(Bloomberg) -- The U.S. Justice Department’s investigation into interest-rate manipulation at global banks is piercing the executive suite, with prosecutors scrutinizing the activities of senior Societe Generale SA officials, according to people familiar with the matter.
The government has collected documents suggesting Societe Generale executives were aware that bankers there were submitting fake U.S. dollar Libor rates, the people said. Such misleading numbers, which made bank borrowing costs look lower than they actually were, have been the focus of years of U.S. and European investigations, charges against more than a dozen bankers and brokers, and more than $2 billion in U.S. criminal penalties. Yet such allegations have rarely touched global banks’ upper reaches.
Clues about the government’s Societe Generale probe can be found in an indictment filed in August against two lower-level employees of the bank. One of the bank employees warned about problematic rate submissions in an email to executives, at least one of whom replied, according to the court documents, which didn’t identify the executives.
Paris-based Societe Generale, which has said it is cooperating with U.S. investigators, declined to comment. Justice Department spokeswoman Nicole Navas Oxman declined to comment.
Societe Generale’s shares fell as much as 1.1 percent in Paris and were down 0.9 percent at 47.38 euros at 12:37 p.m., erasing earlier gains. The lender’s shares are up about 1 percent this year, trailing the 9 percent increase of Europe’s 46-member STOXX 600 Banks Index.
Several challenges confront prosecutors, however. France stopped cooperating with U.S. information requests last year after deciding that doing so could hurt the country’s economy and threaten its national interest, said three people familiar with the dispute over the Mutual Legal Assistance Treaty. The decision was shaped, two of them said, by U.S. authorities’ moves to levy billions of dollars in penalties against French firms including BNP Paribas SA in recent years.
Also, it may be difficult under French law to extradite the two division managers who’ve been charged, hindering any potential efforts by U.S. prosecutors to gain their cooperation to build cases against the executives.
The case is one of three major U.S. criminal investigations of Societe Generale begun during the Obama administration. The Justice Department has also been looking into allegations that bank officials bribed Libyans to win investment contracts in violation of the Foreign Corrupt Practices Act, and that it did business with sanctioned countries. The bank has said it’s cooperating with authorities in those matters.
The internal emails about interest-rate benchmarks emerged in evidence collected against the indicted Societe Generale managers, Danielle Sindzingre and Muriel Bescond. The charges against them include conspiracy to transmit false, misleading and knowingly inaccurate commodities reports. They are French citizens who lived in France and worked at the company when the charges were filed, according to U.S. court filings. The two haven’t filed responses.
The U.S. charges were a surprise to defense lawyers involved in the matter, according to one of the people, and may be an effort by prosecutors to urge the bank and any others who may be involved in the conduct to come forward and work out a deal.
Pressure to Cooperate
Even if the accused managers aren’t tried in the U.S., the complaint against them casts a shadow on the bank by laying out alleged misconduct that wasn’t previously known.
“The decision to indict, even if the defendants are not likely to be extradited from France, will likely put pressure on the bank to cooperate with the U.S. government,” said Jarrett Wolf, a former prosecutor in Miami who isn’t involved in the case.
The indictment may also serve as a warning to others at the bank that they run the risk of being charged and having their travel restricted, said Wolf, who runs a crisis consulting firm.
The investigation into Societe Generale’s rate submissions grew out of a broader probe of whether global banks had fudged the daily borrowing data they provide to calculate benchmarks like Libor, or London interbank offered rate, which helps determine mortgage and credit card rates.
The artificially low rates that resulted from Societe Generale’s submissions caused more than $170 million in harm to the global financial markets, prosecutors said in a statement announcing the charges against the two bankers. The alleged misconduct carried on into October 2011, nearly a year after Libor manipulation targeted by authorities at other banks.
The decision to lowball rate submissions was made in May 2010 after Sindzingre met with members of the bank’s management board, prosecutors wrote in the indictment, referring to an email she sent to colleagues. In that meeting, Sindzingre told colleagues she was required to discuss how the bank’s high Libor submissions “harmed Societe Generale’s reputation for financial soundness.”
Prosecutors also point to emails Sindzingre sent to her superiors, including one to “certain high-level executives,” in 2010 and 2011 warning that the bank’s Libor submissions violated British Banker Association rules and that Societe Generale could be accused of market manipulation. False Libor submissions continued after those emails, according to the indictment.
Societe Generale in recent years posted higher profits than some European rivals like Deutsche Bank AG and Barclays Plc that paid penalties over rate manipulation and were crippled by deep restructurings. Still, risks associated with the three U.S. probes are placing a drag for the bank at a critical time, as Chief Executive Officer Frederic Oudea prepares to announce new 2020 targets at the end of November.
In the Libyan matter, Societe Generale in May agreed to pay more than $1 billion to the Libyan Investment Authority to resolve a U.K. civil dispute over the alleged bribery. One of the former bankers on the Libyan transactions reached a deal with the Justice Department to cooperate in its investigation of the bank.
The bank, which is to report its third-quarter results on Friday, set aside 1.9 billion euros ($2.2 billion) for legal risks at the end of June, taking into account proceedings with U.S. authorities including the Office of Foreign Assets Controls and a dispute over French tax treatment of some assets the bank bought more than 10 years ago.
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