UBS traders charged, bank fined $1.5 billion in Libor scandal

ZURICH/NEW YORK Thu Dec 20, 2012 5:09am EST

1 of 7. An employee walks past a logo of Swiss bank UBS in Zurich December 19, 2012.

Credit: Reuters/Michael Buholzer

ZURICH/NEW YORK (Reuters) - U.S. prosecutors charged two former UBS traders with taking part in a multi-year scheme to manipulate Libor and other benchmark interest rates, making them the first individuals to be criminally accused in the international scandal.

The charges against the two traders, Tom Hayes and Roger Darin, resulted from a broad investigation into the activities of more than a dozen banks in the setting of prices for Libor and related rates.

A day after UBS agreed to pay $1.5 billion to regulators in the United States, UK and Switzerland, the Hong Kong Monetary Authority (HKMA) said the bank was being probed over its submissions of interbank rates there, raising the risk it could face more fines.

In settling with U.S., UK and Swiss authorities, UBS not only paid one of the largest fines ever imposed on a bank, its Japanese subsidiary pleaded guilty to one U.S. criminal count of fraud relating to manipulation of benchmark rates, including the yen Libor.

The Japanese subsidiary is where authorities allege much of the manipulation of interest rates occurred, as employees of the bank looked to profit on derivatives trades linked to the rates.

The bank could have more trouble in store in Asia. HKMA, Hong Kong's de facto central bank, said in a statement early Thursday in Asia that it had received information from overseas regulatory authorities about possible misconduct by UBS involving submissions for the Hong Kong Interbank Offered Rate (Hibor) and other reference rates in the region.

UBS is the second large international bank to reach a settlement with U.S. and UK authorities, and other settlements are expected to follow in the next few months. In June Barclays Plc agreed to pay $453 million in fines to settle allegations its employees attempted to manipulate Libor rates.

The investigation and it findings - that attempts to manipulate Libor were fairly widespread in the banking industry - have cast doubts on the reliability of Libor as a benchmark for setting interest rates. The probe has also raised questions about why bank regulators were slow to uncover the manipulation, which Reuters previously reported dated back to at least the late 1990s.

"The bank's conduct was simply astonishing," Lanny Breuer, who heads the U.S. Justice Department's criminal division, said in announcing the settlement.

"Make no mistake - for UBS traders, the manipulation of Libor was about getting rich."

While the bank will hope that the $1.5 billion settlement with regulators in the U.S., UK and Switzerland will draw a line under its penalties for its role in Libor manipulation, it remains at risk of action from regulators elsewhere for possible rate rigging.

As well as Hong Kong, there is an ongoing investigation in Singapore into the possible manipulation of benchmark lending and foreign exchange rates.

"We continue to work closely with various regulatory authorities to resolve issues relating to the setting of certain global benchmark interest rates. As we are currently in active discussions with these authorities, we cannot comment further," said a spokesman for UBS in Hong Kong.


The Justice Department charged Hayes and Darin with conspiracy, according to a criminal complaint unsealed in U.S. district court in Manhattan on Wednesday. Hayes was also charged with wire fraud and an antitrust violation.

U.S. and UK investigators portrayed Hayes as a ringleader of sorts for UBS' manipulation of rates.

The two men are both believed to be in Europe, according to a U.S. official. Last week, British police arrested Hayes and two other men in connection with the Libor probe. The two others were Terry Farr and James Gilmour, both of whom worked at interdealer broker RP Martin.

The $1.5 billion UBS penalty is the second largest ever imposed on a bank, exceeded only by the $1.9 billion that HSBC agreed to pay to settle U.S. charges in connection with the laundering of drug cartel money.

"We deeply regret this inappropriate and unethical behavior. No amount of profit is more important than the reputation of this firm," said UBS Chief Executive Sergio Ermotti.

The criminal complaint against Hayes and Darin also detailed how some former UBS employees are cooperating in the probe, in exchange for a promise that they won't be prosecuted.

The cooperation agreements forged in the UBS case could prove useful to U.S. and UK authorities as they move against other individuals and other big banks.

U.S. prosecutors, for instance, are continuing to investigate the activities of a number of former Barclays derivatives traders based in New York who were dismissed from the bank following an internal investigation into Libor manipulation. So far, none of those former Barclays employees in the United States have been charged with wrongdoing.

Libor and related benchmarks are used to set interest rates for trillions of dollars worth of loans around the world, ranging from home loans to credit cards to complex derivatives.

Authorities said traders could benefit on their derivatives positions by nudging the prices for Libor up just small amounts, as over time the payoffs added up. Already a number of civil lawsuits have been filed in the U.S. by institutional investors claiming they were harmed on trades because of the interest rate rigging.


In legal filings, Britain's Financial Services Authority (FSA) said UBS staff made "corrupt" payments to reward brokers for helping to manipulate rates - expanding the scandal to include bribery.

It said attempts to manipulate Libor and Euribor, its European equivalent, were so widespread that every submission UBS made over a six-year period from 2005 to 2010 was suspect.

At least 45 people at UBS were involved in the rigging, which was discussed in internal chat forums and group emails but never detected by compliance staff, despite five audits.

The FSA said a wide pool of people within UBS considered the manipulation to be a "normal business practice."

In addition to traders trying to move the Libor rate up or down to make money for themselves, senior managers at the Swiss bank directed dealers to keep Libor submissions low during the financial crisis to make the bank look stronger.

Documents filed by the FSA did not reveal the names of individual participants, but a source familiar with the matter identified Hayes as the FSA's "Trader A," who the regulator said "embarked on a coordinated campaign" to influence the yen Libor rate.

In 2006 Hayes told a junior submitter at UBS that he "generally coordinate" with Darin and "skew the libors a bit."

In early 2007, Darin trained another junior submitter and told him the primary consideration for UBS's yen Libor submissions was the requests from Hayes and other UBS traders.

The extent of the wrongdoing was highlighted in a series of emails released by the FSA. The exchanges may indicate how traders and brokers conspired to rig the rate while adopting nicknames such as "Captain Caos," (sic) and calling each other "superman," "hero" or "the three muscateers (sic)."

In one email, Trader A (Hayes) wrote to a broker, urging him to keep the six-month yen Libor rate unchanged on the day.

Traders paid brokers as much as 15,000 pounds ($24,000) a quarter for their help in rigging the rates.

It is the first time that brokers have been accused of taking bribes to aid the manipulation. ICAP, the world's largest interdealer broker, and rival RP Martin have suspended employees in connection with the probe.

Until the rate-rigging scandal broke, Libor had been ignored by regulators and left to the banks to police. From next year, Britain's FSA will oversee it as part of a major overhaul.

The steep fine for UBS comes even as the bank has cooperated with law-enforcement agencies. The bank said it received conditional immunity from some regulators.

The investigation into UBS's trading shows that the manipulation of the benchmark rates and illicit trading took place over a much longer time period than previously thought with the improper requests extending into June 2010, according to the UBS settlement with the Justice Department.


UBS will pay $1.2 billion to the Justice Department and the U.S. Commodity Futures Trading Commission, 160 million pounds to the FSA, and 59 million Swiss francs from its estimated profit to Swiss regulator Finma.

The UK penalty is the largest in the history of the FSA and more than double the 59 million pounds paid by Barclays.

UBS said the fines would widen its fourth-quarter net loss but that it would not need to raise new capital.

UBS shares fell 0.3 percent in trading on Wednesday after earlier hitting a 17-month high.

The reputational impact of the controversy may only emerge next year.

"The only thing shareholders can do is keep a very close eye on the money flows on the wealth management side," said Neil Wilkinson, portfolio manager at Royal London Asset Management. ($1 = 0.9133 Swiss francs)

(Additional reporting by the Zurich bureau and London bureau and Carrick Mollenkamp in New York, Aruna Viswanatha in Washington,Vikram Subhedar in Hong Kong and Rachel Armstrong in SINGAPORE; writing by Carmel Crimmins, Alex Smith and Michael Erman; Editing by Anna Willard, Janet McBride, Jeffrey Benkoe, Matthew Goldstein and Simon Cameron-Moore)

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Comments (3)
Reuters1945 wrote:
Re: “UBS traders charged, bank fined $1.5 billion in Libor scandal”
What a surprise. People whose entire existence and “raison d’etre”, 24/7, had no problem skimming a little cream off the top for themselves.

No doubt, in their sick, twisted minds, permeated with insatiable greed, they felt that what they were doing was a virtually “victimless”
crime where a difference of a few fractions of a per cent, up or down, really did not hurt anyone and was simply part of the equation of doing business as trillions of dollars went sloshing around the globe every 24 hours.

Remember the Corporate executive who says in the back of Danny DeVito’s limo, in “Other People’s Money”, as he sells out his own company: “Hey, after all, what’s in it for me ? ”

And then of course, we have to have that obligatory, tired old “Dog and Pony Show” from the worldwide “law enforcement community” to prove to the world how they are so on top of the financial evil doers and how “there will be Justice”.

Except it is really about “Just Us”.

And the icing on the cake is that so many people have been wiped out during the past decade as the super rich became even more super rich, that a “billion dollar” fine sounds like a big deal to those who have nothing at all.

Of course the cost of such fines, that to the uninitiated seem so huge, are actually totally built into the bank’s cost of doing business. Notice how none of the bank’s stockholders are running for the exits. The ticker tapes hardly registered a ripple.

And observe how the penalty fines are never so high as to really rock anyone’s boat- or yacht, as the case may be. After all we do not want to overly upset the markets or the well being of the banks during these financially sensitive times, do we ? We have to keep our eyes on the big, long term picture, n’est ce pas !

The sayings that spring to mind are endless. Take your pick.

“Put the wolves in charge of the chicken coop.” Or how about
“Close the barn door after all the horses have run through the gate”.

Whenever you allow people to handle someone else’s money there will always be that little invisible bird sitting on their shoulder, whispering in their ear: “Hey what’s in this for us ?”

In 1750, a twelve year old boy was publicly hung in the center of London for stealing a loaf of bread.
It was felt that an example had to be made to discourage such behavior.

But in all likelihood that barbaric and gruesome execution did not put an end to starving children stealing bread. They just had to become more careful- as will the next generation of grifters at all the world’s banks.

And with millions of US Dollars, and British Pounds and Japanese Yen to be so easily acquired by pressing on little computer keys it is highly to be doubted that something short of a long rope with a good strong noose on the end, is going to alter anyone’s lust for wealth in the shady world of high finance at this late stage of the “game”.

The more the world changes- the more it stays the same, more is the pity.

Dec 19, 2012 11:47pm EST  --  Report as abuse
EthicsIntl wrote:
Are there any banks or financial institutions that have not been heavily involved in criminal activities ???

These fines are miniscule to these international gangsters.
These individuals need to be prosecuted and thrown into work prisons,
and the ‘family’ business put out of business for good, otherwise it is business as usual all over again.
But then, there are no honest people left in our government.
Time to get the hell out of this American ‘Chinese style’ democracy.

Dec 20, 2012 3:58am EST  --  Report as abuse
reality-again wrote:
Furthermore, Switzerland should be labeled a rogue state, following decades of legislative and financial activities that hurt the citizens and taxpayers of other countries.
Let’s face it – Switzerland has become instrumental to many crime organizations, dictatorships and tax fraudsters that benefit from its crooked banking laws and crooked attitudes towards breaking the laws of other countries.

Dec 20, 2012 7:50am EST  --  Report as abuse
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