Ex-ICAP Brokers Charged in Libor Scheme as Company Fined
By Lindsay Fortado & Tom Schoenberg – Sep 25, 2013 10:56 AM ET
Three former ICAP Plc (IAP) employees were charged by U.S. prosecutors in a scheme to manipulate Libor as the interdealer broker was fined $88 million in a five-year international probe of rigging of benchmark interest rates.
The brokers were charged with two counts of wire fraud and one count of conspiracy to commit wire fraud for allegedly colluding with traders at UBS AG (UBSN) to manipulate yen libor, according to a complaint unsealed today in Manhattan federal court. London-based ICAP, the world’s largest broker of transactions between banks, was fined $65 million by the U.S. Commodity Futures Trading Commission and 14 million pounds ($22.5 million) by the U.K. Financial Conduct Authority, the regulators said today.
The three men, two former derivatives brokers and an ex-cash broker, face as long as 30 years in prison if convicted of the most serious charges, the U.S. said. According to the complaint, the derivative brokers referred to the cash broker as “lord Libor.”
“These three men are accused of repeatedly and deliberately spreading false information to banks and investors around the world in order to fraudulently move the market and help their client fleece his counterparties,” Mythili Raman, the acting assistant attorney general of the Justice Department’s criminal division, said in a statement.
The penalties are the first against an interdealer broker in the global investigation. Seven people have been charged and four financial institutions have been fined about $2.6 billion. Barclays Plc (BARC) Chief Executive Officer Robert Diamond was forced to resign last year after the lender became the first institution penalized in the scandal over the London interbank offered rate.
“We deeply regret and strongly condemn the inexcusable actions of the brokers who sought to assist certain bank traders in their efforts to manipulate yen Libor,” Michael Spencer, chief executive of ICAP, said in a statement. He said no provision has been made by the company for Libor.
Spencer said in July of last year that probes into Libor were “not a high priority or a high concern” as ICAP wasn’t “front and forward” in the investigations.
ICAP rose 3.6 percent on the announcement of the charges and settlements, to 392.70 pence, which is 0.9 percent down on the day. The firm is also under investigation by the CFTC over allegations that ISDAfix, the benchmark for the $379 trillion swaps market, was manipulated by brokers.
Michael Passman, a spokesman for the Justice Department, said in an e-mail that the defendants aren’t in custody, declining further comment on their whereabouts. Arrest warrants issued Sept. 13 for the men in London and Wellington, New Zealand, remain unexecuted, according to court records.
London-based Barclays, Zurich-based UBS and Royal Bank of Scotland Group Plc (RBS) have previously been fined in the Libor probe. Firms including Rabobank Groep, Lloyds Banking Group Plc and Deutsche Bank AG are still under investigation.
Darrell Read, of New Zealand, and Daniel Wilkinson and Colin Goodman, both from England, were charged by the U.S. for allegedly helping a senior UBS trader, Tom Hayes, to rig rates. Goodman, the cash broker, sent out a daily e-mail to his contacts outside of ICAP, including derivatives traders at large banks and people responsible for providing the British Bankers Association with Libor submissions, the U.S. said in the complaint.
The note, where Goodman would allegedly include his suggestions on where yen Libor would be each day across eight borrowing periods, was used to disseminate misinformation to help the UBS trader, the U.S. alleged.
According to the U.K.’s FCA, UBS made more than 330 written requests to ICAP brokers over a four-year period to help them with inappropriate rate submissions.
“Three brokers, including one manager, were central to the collusion, although at least seven other individuals, including another manager, spanning three desks also participated,” the FCA said.
A “significant part” of Read and Wilkinson’s compensation was tied to the brokerage fees generated by a UBS trader and paid to ICAP, the U.S. said.
The U.S. charged Hayes and Roger Darin in December as part of the Libor probe. Hayes was also charged in the U.K. by the Serious Fraud Office, along with two former brokers at RP Martin Holdings Ltd. He faces eight charges of conspiracy to defraud for assisting employees at 10 banks and brokerages, including ICAP, to manipulate yen Libor rates over a four-year period. Hayes is scheduled to enter a plea next month.
A broker at ICAP also asked a yen Libor submitter at Royal Bank of Scotland Group Plc to fix rates on their behalf to benefit a UBS trader, according to the CFTC, which didn’t identify the UBS employee. In one note, a sterling broker offered the submitter a steak for his help, the regulator said.
Richard Morton, a spokesman for UBS, and Debbie Phillips, a spokeswoman for RBS, declined to comment on the settlement or the U.S. allegations.
Interdealer brokers such as ICAP act as go-betweens for banks that trade bonds, stocks, currencies, energy and derivatives.
Brokers assumed greater influence as credit markets froze during the early stages of the financial crisis in 2007. Bankers who made submissions to Libor increasingly relied on information from the brokers to determine what figures to contribute because there were no trades on which to base them.
That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives.
The ICAP brokers referred to the panel bank submitters as “sheep” when they copied their suggestions on Libor, according to the CFTC. The regulator found that at least two banks’ submissions mirrored the ICAP brokers’ suggestions as much as 90 percent of the time.
The brokers provided the help on Libor to keep the senior yen trader’s business, which accounted for as much as 20 percent of the Yen derivatives desk’s revenue, the CFTC said. ICAP employees allegedly conspired with Hayes to manipulate yen Libor, according to the SFO. Hayes is also accused of working with employees of the interdealer brokers RP Martin and Tullett Prebon Plc, according to court documents.
In some instances, the brokers took bribes as payment for the services in the form of so-called wash trades, where counterparties place two or more matching trades through the broker that cancel one another out while triggering payment of fees to the middle man, regulators have said.
CFTC Commissioner Bart Chilton said today in an interview that the “The brazen attempts and success at manipulation were crazy.” He praised the Justice Department for bringing charges against the three defendants, adding that more work was needed to ensure global benchmarks are “good for consumers, good for markets.”
The case is U.S. v. Read, 13-mag-02224, U.S. District Court for the Southern District of New York (Manhattan).
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