Some big news overnight from the US, where Matthew Connolly and Gavin Black, two former traders for German lender Deutsche Bank, have had their convictions for Libor rigging quashed. Here’s the FT’s take:
A US federal appeals court has overturned the convictions of two former Deutsche Bank traders charged in connection with an alleged scheme to rig the Libor benchmark, a blow to prosecutors who have struggled to prosecute individuals for actions that netted billions of dollars in fines from banks.
In an opinion on Thursday from the Second US Circuit Court of Appeals in Manhattan, the three-judge panel ruled that “the government failed to show that any of the trader-influenced submissions were false, fraudulent, or misleading”. It directed the district court to enter orders of acquittal for both men.
Readers might recall the Libor scandal became something of lightning rod for public opprobrium following the great financial crisis in 2008. Those closer to the action, however, viewed the affair as an accident waiting to happen, given the rather flawed way in which the benchmark (and the supervision of it) were designed.
In the 14 years since, it’s not as though the world of finance has entirely done away with its reliance on tight networks of individuals who have the power to influence funding costs when they operate in unison thanks to mutual engagement in Discord chats. Which led to Izzy posing the following question this morning on Twitter:
We wanted to share this reply, by Tom Hayes, who was jailed in the UK for eleven years (of which he served five and a half) for manipulating Libor:
There are close parallels with the case against Hayes — who found out in December that he would not be allowed to appeal against his conviction — and the bankers tried in the US. All of them were derivatives traders charged with conspiring with their co-workers to manipulate their banks’ Libor fixes (excuse the pun).
The judgement raises interesting questions about whether Hayes would have faced quite so punitive a sentence had he been tried outside the UK.
For instance, the US Appeals Court found that there was “no merit” in the government’s line that the defendants’ influence on their bank’s submissions ought to have been considered a “half truth”.
From page 52 and page 53 of the judgement: (their emphasis)
The BBA LIBOR Instruction as it existed during the earlier period at issue in this prosecution, while explicitly barring collaboration between panel banks, said nothing to bar a panel bank’s LIBOR submitters from receiving or considering input from that bank’s employees who were derivatives traders. There being no guidance from the BBA as to intrabank input — especially given an explicit prohibition of interbank input — a bank’s submission of a LIBOR rate did not implicitly represent that there had been no consideration of the panel bank’s existing trades.
In 2013, the BBA adopted a “LIBOR Code of Conduct” for “Contributing Banks” limiting the permissible exchange of LIBOR-relevant information between submitters and traders (“BBA 2013 Code”). (“[r]equiring individuals not involved in the LIBOR-setting process . . . [n]ot to contact submitters and reviewers to attempt to influence, or inappropriately inform, the contributing bank’s submissions for any reason, including for the benefit of any derivatives trading positions”). But during the earlier period at issue in the present case, there were no such guidelines or prohibitions, and the BBA LIBOR Instruction did not prohibit LIBOR submitters’ consideration of traders’ positions. The government concedes that this prohibition was not issued by BBA until “after the charged conspiracy [had] ended.”
The charges against Hayes related to his behaviour while he was working for UBS as a derivatives trader in Tokyo, a bank he left in 2009.
What crypto traders operating in the grey area of quasi-regulated markets should pay attention to in this story is that just because something isn’t technically illegal today doesn’t mean it won’t be deemed scandalous or criminal in the future. When norms change, so do expectations about how people should have acted before they changed.
Ignorance of the law or best practice is not necessarily a defence.