The settlement announced Wednesday by the Royal Bank of Scotland with United States and British authorities is the third deal by a global bank emerging from the manipulation of the London interbank offered rate, or Libor.
The investigation is likely to result in more banks being named, and more banks reaching big settlements to end such cases. For banks looking for a framework of what to expect when negotiating deals, three crucial questions will come into play:
How Much Will It Cost
Many of these settlements have required banks to pay hundreds of millions of dollars. The Roya Bank of Scotland agreed Wednesday to pay criminal fines of $150 million to the Justice Department, and a $325 million civil penalty to the Commodity Futures Trading Commission, the regulatory agency that has taken the lead in these cases. An additional penalty of £87.5 million,or $137 million, will be paid to the Financial Services Authority in Britain. So, it will pay a total of more than $600 million to resolve the case.
The other two banks that settled were Barclays and UBS. As the first one to resolve its case, Barclays paid the lowest amount, with a criminal fine of $160 million and civil penalty of $200 million, plus another £59.5 million to the Financial Services Authority, for a total of about $450 million.
UBS paid a much steeper price as part of its settlement: $500 million in criminal fines, $700 million in civil penalties, plus about $323.5 million to British and Swiss authorities, for a total of more than $1.5 billion.
For other banks looking to settle, they should figure on at least $500 million to the Justice Department and Commodity Futures Trading Commission, and the total could easily reach $1 billion if the governments of several nations are involved and the conduct by its employees was particularly problematic.
Is a Guilty Plea Required to Be Part of Any Settlement
Althoug Barclays avoided having criminal charges filed against it, the Japanese securities operations of both UBS and the Royal Bank of Scotland were required to plead guilty to one count of wire fraud in Federal District Court in Connecticut. That now looks as if it is the price for any settlement, something that had not been seen in recent years in cases involving banks.
As I discussed when UBS settled in December, the Justice Department has structured the deal to minimize the impact of the guilty plea by having a foreign subsidiary responsible for the guilty plea. This should largely avoid the so-called Arthur Andersen effect on the bank by limiting the chances a bank will lose its ability to continue in business in the United States because of the conviction.
The parent company does have to acknowledge its violations by accepting a statement of facts that describes how it violated the law. ! For Barc! lays and UBS, this came as part of a nonprosecution agreement, which means no criminal charges were ever filed against the banks.
This admission does, however, subject the banks to additional legal liability in cases file by those that relied on Libor for everything from mortgage rates to derivatives. Plaintiffs in such cases will now be armed with plenty of evidence provided by the government.
In an interesting twist, the Royal Bank of Scotland accepted a deferred prosecution agreement under which federal prosecutors filed a wire fraud charge that will be held in abeyance as long as the bank continues to cooperate. While there is not a significant difference between deferred prosecution and nonprosecution agreements, banks certainly prefer the latter because there is no record of a criminal charge being filed.
Now that such precedent has been set, other banks caught up in Libor will probably have to agree to allow a subsidiary to plead guilty. In addition, they are likely to have to admi to their own violations under either a deferred or nonprosecution agreement.
The banks dealing with the Justice Department will want to make sure they have a subsidiary in Japan or another country that can be used as the vehicle for the settlement. A lot of the manipulation of the Libor has taken place in Japan and not just Britain and the United States, which is one reason the operations in that country have been used for the guilty pleas.
Two American banks involved in the investigation are Citigroup and JP Morgan Chase. Each has a separately incorporated securities subsidiary in Japan - Citigroup Globa! l Markets! Japan and JPMorgan Securities Japan Company - that might be available for a guilty plea that would minimize the impact on their banking operations in critical financial centers like London and New York.
Will There Be Embarrassing E-Mails
It seems as if every case of corporate misconduct these days includes the usual string of e-mails between employees that paints a company in especially unflattering terms. For the Royal Bank of Scotland., messages were unearthed from its traders about manipulating Libor that included statements like “i owe you big time,†“thats beyond the call of duty!†and even “if u did that i would come over there and make love to you.â€
Financial firms have successful trading operations because of the energy of their employees. Certainly, the colorful wording of the things they say in e-mails and text messages have, in hindsight, not been helpful.
Banksshould expect the government to continue to trot out this type of evidence to show there is a legitimate basis for pursuing the case for conduct that was clearly not isolated. And certainly, prosecutors can count on generating headlines and garnering attention with such fodder.
Any bank looking to settle with the Justice Department and Commodity Futures Trading Commission has to be prepared for a rite of passage that includes seeing humiliating e-mails being released for public consumption and snickering.
All these issues will mean that governments and regulators will have the upper hand when negotiating settlements with banks in cases involving Libor manipulation.
