December 27, 2012

Government Ups the Ante for Financial Fraud With Criminal Charges Against UBS for LIBOR Misdeeds

By Gordon Schnell

It was just two weeks ago that the government slapped HSBC with a record $1.9 billion fine to settle charges of money laundering and dealing with terrorist states. As steep as the payment was, however, there seemed to be an overriding consensus that the government let the banking giant off easy by foregoing any criminal charges. To many, it was just the latest iteration of the government-going-soft approach to enforcing big-bank financial fraud. See Too Big to Prosecute? — HSBC Pays Record Fine . . . But Dodges Criminal Sanctions.  With its second record-breaking bank fine in as many weeks — this one against UBS for an equally eye-popping $1.5 billion — the government appears to have upped the ante for financial fraud by also securing criminal charges. Click here for DOJ press release.  But the question remains. Did the feds go far enough?

The government’s settlement last week with UBS stems from the Swiss bank’s role in the mighty LIBOR scandal which has been winding its way round the globe since the international interest rate-rigging scheme was first uncovered almost two years ago. LIBOR, which stands for the London Interbank Offered Rate, is the primary global benchmark for short-term interest rates used for trillions of dollars of consumer financial products such as mortgages, credit cards and student loans. UBS, along with a coterie of its banking brethren, apparently manipulated these rates for much of the past decade. They did so to improve the perception of their creditworthiness, particularly during the economic downturn, and to boost their trading profits by placing bets on the movement of these benchmark rates.

The UBS settlement is a product of a broad-based cross-agency, cross-border collaboration that includes the DOJ, CFTC and SEC at home, and their counterparts abroad in the U.K., Japan and Switzerland. It is only the second LIBOR settlement to date, the first one occurring in June with Barclays paying a relatively measly $450 million global fine. Click here to see the DOJ press release for the Barclays Settlement.  But the investigation continues with numerous other uber-banks under government review and several of them, including Royal Bank of Scotland and Deutsche Bank, acknowledging that they too are on the hook for heavy sums. And with the UBS punishment taking a criminal turn, the first time in a very long time for a big bank, perhaps the stage is set for even more serious enforcement down the road.

The U.S. government’s relatively heavy hand against UBS was particularly surprising given the bank’s early cooperation with the authorities in a bid for leniency (which it apparently received from the DOJ’s Antitrust Division but not from its Criminal Division). Is this the beginning of a new era in the government’s enforcement of financial fraud? Will the too-big-to-fail approach to prosecuting (or not prosecuting) financial crimes finally be laid to rest? Many still have their doubts.

That is because the UBS misconduct was apparently deep and widespread, involving dozens of employees and rising to the level of senior management. The DOJ described it as “epic in scale.” Yet, the government secured only a guilty plea for wire fraud from a Japanese subsidiary, and is pursuing criminal charges against only two former traders. As The New York Times complained, there is nothing “epic” in the government’s punishment of UBS other than its shielding of the parent company and its senior management from criminal prosecution. According to the paper, this is just “another questionable bank settlement” unlikely to “deter future wrongdoing.” Click here to read the editorial.

The Times may have a point in its ultimate rebuke of the government’s treatment of UBS here. At the same time, however, with these back-to-back 10-figure settlements, with the first criminal charges in more than a decade, and more steep settlements on the horizon (potentially enveloping the likes of Citigroup and JP Morgan Chase), it is hard to argue that the government is not getting tougher, much tougher, on financial crime than it ever has before. Will it be enough to stop this seemingly irrepressible corporate scourge from continuing? Probably no. Is there more the government could be doing to more strongly deter this kind of illicit activity. Probably yes. But it seems without doubt that the government is heading in the right direction and at the very least putting into serious question the notion that these banking behemoths are above the law.

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