The day after Barclays Plc (BARC) was lashed with a record fine for manipulating interest rates, a gold trader at the bank cheated a client and artificially suppressed the price of one of the world’s most widely traded metals.
On the evening of June 27, 2012 -- the same day U.S. and U.K. regulators fined Barclays 290 million pounds ($488 million) for manipulating the London interbank offered rate, or Libor -- Daniel Plunkett e-mailed colleagues to say he hoped for a “mini puke to 1,558” the next afternoon, meaning a drop in the gold price. Plunkett got that by manipulating the fixing, avoiding a $3.9 million payment to a client, according to the FCA.
The U.K. Financial Conduct Authority fined the British bank 26 million pounds, Plunkett 95,600 pounds, and banned the former trader from the industry. The incident is a blow to Barclays as Chief Executive Officer Antony Jenkins attempts to rehabilitate the lender’s reputation. Jenkins took over after Robert Diamond left in the wake of the Libor fine.
“Barclays has undertaken a significant amount of work to enhance our systems and controls,” Jenkins said in an e-mailed statement yesterday after the settlement with the FCA was announced. “While there is much more to do to achieve the deep-rooted cultural change we embarked upon at the start of 2013, Barclays today has significantly changed for the better.”
The deal started a year earlier. On June 28, 2011, Barclays entered into an option, known as the Digital, with Customer A, according to the FCA notice. It was a winner-take-all bet where Customer A could receive a fixed pay-out if the derivative finished “in the money,” or nothing at all.
To be “in the money,” the London gold fixing price had to exceed $1,558.96 on June 28, 2012. With the June 27 afternoon price fixing at $1,573.50, Plunkett’s odds weren’t good.
At 3 p.m. on June 28, the fixing price opened at $1,562. At 3:06 p.m. the price had dropped to $1,558.50, according to the FCA report. Plunkett put in his first order, to sell between 100 bars and 150 bars to keep the price low. Once all the other gold fixing members had declared their positions, it became clear the level of selling exceeded the level of buying, suggesting the price was going to fall further. A minute after posting his order, Plunkett withdrew it.
Within two minutes, there was cause for concern. The number of buyers and sellers had changed and the price looked like it was going to move higher again, according to the FCA report. At 3:09 p.m. Plunkett placed another large sell order. The move had the desired effect. One minute later, the price was set at $1,558.50 and his client lost.
Plunkett, who booked a $1.75 million profit, had to unwind his fake position at a cost of $114,000. The hit was 2.9 percent of the $3.9 million the client would have gotten had he not manipulated the barrier.
Shortly after, the customer asked Barclays why it had settled below the barrier price, according to the FCA. Barclays started an internal probe and informed the regulator of the issue, according to a person with knowledge of the situation. The bank voluntarily repaid the customer the $3.9 million.
Barclays couldn’t provide contact details for Plunkett and he wasn’t listed in the local telephone directory.
The fixing is a rate-setting ritual dating back to 1919 led by representatives of Barclays, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA. The banks hold daily conference calls at 10:30 a.m. and 3 p.m. where they discuss buying and selling the metal, starting from the dollar spot price, until a rate is agreed upon. The rate is used as a benchmark by miners, jewelers and central banks.
The process has come under growing scrutiny over the last six months, as academics and economists have argued knowledge gleaned on the fixing calls could give some traders an unfair advantage. The banks are considering overhauling the process and set up a steering committee to review the fixing as criticism has increased, Bloomberg News first reported in January. The FCA has been visiting the fixing members to observe the calls as part of its review of the process, Bloomberg said last month.
The FCA criticized the bank in its penalty notice for “failing to adequately manage conflicts of interest” with its customers between 2004 to 2013. The “precious metals desk staff had not been given adequate training or guidance regarding what they were, or were not, permitted to do during the gold fixing,” the regulator said.
On Feb. 5, 2013, Barclays adopted formal guidelines for the desk stating that traders could not participate in the gold fixing if they were party to a derivative like the Digital one.
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