Libor-Rigging Guilty Verdicts Bolster U.S. Bid to Punish Traders

(Bloomberg) -- A U.S. crackdown on the people who rigged key financial-market benchmarks suffered a stinging setback last year when an appeals court tossed out the conviction of two former Rabobank Groep traders.

Prosecutors got a measure of redemption on Wednesday.

A federal jury returned guilty verdicts in a separate case against two ex-traders at Deutsche Bank AG. The company was one of the worst offenders in a scandal that led to billions of dollars in fines to settle government claims that companies rigged Libor, a global interest-rate benchmark.

Matthew Connolly, 48, of Basking Ridge, New Jersey, and Gavin Black, 53, of London, were convicted of conspiring to manipulate the London interbank offered rate, which is used to value trillions of dollars of financial products, from 2004 to 2011. After a monthlong trial in Manhattan federal court, the jury of seven men and five women deliberated for less than seven hours before reaching their verdict.

Libor-Rigging Guilty Verdicts Bolster U.S. Bid to Punish Traders

The two men “undermined the integrity of our financial markets,” Assistant U.S. Attorney General Brian A. Benczkowski said in a statement. “The Justice Department and its law-enforcement partners will aggressively investigate and prosecute individuals and financial institutions who engage in this sort of misconduct.”

Since regulators began a global crackdown on how the Libor benchmark is set, banks including Deutsche Bank and Barclays Bank Plc have agreed to pay more than $9 billion in fines. Dozens of traders have been fined, barred from the financial industry or criminally charged in different countries. But only four, including Connolly and Black, have been found guilty at a U.S. trial, including the two Rabobank traders whose convictions were reversed.

Connolly and Black may have reason for hope, however. Throughout the trial, U.S. District Judge Colleen McMahon lambasted prosecutors for legal missteps, while signaling she may be sympathetic to requests to throw out the case after the verdict. And McMahon declined to set a sentencing date for the two men while she hears post-trial motions to dismiss the charges.

“This isn’t over," said Ken Breen, a lawyer for Connolly. "We will pursue our post-trial challenges until we get to exoneration.” Black’s attorney, Seth Levine, also said he will seek to have the verdict overturned.

“Given the track record in Libor cases, even generally in securities cases lately, I think they have a reasonable chance of getting the convictions overturned,” said Peter J. Henning, a professor at law at Wayne State University in Detroit. “This was a close case.”

Deutsche Bank was a key player in global rate-rigging scandals. Authorities said bank employees played central roles in manipulating Libor and a similar European benchmark known as Euribor. Both are based on the average borrowing rate of big banks and are used to value financial products.

In 2015, Deutsche Bank was fined $2.5 billion -- dwarfing settlements reached by other lenders -- after British and U.S. regulators said the company intentionally misled investigators and then provided an “unacceptably slow and ineffective response” to requests for information. As the banks settled charges, prosecutors targeted individuals who could be held accountable.

Connolly, who supervised the money-market derivatives desk in New York, was convicted of conspiracy and two counts of wire fraud, while jurors cleared him of three wire-fraud counts. Black, who traded derivatives in London, was found guilty of conspiracy and one count of wire fraud. They face as long as 30 years in prison and a $1 million fine, although they will likely serve a much shorter sentence under federal guidelines.

Prosecution Witnesses

Prosecutors built their case against the pair on the testimony of two ex-Deutsche Bank traders who pleaded guilty to Libor-rigging and, in bids for leniency, agreed to take the witness stand against them: Michael Curtler, a senior trader who oversaw the person who made the bank’s daily Libor submission, and Timothy Parietti, a derivatives trader in New York who was supervised by Connolly.

The U.S. also called James King, a cash trader who was responsible for the daily Libor submission and testified under an agreement that the government wouldn’t prosecute him.

The three former traders told jurors that, at the urging of the defendants, they altered the rate or pressured others to submit false data to benefit trading positions held by themselves and others. Parietti said Connolly ordered him to disclose positions to the submitters in London because Connolly believed his team was being undermined by others at the bank who were rigging the rate in their favor.

The defense argued that there were no clear guidelines on how banks should submit their rates for the calculation of Libor until at least 2008, and that they weren’t expressly forbidden from taking derivative trading positions into account when making the submission until 2013.

Stories Changed

During cross-examination, attorneys for Connolly and Black attempted to portray the government’s witnesses as liars who initially defended their practices to investigators and changed their stories only in exchange for a deal with prosecutors.

The first trial held in the U.S. over Libor manipulation targeted two former Rabobank traders. They were found guilty in 2015, but their convictions were thrown out by an appeals court that determined the case was tainted by their forced testimony to the U.K.’s Financial Conduct Authority.

At least 10 former Deutsche Bank traders have been charged with rigging interest-rate benchmarks in the U.S. and the U.K.

Christian Bittar pleaded guilty to fixing the Euribor rate in March and was sentenced to more than five years in prison in July. Fellow Deutsche Bank trader Philippe Moryoussef got eight years, though he was convicted and sentenced in absentia after staying in France. The jury that convicted Moryoussef cleared former Deutsche Bank executive Achim Kraemer.

Escaped Trial

Andreas Hauschild was arrested in Italy in August after a trip to the country activated a European arrest warrant issued by the U.K.’s Serious Fraud Office. He was one of several Deutsche Bank traders charged with Euribor manipulation in the U.K. in 2015 who escaped trial because Germany rejected an extradition request. A court in Frankfurt in March found that the alleged crimes had taken place too long ago to be tried.

After the Libor scandal, support has been growing for an alternative benchmark. Some financial institutions are promoting one based on the secured overnight financing rate, which is calculated based on overnight loans collateralized by U.S. government debt. Libor is derived from a daily survey of large banks that estimate how much it would cost to borrow from each other without collateral.

The case is U.S. v Connolly, 16-cr-370, U.S. District Court, Southern District of New York (Manhattan).

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