Feds aim criminal cases at big banks

Article by: BEN PROTESS and MARK SCOTT , New York Times
Updated: July 14, 2012 - 9:56 PM

Charges over LIBOR rate fixing scandal may come down later this year.

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This video image shows Barclays chairman Marcus Agius giving evidence to the Treasury Select Committee in Portcullis House, London, Tuesday July 10, 2012. The chairman of Barclays announced his resignation Monday July 2, 2012 after accepting responsibility for a price-fixing scandal that saw the bank slapped with trans-Atlantic fines of $453 million.

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As regulators ramp up their global investigation into the manipulation of interest rates, the Justice Department has identified potential criminal wrongdoing by big banks and individuals at the center of the scandal.

The department's criminal division is building cases against several financial institutions and their employees, including traders at Barclays, the British bank, according to government officials close to the case who spoke on the condition of anonymity because the investigation is continuing. The authorities expect to file charges against at least one bank later this year, one of the officials said.

The prospect of criminal cases centered on the rigging of rates that serve as the benchmark for millions of loans -- everything from mortgages to credit cards and student loans -- is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private-investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. Collectively, civil and criminal actions could cost the banking industry tens of billions of dollars.

Authorities worldwide are examining whether financial firms manipulated interest rates before and after the financial crisis to improve their profits and deflect scrutiny about their health. Investigators in Washington and London sent a warning shot to the industry last month, striking a $450 million settlement with Barclays in a rate-rigging case. The deal does not shield Barclays employees from prosecution.

The multiyear investigation has ensnared more than 10 big banks in the United States, including industry leaders JPMorgan Chase, Citigroup and Bank of America, and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, said lawyers close to the case. In part, they are trying to avoid the public outcry that stemmed from the Barclays case, which prompted the resignation of top executives.

Armed with threat of jail

The criminal and civil investigations have focused on how banks set the London interbank offered rate, known as LIBOR. The benchmark, a measure of how much banks charge one another for loans, is used to determine the borrowing costs for trillions of dollars of financial products, including mortgages, credit cards and student loans. Cities, states and municipal agencies also are examining whether they suffered losses from the rate manipulation, and some have filed suits.

With civil actions, regulators can impose fines and force banks to overhaul their internal controls. But the Justice Department wields an even more potent threat by bringing criminal fraud cases against traders and other employees. If found guilty, they could face jail time.

The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan, have only further fueled the anger of consumers and investors.

But the LIBOR case presents a potential opportunity for prosecutors. Given the scope of the problems and the number of institutions involved, the investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis. "It's hard to imagine a bigger case," a government official said.

The Justice Department has jurisdiction over the London bank rate because the benchmark affects U.S. markets. It could not be learned which institutions the criminal division is chasing next.

According to people briefed, the Swiss bank UBS is among the next targets for regulatory action. The Commodity Futures Trading Commission is pursuing a potential civil case against the bank. Regulators have not yet decided to file an action against the bank, nor have settlement talks begun. UBS already has reached an immunity deal with one division of the Justice Department, which could protect the bank from criminal prosecution if certain conditions are met. The bank declined to comment.

The investigation into the global banks is unusually complex and it could continue for years, said the officials close to the case. For now, regulators are building investigations piecemeal because the facts of the cases vary widely. That could make it difficult to compile a global settlement, although some banks would prefer an industrywide deal to avoid the harsh glare of the spotlight, a lawyer said.

In the Barclays case, the British bank was accused of reporting false rates to squeeze out extra trading profits and fend off concerns about its health.

Signs as early as April 2008

Lawmakers in London and Washington are examining whether regulators looked the other way as banks artificially depressed the rates. On Friday, it was disclosed that a Barclays employee notified the Federal Reserve Bank of New York in April 2008 that the firm was underestimating its borrowing costs. Despite the warning signs, the illegal actions continued for another year.

But in April 2008, a senior enforcement official at the Commodity Futures Trading Commission, Vincent McGonagle, opened an investigation. At first the case stalled as the agency waited months to receive millions of pages of documents and Barclays pushed back against the U.S. regulators, sources said. By the fall of 2009, the trading commission received a trove of information, providing a broad view into the wrongdoing.

A series of incriminating e-mail and instant messages, regulators say, laid bare the multiyear scheme. In one document, a Barclays employee said the bank was "being dishonest by definition."

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