Barclays fined over $450 million for market manipulation

Barclays has settled claims against it by both the U.S. and the U.K. that it was manipulating the LIBOR and Euribor. The CFTC issued a $200 million fine against Barclays as a result of this conduct, the largest fine it has ever issued. The U.S. Department of Justice and the UK Financial Services Authority have also settled the dispute, resulting in total fines exceeding $450 million. Canadian authorities are continuing to investigate, and criminal investigations against individual Barclays employees are ongoing.

LIBOR and Euribor are averages of the rates that banks charge when loaning other banks money. These averages are then used to determine the prices of multitudes of other transactions around the world; from basic home and car mortgage rates to securities and security derivatives and even to credit card rates. These benchmarks are integral parts of international commerce, which is what makes Barclays’ actions so egregious.

Employees of Barclays have been reporting false interest rates to the surveys that calculate LIBOR and Euribor from at least 2005 through at least 2009. Barclays holds many securities in its own name, including swaps and derivatives whose values are often directly determined by LIBOR. In order to increase profitability of these positions, the submitters would turn in false rates to the survey in order to artificially keep the benchmark low. Essentially, these employees were perpetrating a fraud upon the entire world’s economic systems in order to make a bit more money.

The evidence that the investigation uncovered is very clear. There are emails from Barclays’ traders to the submitters asking for LIBOR numbers to be either high or low on particular days. There are just as many emails from those submitters saying that they were “always happy to help” or some similar response. There is similar documentation that these false reports were done at the direction of senior management. In 2007, Barclays began receiving bad publicity because it had been reporting higher rates to LIBOR than most of its competitors. This led investors to question Barclays’ financial stability. To prevent this issue, submitters were ordered to not turn in rates that were out of line with what other banks were submitting, regardless of whether the numbers accurately reflected the rates Barclays was charging.

As part of the settlement, Barclays has been required to implement a number of new protocols to hopefully prevent future abuses. Among other things, the CFTC has required that Barclays make its LIBOR submissions solely based upon certain factors, primarily based upon Barclays’ transactions with other banks. It also has to put firewalls in place to prevent or filter communication between LIBOR submitters and traders, implement new auditing and training measures, and make regular reports to the CFTC about its ongoing compliance with the order.

Unfortunately, this situation does not appear to be isolated to Barclays. The U.S. Justice Department is continuing a criminal investigation into individual employees of Barclays and other banks. Other banks that are being investigated by the regulators include Citigroup, HSBC, the Royal Bank of Scotland, and UBS. None of these other banks have been fined or charged as of yet, but it seems unlikely that this activity was completely isolated to Barclays.

A Vienne hedge fund named FTC Capital GmbH had already filed suit in April 2011 based upon these practices. The fund is claiming that these false postings of LIBOR rates affected Eurodollar futures prices, which the fund was investing in. As a result, the fund sustained substantial losses. This is likely just the beginning of what will be a flood of lawsuits against Barclays and other banks found to have engaged in this type of conduct. As more of these probes are concluded, more of these suits will spring up.

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