International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, July 29, 2014

Lloyds Banking Group Will Pay $370 Million, Admits Criminal Wrongdoing

Justice logoLloyds Banking Group plc has entered into an agreement with the Department of Justice to pay an $86 million penalty for manipulation of submissions for the London InterBank Offered Rate (LIBOR), a leading global benchmark interest rate.  (excerpt highlights from the various regulatory and prosecution agreements below)

A criminal information will be filed today in U.S. District Court for the District of Connecticut that charges Lloyds as part of a deferred prosecution agreement (DPA).   The information charges Lloyds with wire fraud for its role in manipulating LIBOR.   In addition to the $86 million penalty, the DPA requires the bank to admit and accept responsibility for its misconduct as described in an extensive statement of facts.   Lloyds has agreed to continue cooperating with the Justice Department in its ongoing investigation of the manipulation of benchmark interest rates by other financial institutions and individuals.

The DOJ disclosed that Lloyds is the fifth major financial institution that has admitted LIBOR manipulation and paid a criminal penalty, and nine individuals have been criminally charged by the Justice Department.

Together with approximately $283 million in criminal and regulatory penalties imposed by
other agencies in actions arising out of the same conduct – $105 million by the Commodity Futures Trading Commission (CFTC), and approximately $178 million by the U.K. Financial Conduct Authority (FCA) – the Justice Department’s $86 million criminal penalty brings the total amount to be paid by Lloyds to almost $370 million.

According to signed documents, LIBOR is an average interest rate, calculated based upon submissions from leading banks around the world and reflecting the rates those banks believe they would be charged if borrowing from other banks.   LIBOR serves as the primary benchmark for short-term interest rates globally and is used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer lending products.   

Logo_bisThe Bank of International Settlements estimated that as of the second half of 2009, outstanding interest rate contracts were valued at approximately $450 trillion.

At the time relevant to the conduct in the criminal information, LIBOR was published by the British Bankers’ Association (BBA), a trade association based in London.   LIBOR was calculated for 10 currencies at 15 borrowing periods, known as maturities, ranging from overnight to one year.   The LIBOR for a given currency at a specific maturity was the result of a calculation based upon submissions from a panel of banks for that currency (the Contributor Panel) selected by the BBA.   From at least 2006 through the present, Lloyds (through its subsidiaries) has been a member of the Contributor Panel for a number of currencies, including United States Dollar LIBOR, Pound Sterling LIBOR, and Yen LIBOR.

According to the statement of facts accompanying the agreement, between at least as early as 2006 and at least as late as July 2009, Lloyds’s LIBOR submitters for Dollar LIBOR, Yen LIBOR, and Pound Sterling LIBOR submitted LIBOR contributions intended to benefit their own trading positions or the trading positions of others , rather than rates that complied with the definition of LIBOR.   When Lloyds LIBOR submitters contributed LIBOR submissions to benefit trading positions, the manipulation of the submissions affected the fixed rates on occasion.

According to signed documents, on May 19, 2009, a money markets trader who was a former Dollar LIBOR submitter at a subsidiary of Lloyds wrote to the then-current Dollar LIBOR submitter: “have 5 yard [billion] 3 month liability rolls today so would be advantageous to have lower 3month libor setting if doesn’t conflict with any of your fix’s.”   Later that day, the Dollar LIBOR submitter told the money markets trader in a phone call: “obviously we got the Libors down for you.”

In another example, on March 6, 2009, a money markets trader who was a former Pound Sterling LIBOR submitter for a subsidiary of Lloyds told the then-current Pound Sterling LIBOR submitter: “Um, I’m paying on 12 yards [billions] of 1s today, . . . so if there is any way of making 1s relatively low it would just be helpful for us all.”   That day, the Pound Sterling LIBOR submitter contributed a rate that was ten basis points lower than the previous day’s submission.

Also according to the statement of facts, a Yen LIBOR submitter and a former submitter at Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) who traded money-markets and derivatives products had an agreement to submit Yen LIBOR contributions that benefitted their respective trading positions, rather than submissions that complied with the definition of LIBOR.

For example, on July 28, 2006, the Rabobank submitter wrote to the Yen LIBOR submitter: “morning skipper.....will be setting an obscenely high 1m again today...poss 38 just fyi.”   The Yen LIBOR submitter responded: “(K)...oh dear..my poor customers....hehehe!! manual input libors again today then!!!!”   Both banks’ submissions on July 28 moved up one basis point, from 0.37 to 0.38.

FCA UKfrom the UK investigation£70 million of the fine relates to attempts to manipulate the fees payable to the Bank of England for the firms’ participation in the SLS, a taxpayer-backed government scheme designed to support the UK’s banks during the financial crisis. The £105 million total fine is the joint third highest ever imposed by the FCA or its predecessor, the Financial Services Authority, and the seventh penalty for LIBOR-related failures.

Whilst the firms’ LIBOR-related misconduct is similar in many ways to that of other financial institutions, the manipulation of the Repo Rate benchmark in order to reduce the firms’ SLS fees is misconduct of a type that has not been seen in previous LIBOR cases.

Repo Rate manipulation

Between April 2008 and September 2009, the firms manipulated their Repo Rate submissions in order to reduce the fees payable by them to the Bank of England for participation in the taxpayer-backed SLS. The Repo Rate, a now discontinued benchmark rate, was published daily by the BBA until December 2012. Repo Rate panel banks submitted the rates, across a range of maturities, at which they were prepared to trade in the repo market.

By artificially inflating their Repo Rate submissions, the firms sought to narrow the Repo Rate-LIBOR spread and thereby reduce the fees properly payable to the Bank of England for their participation in the SLS. A total of four individuals (a manager and a trader at each firm) colluded with each other in the manipulation of the firms’ Repo Rate submissions without any oversight or challenge.

This was an extremely serious failing, with the potential to reduce the fees due to the Bank of England from all the firms that participated in the SLS.

Lloyds Banking Group has paid the Bank of England £7.76 million in compensation for the reduction in the amount of Special Liquidity Scheme (SLS) fees received by the Bank (from all users of the SLS) as a result of manipulation by Lloyds and BoS of their submissions to the BBA GBP Repo Rate.

Lloyds Response Press Release 

In addition, the FCA has noted in the Final Notice that: 
“…the frequency of documented LIBOR Requests is lower than at other firms who have been the 
subject of disciplinary action by the Authority for LIBOR manipulation”. 

The DoJ has also said in the Deferred Prosecution Agreement that: 
“…although the LIBOR misconduct was serious, it was limited in scope relative to certain other 
LIBOR panel banks and was not pervasive within LBG or its predecessor entities.”

720px-US-CFTC-Seal.svg

See also US Commodity Futures Trading Commission announcement.  The U.S.  Commodity Futures Trading Commission (CFTC) today issued an Order against Lloyds Banking Group plc and Lloyds Bank plc... bringing and settling charges for acts of false reporting and attempted manipulation of the London Interbank Offered Rate (LIBOR) for Sterling, U.S. Dollar, and Yen committed by employees of Lloyds TSB and HBOS plc (HBOS), which was acquired by Lloyds Banking Group in January 2009.  The Order finds that, in a few instances, Lloyds TSB was successful in its manipulation of Sterling LIBOR and Yen LIBOR.  The CFTC also brought and settled charges that Lloyds TSB, at times, aided and abetted the attempts of derivatives traders at Rabobank to manipulate Yen LIBOR.

The Order requires Lloyds Banking Group and Lloyds Bank to pay a $105 million civil monetary penalty, cease and desist from their violations of the Commodity Exchange Act, and to adhere to specific undertakings to ensure the integrity of LIBOR submissions in the future.

Highlights of the CFTC’s Order

  • Before the acquisition of HBOS by Lloyds Banking Group in January 2009, the Sterling and U.S. Dollar LIBOR submitters at each bank individually altered LIBOR submissions on occasion to benefit the submitters’ and traders’ cash and derivatives trading positions. Upon the consolidation of the two companies, the submitters, who were located in separate offices, coordinated with one another to adjust LIBOR submissions to benefit their respective trading positions.

  • From at least mid-2006 to October 2008, the Lloyds TSB Yen LIBOR submitter colluded with the Yen LIBOR Submitter at Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) to adjust their respective Yen LIBOR submissions to benefit the trading positions of Lloyds TSB and Rabobank. 

  • During the global financial crisis in the last quarter of 2008, HBOS, through the acts of its submitters and a manager, improperly altered and lowered HBOS’s Sterling and U.S. Dollar LIBOR submissions to create a market perception that HBOS was relatively financially healthy and not a desperate borrower of cash. Specifically, the manager who supervised the HBOS Sterling and U.S. Dollar LIBOR submitters directed the submitters to make LIBOR submissions at the rate of the expected published LIBOR so that the bank did not stand out as a material outlier from the rest of the submitting banks. The submitters followed these instructions, making submissions through the end of the year that did not reflect their honest assessment of HBOS’s cost of borrowing unsecured interbank funds, and, accordingly, were not consistent with the BBA LIBOR definition. 

  • In 2006, Lloyds TSB and HBOS submitters on certain occasions increased their bids for Sterling in the cash market in an attempt to manipulate the published Sterling LIBOR fixing higher, thereby benefitting specific trading positions that were tied to Sterling LIBOR.

 

https://lawprofessors.typepad.com/intfinlaw/2014/07/lloyds-banking-group-admits-criminal-wrongdoing-in-libor-investigation-agrees-to-pay-370-million.html

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Comments

US v Lloyds, Criminal Complaint, Dis. Ct. Conn.
http://www.justice.gov/atr/cases/f307500/307532.pdf

Posted by: william byrnes | Aug 1, 2014 5:02:23 PM

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