UBS $1.5 Billion Libor Settlement Signals More to Come

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UBS AG’s $1.5 billion settlement for manipulation of interest rates and criminal charges against two former traders paves the way for additional sanctions in a global investigation of more than a dozen banks and brokers.

Switzerland’s biggest bank settled with U.S., U.K. and Swiss regulators for manipulating rates thousands of times over six years through relationships with multiple banks and brokers. Two traders were charged with conspiracy in a criminal complaint, while UBS’s Japanese affiliate pleaded guilty in the U.S. to felony wire fraud. Hong Kong authorities today said they’ve started a probe into potential misconduct by the bank.

“UBS sometimes acted alone, sometimes in two-way collusion with at least four other banks and sometimes it violated the law with the assistance of one or more of five inter-dealer brokers,” David Meister, head of enforcement at the U.S. Commodity Futures Trading Commission, said in a news conference in Washington.

The UBS settlement is the second in the investigation of global interest rate benchmarks after Barclays Plc agreed to pay 290 million pounds in June. Regulators have sought information from more than a dozen banks that set rates in the U.S., Europe and Japan that underpin more than $300 trillion in contracts worldwide.

Probes Continue

The Hong Kong Monetary Authority has started an investigation to see if there was wrongdoing by UBS in its submission of data for setting the Hong Kong Interbank Offered Rate, according to a statement from the de-facto central bank today. The HKMA is also reviewing whether the potential misconduct may have had a material impact on the rates.

The Royal Bank of Scotland Group Plc is in settlement negotiations with regulators, according to people with knowledge of the matter. Meanwhile, traders at Deutsche Bank AG, Credit Agricole SA and HSBC Holdings Plc are under investigation, according to a person with knowledge of the matter who asked not to be identified because the probes are continuing.

The UBS settlement for the first time details how brokers played a role in the manipulation. ICAP Plc, the world’s largest broker of transactions between banks, said in May that it had received requests from government agencies probing banks’ submissions to the London interbank offered rate.

“I suspect this is the tip of the iceberg from the perspective of regulators going after financial firms,” Andrew Lo, professor of finance at the Massachusetts Institute of Technology, said in a telephone interview.

‘Pervasive’ Behaviour

Regulators found that traders at the Zurich-based bank made more than 2,000 requests to its own rate submitters, traders at other banks and brokers to manipulate rate submissions through

2010. At least 45 bank employees, including some managers, knew of the “pervasive” practice and a further 70 people were included in open chats and messages where attempts to manipulate Libor and Euribor were discussed, the U.K. Financial Services Authority said.

Lanny Breuer, assistant attorney general and head of the U.S. Justice Department’s criminal division, said the manipulation of global interest rates is “one of the most significant scandals ever to hit the global banking industry,” and UBS may have been one of the worst actors.

“The bank’s conduct was simply astonishing,” Breuer said at the news conference in Washington.

The U.S. Justice Department said Tom Alexander William Hayes and Roger Darin were part of a conspiracy to commit wire fraud from September 2006 to 2009. Hayes, 33, served as a senior yen swaps trader at UBS in Tokyo, while Darin, 41, worked as a short-term interest rates trader at UBS in Singapore, Tokyo and Zurich, the U.S. said.

Getting Rich

“Make no mistake, for UBS traders, the manipulation of Libor was about getting rich,’” Breuer said.

Prosecutors allege that Hayes and Darin “conspired with others known and unknown within UBS to cause the bank to make false and misleading yen Libor submissions to the British Bankers’ Association.”

Darin didn’t respond to a voice-mail message, and efforts by Bloomberg News to contact Hayes and his lawyer were unsuccessful. Wire fraud and conspiracy convictions carry a maximum prison sentence of 30 years and a $1 million fine for each count. Antitrust convictions carry a 10-year maximum sentence and $1 million fine.

Hayes, in a March 2009 message, asked a broker to help influence nine of the 16 banks contributing to the Yen Libor rate, naming the unidentified banks in separate messages.

Champagne Shipments

“Got it mate,” came the response from the broker, identified only as “Broker-C” in the Justice Department documents.

In a separate conversation earlier in the month, Hayes again requested a broker to push for two separate banks to lower their submissions.

Brokers were compensated for assisting Hayes in manipulating Libor through a special bonus and “other perks,” according to the Justice Department. Hayes, noting how helpful a broker had been, said in an August 2008 message to a colleague “Yeah… I reckon I owe him a lot more.”

“He’s ok with the annual champagne shipment, a few [drinking sessions] with [his supervisor] and a small bonus now and then,” the broker responded.

(Updates with Hong Kong probe from second paragraph.)
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