with an estimated value of U.S. $350-400 trillion contracts, instruments and transactions referencing it.[3]
The LIBOR was calculated by the British Bank Association (BBA) in the following way - each day the BBA would ask 16 of the worlds leading banks the following question:
At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am London time?
The BBA would then take the quotes from the 16 participating banks and determine the four highest and the four lowest quotes. It would then disregard these eight quotes and then work out the average of the remaining eight “middle” quotes. This average figure would become the LIBOR rate, which would then become the reference for trillions of dollars of contracts, instruments and other transactions.
The 16 participating banks at the time when the alleged LIBOR scandal was to said to have occurred were:
- Bank of Tokyo–Mitsubishi UFJ
- Credit Swisse First Boston (CSFB)
First warnings
The first warnings that there may be something wrong with the LIBOR rate arose in May 2008. In an article written for the Wall Street Journal, Carrick Mollenkamp and Mark Whitehouse argued that a number of the participating banks may have filed flawed interest rate data in order to reduce their own borrowing costs.[4] As stated in the article:
The Journal analysis indicates that Citigroup, WestLB, HBOS, JP Morgan Chase & Co and UBS are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or LIBOR, than what other market measures suggest they should be.[5]
The market measure which Mollenkamp and Whitehouse were referring to was the market for credits–default swaps, or the default insurance market. Such credit-default insurance is generally seen as a good indicator of a bank's financial health because it measures the likelihood of a bank reneging on its debts.
Accordingly, Mollenkamp and Whitehouse formed the view that if the LIBOR rates were accurate, that they should be moving in unison with the credit-default swap market. However, after “crunching the numbers” Mollenkamp and Whitehouse concluded that:
… beginning in late January (2008), as fears grew about possible bank failures, the two measures began to divert, with reported LIBOR failing to reflect rising default – insurance costs… The gap between the two measures was wider for Citigroup, Germany's WestLB, UK’s HBOS, JP Morgan Chase and Switzerland’s UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates.[6]
Mollenkamp and Whitehouse also speculated about the potential effects of the participating banks “low-balling” the LIBOR. If the LIBOR had been understated to the extent estimated by Mollenkamp and Whitehouse, this would have resulted $45 billion less interest being paid by borrowers, which would have included the participating banks.
Mollenkamp and Whitehouse also provided details of a particularly graphic example involving UBS AG, which appeared to support their broader thesis. In April 2008, UBS AG went to the commercial-paper market to borrow dollars for a three-month period at an annual interest rate of 2.85%. However, the interest rate that UBS AG submitted to the BBA as part of its LIBOR quote for 16 August 2008, was only 2.73%, which was 0.12% lower than the interest rate at which it was actually borrowing money.
Muddying the waters
After the Mollenkamp and Whitehouse article, a number of economists took up the challenge of trying to establish whether the LIBOR rate had in fact been manipulated.
In an article written in August 2008, entitled LIBOR Manipulation?, Rosa M Abrantes-Metz, Michael Kraten, Albert D Metz and Gim Seow,[7] set out to examine the methodology adopted by Mollenkamp and Whitehouse to determine whether the LIBOR had been manipulated. In their analysis, the authors also sought to compare the LIBOR rates with other rates of short-term borrowing costs, namely credit default swaps.
After reviewing a considerable amount of data, the authors concluded:
While there are some apparent anomalies within the individual quotes, the evidence found is inconsistent with an effective manipulation of the level of the LIBOR. However, some questionable patterns exist with respect to the bank’s daily LIBOR quotes, especially for the period ended August 8, 2007, for which the intraday variance for banks quotes is not statistically different from zero.[8]
The conclusions reached by Abrantes-Metz et. al. were challenged by Snider and Youle in an article entitled Does the LIBOR reflect banks’ borrowing costs? written in 2010. These authors also examined the banks’ LIBOR bids and compared then to observable cost measures, including both credit-default swap spreads and LIBOR quotes by the same banks for other currencies. These authors concluded that:
…we have presented new evidence corroborating concerns that LIBOR panel banks maybe understating their true borrowing costs. Previous analysis of the problem have suggested the cause of this misreporting is the desire of panel banks to appear strong, especially during the recent banking crisis. In contrast, our theory of misreporting incentives points to a more fundamental source, namely that bank portfolio exposure to the LIBOR give them incentives to push the rate in a direction favorable to these positions.[9]
In other words, not only did Snider and Youle find that participating banks had understated the LIBOR, but they concluded that the participating banks had done so for the purpose of favouring their own trading positions.
Barclays’ Capitulation
Any debate as to whether the participating banks had been engaged in widespread manipulation of the LIBOR was put to rest with Barclays Bank’s $US450 million settlement with various regulators in June 2012.
On 27 June 2012, Barclays agreed to settle a Financial Services Authority (FSA) investigation with the payment of a financial penalty of £59.5 million in accordance with section 206 of the UK Financial Services and Markets Act 2000. This fine represented a 30% discount off the FSA’s proposed financial penalty of £85 million because of Barclay’s cooperation and agreement to settle the case.
At the same time, Barclays agreed to pay fines of $US200 million to the Commodity Futures Trading Commission (CFTC) and a further $US160 million to the US Department of Justice (US DOJ) for their role in manipulating the LIBOR.
The FSA in its decision found that:
Barclays acted inappropriately and breached Principle 5 on numerous occasions between January 2005 and July 2008 by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its interest rate derivatives traders (“Derivatives Traders”). At times these included requests made on behalf of derivatives traders at other banks. The Derivatives Traders were motivated by profit and sought to benefit Barclays’ trading positions.[10]
The FSA identified 257 instances of traders asking the Barclay’s staff responsible for submitting LIBOR quotes to alter these quotes to benefit their trading position. There was also evidence of similar requests being made to alter the quotes for the yen and euro equivalents of the LIBOR.
The following are some of the more colourful examples taken from the FSA Report of the types of “inappropriate” behaviour that was occurring at Barclays:
1. On 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody […] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.
Manager B instructed Trader B to: “just tell him to keep it, to put it low”.
Trader B said that he had “begged” the Submitter to put in a low LIBOR submission.
The Submitter had said he would “see what I can do”.[11]
2. On Friday, 10 March 2006, two US dollar Derivatives Traders made email requests for a low three month US dollar LIBOR submission for the coming Monday:
Trader C stated “We have an unbelievably large set on Monday (the IMM). We need a really low 3m fix, it could potentially cost a fortune. Would really appreciate any help.”
Trader B explained “I really need a very very low 3m fixing on Monday – preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So 4.90 or lower would be fantastic”. Trader B also indicated his preference that Barclays would be kicked out of the average calculation.[12]
3. On Monday, 13 March 2006, the following email exchange took place:
Trader C: “The big day [has] arrived… My NYK are screaming at me about an unchanged 3m LIBOR. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”
Submitter: “I am going 90 altho 91 is what I should be posting”.
Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.
Submitter: “I would prefer this [to] not be in any book!”[13]
4. Trader C requested low one month and three month US dollar LIBOR submissions at 10:52 am on 7 April 2006 (shortly before the submissions were due to be made):
“If it’s not too late low 1m and 3m would be nice, but please feel free to say “no”... Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”.
A Submitter responded “Done…for you big boy”.[14]
As is apparent from the above examples, the Barclays employees did not appear to be making any effort to keep secret their illegal activities in suppressing the LIBOR rates. It is also clear from these extracts that Barclays often engaged in the conduct for the purpose of protecting or promoting their own trading positions.
Futhermore, requests for a reduction of the Barclay’s LIBOR quotes did not only come from Barclays traders. Often requests would be received from external traders:
5. On 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays “If it comes in unchanged I’m a dead man”.
Trader G responded that he would “have a chat”.
Barclays’ submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged.
The external trader thanked Trader G for Barclays’ LIBOR submission later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.[15]
Finally, the FSA Report provides a number of examples of Barclays employees seeking to influence LIBOR rates and EURIBOR rates of competing banks:
6. From early October 2006, Barclays’ Derivatives Traders communicated with others in order to co-ordinate high one month EURIBOR submissions on 16 October 2006. These communications included the following:
Trader E made internal requests for high one month EURIBOR submissions to Barclays’ Submitters.
Trader E discussed his requests with an external trader at Panel Bank 1 and made requests to external traders at Panel Banks 2 and 3
The external trader at Panel Bank 1 informed Trader E he would also make a request to a trader at Panel Bank 4.[16]
7. Trader E communicated with traders at Panel Banks 1, 2 and 6 in advance of the IMM date (International Monetary Market date).
For example on 12 February 2007, Trader E stated in an instant message with a trader at Panel Bank 6:
“if you know how to keep a secret I’ll bring you in on it…we’re going to push the cash downwards on the imm day…if you breathe a word of this I’m not telling you anything else…I know my treasury’s firepower…which will push the cash downwards…please keep it to yourself otherwise it won’t work.”[17]
The evidence contained in the FSA report of trader’s behaviour in relation to the LIBOR is reminiscent of the type of behaviour engaged in by Enron’s energy traders. It is quite apparent from these accounts that LIBOR manipulation and collusion was an every day occurrence at Barclays. Indeed, it appears that such illegal conduct was treated very much like a joke within Barclays and with the external traders with whom Barclays dealt.
Dominos starting to fall
Following the explosive revelations documented in the FSA Report, the pressure on both the participating banks and various government regulators to do something increased dramatically. The following is only a brief summary of the major events which have occurred since the Barclay’s settlement on 27 June 2012.
On 3 July 2012, Bob Diamond, the Chief Executive Officer of Barclays and Jerry del Missier, the Chief Operating Officer of Barclays resigned.
On 6 July 2012, the US Serious Fraud Office announced that it would be undertaking a criminal investigation into the LIBOR scandal.[18]
On 27 July 2012, Britain's Lloyds Banking Group announced that it had received subpoenas and requests for information as part of global probes into the LIBOR scandal.
On the same day, there were reports that Rabobank had fired four employees between 2008 and 2011 over the manipulation of interbank lending rates.[19]
On 28 July 2012, there was increased media speculation that UK-based Royal Bank of Scotland Group Plc was likely to be the next major target of the FSA in relation to the LIBOR scandal.
On 30 July 2012, the first of what would become a deluge of class actions was commenced by New York lender, Baltimore Bank. The lender alleged that it had been defrauded of interest income because rates on loans tied to LIBOR were "artificially" depressed. In its suit it indicated that "tens, if not hundreds, of billions of dollars" of loans made or sold in the state of New York alone were affected by rigging the LIBOR.[20]
One 30 July 2012, FINMA, the Swiss market supervisory authority announced that it was questioning UBS AG and Credit Suisse as part of an investigation into possible LIBOR rate rigging.[21]
On 31 July 2012, Deutsche Bank announced that it had discovered that a "limited number" of staff had been involved in the LIBOR rate-rigging scandal. However, Deutsche Bank also claimed that its internal inquiry had cleared senior management of taking part in attempts to manipulate the rate.[22]
On 2 August 2012, Bank of America Corporation disclosed that it had received subpoenas from the US DOJ, CFTC and FSA, as part of their investigations into the LIBOR.[23]
On 3 August 2012, Royal Bank of Scotland announced that it had dismissed a number of traders and employees due to concerns that they had been involved in manipulating the LIBOR.[24]
On 5 August 2012, news reports claimed that UBS AG had dismissed about two dozen traders and managers following an internal investigation into the manipulation of the LIBOR.[25]
On 8 August 2012, Citigroup announced in a filing to the US Securities and Exchange Commission that it had received requests for information and documents from various U.S. and non-U.S. various law-enforcement agencies in relation to the LIBOR.[26]
Finally, on 8 August 2012, there were reports that the Antitrust Division of the DOJ had reached an agreement several former UBS AG employees not to pursue criminal charges against them in return for their cooperation in the investigation of suspected LIBOR rate manipulation.[27]
As is apparent from the short history outlined above, there has been a remarkable amount of activity in relation to the LIBOR scandal in the last month since the Barclays settlement was announced.
Where to from here?
It seems apparent that the LIBOR investigations are likely to gain even greater momentum over the next few weeks as regulators around the world follow the US DOJ’s lead – namely, by offering immunity deals to the various employees and traders who were involved in the LIBOR rate rigging, who have been subsequently dismissed by their employers.
The actions of the US DOJ in offering the former UBS AG employees immunities strongly suggests that the US DOJ will be targeting the senior managers of the participating banks in its investigations. It is likely that the US DOJ has formed the view that the senior managers of the participating banks must have known of the conduct of their employees in manipulating the LIBOR. Indeed, based on the FSA evidence concerning the events at Barclays it is hard to see how the senior managers of the participating banks could not have been aware of what was going on with their LIBOR quotes.
It also seems clear that both the US DOJ and the UK Serious Fraud Squad are minded to pursue criminal penalties and jail time against those senior managers of the participating banks, if they can prove that they have colluded in the setting of LIBOR rates. Furthermore, based on the pace of the investigations thus far it seems possible that the first indictments for LIBOR rate collusion may be only a few weeks away.
Finally, given the importance of the LIBOR rate to global finance, it is inevitable that any fines which will be sought by regulators against the participating banks will be immense. If the financial penalties in the Barclay’s settlement are any guide, the total fines and penalties could well exceed $5 billion once all the participating banks have either settled or been prosecuted. If one adds the likely damages which will arise from the deluge of class actions which have been launched, or are still to be launched against the participating banks, the total financial impact of the cartel on the banks could be many times higher. Indeed one estimate of the potential exposure of the participating banks to civil damages alone has been put at $35 billion.[28] If these estimates prove to be correct, the LIBOR scandal will become the largest and most costly cartel case in the history of antitrust.
Tuttle v Buck 107 Minn. 145, 119 N.W. 946 (1909)
In this Blast from the Past Case Summary, I will be briefing discussing the curious case of Tuttle v Buck decided by the Minnesota Supreme Court at the beginning of the last century.[1] The reason for looking at this case now is because I think that some parallels can be drawn between this case and the recently released report from the Master Grocers of Australia entitled Let’s Have Fair Competition! [2]
Facts: The plaintiff, Tuttle, was the only barber in the village of Howard Lake, Minnesota. He had enjoyed that local monopoly for about ten years. Due to his monopoly of the local market for the supply of haircuts, he enjoyed a prosperous existence – ie he was able to “comfortably maintain himself and family out of the income and profits thereof, and also to save a considerable sum per annum, to wit, about $800”.
The defendant, Buck, a local banker of “great wealth and prominence” in the community decided to establish his own barbershop in competition with Tuttle. He did this by employing barbers at an agreed salary and charging a nominal rent for his barbershop premises. Tuttle sued Buck on the basis that Buck has set up his barbershop for the “malicious” purpose of driving Tuttle out of business.
Issues: Could Buck be liable for trying to drive against Tuttle out business out of pure personal animus?
Decision: The Supreme Court of Minnesota decided that Buck was guilty of “a wanton wrong and actionable tort” because he had the "malevolent" purpose of driving Buck out of business and then “retiring” from the barbershop business.
As stated by the court:
To divert to one’s self the customers of a business rival by the offer of goods at lower prices is in general a legitimate mode of serving one’s own interest, and justifiable as fair competition. But when a man starts an opposition place of business, not for the sake of profit to himself, but regardless of loss to himself, and for the sole purpose of driving his competitor out of business, and with the intention of himself retiring upon the accomplishment of his malevolent purpose, he is guilty of wanton wrong and an actionable tort. In such a case he would not be exercising his legal right, or doing an act which can be judged separately from the motive which actuated him. To call such conduct competition is a perversion of terms. It is simply the application of force without legal justification, which in its moral quality may be no better than highway robbery.[3]
In other words, the fact that Buck simply wanted to set up his business to destroy Tuttle’s business and then close down his barbershop business made his actions illegal. Ironically, had Buck been motivated by a desire to drive Tuttle out of business and then to recoup monopoly rents from his barbershop business, his conduct may have been legal.
The court also made the following broad observations about the dangers of “unrestrained business competition”:
[T]he common law is the result of growth, and . . . its development has been determined by the social needs of the community which it governs. It is the resultant of conflicting social forces, and those forces which are for the time dominant leave their impress upon the law. It is of judicial origin, and seeks to establish doctrines and rules for the determination, protection, and enforcement of legal rights. Manifestly it must change as society changes and new rights are recognized. To be an efficient instrument, and not a mere abstraction, it must gradually adapt itself to changed conditions. Necessarily its form and substance has been greatly affected by prevalent economic theories.
For generations there has been a practical agreement upon the proposition that competition in trade and business is desirable, and this idea has found expression in the decisions of the courts as well as in statutes. But it has led to grievous and manifold wrongs to individuals, and many courts have manifested an earnest desire to protect the individuals from the evils which result from unrestrained business competition.
The problem has been to so adjust matters as to preserve the principle of competition and yet guard against its abuse to the unnecessary injury to the individual. So the principle that a man may use his own property according to his own needs and desires, while true in the abstract, is subject to many limitations in the concrete. Men cannot always, in civilized society, be allowed to use their own property as their interests or desires may dictate without reference to the fact that they have neighbors (sic) whose rights are as sacred as their own. The existence and wellbeing of society requires that each and every person shall conduct himself consistently with the fact that he is a social and reasonable person. The purpose for which a man is using his own property may thus sometimes determine his rights…[4]
Relevance: The Master Grocers would have the public believe that independent retailers are being driven out of business by the illegal anti-competitive conduct of Coles and Woolworths. They make reference to alleged cross-subsidies, price discrimination and over investment by Coles and Woolworths as the cause of their demise. However, none of this conduct is currently illegal under the Competition and Consumer Act 2010. Therefore, in reality the Master Grocers are complaining about Coles and Woolworths engaging in legal but (in their view) unfair competition.
While I suspect that Coles and Woolworths may be engaging in illegal anti-competitive conduct (given their record of contravening such laws in the past - see earlier post on this blog entitled ACCC’s investigation of Woolworths and Coles: A Blueprint for Action [5]), that is not the real reason why the independent supermarket sector is failing. The main reason that the independent supermarket sector is failing is because the sector has not been able to differentiate itself successfully from the supermarket offerings of Coles and Woolworths.
An inconvenient truth for the independent supermarket sector is the fact that both ALDI and Costco appear to be having a great deal of success in competing with Coles and Woolworths. These companies are enjoying this success because they have been successful in differentiating themselves from Coles and Woolworths in meaningful ways.
If the Master Grocers are hoping that the Commonwealth government will embrace a paternalistic approach to assisting the independent supermarket sector, similar to that shown by the Minnesota Supreme Court to Buck in Tuttle v Buck over 100 years ago, they are very much mistaken.
Furthermore, even if the government accepted all of the Master Grocer’s recommendations as set out in its Report, such assistance would do no more than provide a short respite from the inevitable fate of the independent supermarket sector.
The only way that the independent supermarket sector can remain viable and grow is by spending the time and effort necessary to fully explore ways of differentiating itself from Coles and Woolworths. While this will be no easy task, the sooner the independent supermarket sector focuses on exploring such approaches (rather than continually trying to get legislative relief from what they believe is “unfair” competition), the better.
[1] Cited in Roscoe Pound, A Selection of Cases on the Law of Torts, Cambridge Harvard University Press, 1919 at http://archive.org/stream/selectionofcases00amesuoft/selectionofcases00amesuoft_djvu.txt
[2] Master Grocers Australia, Lets Have Fair Competition!: The risk of losing retail diversity, choice and true competition in the Australian supermarket industry at http://www.mga.asn.au/files/5313/4482/4428/Fair_Competition_Release_Aug2012.pdf
[3] Pound, op. cit., footnote 1.
[4] Ibid.
[5] http://competitionandconsumerprotectionlaw.blogspot.com.au/2012/05/acccs-investigation-of-woolworths-and.html
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