John Terzaken is head of the United States cartel practice at Allen & Overy in Washington, focusing on antitrust enforcement actions, investigations, compliance and litigation. He was previously director of criminal enforcement at the Justice Department’s antitrust division.
Compliance chiefs on Wall Street have had their hands full lately, thanks to sweeping reforms initiated by the 2010 Dodd-Frank Act. Yet complying with Dodd-Frank is hardly the only serious challenge they face. That is especially true now that federal antitrust authorities are focusing on bid-rigging, interest rate manipulation and other forms of collusion on Wall Street trading desks and turning up the heat on the world’s biggest financial services firms and banks.
Front and center has been the Justice Department’s investigation into suspected manipulation of benchmark rates â€" particularly the London interbank offered rate, or Libor â€" for setting global interest rates. It is a case I oversaw.
Since 2011, when news of the Libor investigation first broke, antitrust prosecutors have levied hundreds of millions of dollars in fines against offending institutions. Last June, Justice Department lawyers filed criminal antitrust charges against the Royal Bank of Scotland for its role in the Libor case. It was the first time a financial services firm was ever held criminally liable under antitrust laws for a trader-based market manipulation scheme.
Given the scope of the suspected conspiracy â€" traders from a dozen of the world’s largest banks have been accused of submitting false data or otherwise colluding to fix Libor â€" more criminal antitrust charges are possible. And in the wake of the investigation have come charges against traders accused of manipulating other benchmark rates like the euro interbank offered rate, or Euribor. To financial institutions, the message is clear: A new, more vigorous era of antitrust enforcement is at hand â€" and in fact, just getting started.
In addition to its Libor cases, the Justice Department’s antitrust division announced a criminal investigation into suspected manipulation of foreign exchange rates. This comes after several years of investigations into possible big-rigging in the municipal bond market, as well as anticompetitive conduct in the market for credit-default swaps. The department recently opened a preliminary inquiry into possible price-fixing in the metals warehousing business. The question there is whether Wall Street firms that hold controlling interests in those warehouses conspired to artificially drive up storagerates for aluminum and other metals.
Until recently, antitrust regulation was never regarded as a high-priority concern. Wall Street has long had to face a laundry list of enforcers who were more focused on rooting out fraud, insider trading and other market crimes. But the Street largely avoided the watchful eye of antitrust authorities.
The industry was put on notice that things were about to change. In 2009, the antitrust division announced that banks would be receiving closer scrutiny along with four other sectors. Later that year, the division joined the Securities and Exchange Commission, the Internal Revenue Service and other agencies on President Obama’s Financial Fraud Enforcement Task Force â€" trumpeted as “an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.â€
How effective that effort has been is a continuing source of debate. Still, there is no denying that the antitrust division has made good on its pledge to crack down on anticompetitive conduct in the financial sector. A similar crackdown has been under way by antitrust authorities in the European Union, which has already levied hundreds of millions of euros in fines against financial firms.
Not to be outdone, the plaintiffs’ bar has gotten in on the action, filing a barrage of civil class action lawsuits against banks that piggyback on the accusations underlying the government’s investigations into collusion.
Given the enormous costs and risks posed by the new enforcement threat, financial firms must take antitrust compliance seriously. Wall Street needs to begin taking requisite steps to mitigate the hazards associated with potential collusion and price-fixing. That will require firms to rethink the way their trading desks have traditionally gathered information and made markets.
Consider the recent publicity about electronic chat rooms. Many traders have long frequented these sites to unearth market intelligence from peers at other firms. But with antitrust prosecutors on the hunt for evidence of collusion, there is increasing concern that even benign use of chat rooms and instant-messaging services may pose compliance risks. As a result, firms with trading books are imposing enhanced restrictions on employee access to the sites.
Bloomberg L.P. recently announced it would offer users of its terminals new tools to monitor and limit chat room visits. And Goldman Sachs said it planned to prohibit traders from gaining access to any computer messaging platforms to prevent leaks of its proprietary sales and trading information. That includes a ban on any instant-messaging sites â€" including those operated by Yahoo, AOL and other third parties.
That is just one sign of the post-Libor norm. As Wall Street continues to confront the new era of tougher antitrust oversight, firms should get ahead of the regulators in policing their own houses.
One obvious starting point is greater use of antitrust compliance programs. Banks â€" especially those with trading desks â€" would be wise to bolster their antitrust training and oversight systems to ensure that traders don’t even appear to share information on pricing or bidding on securities.
Firms should conduct a comprehensive top-down audit of trading operations. If serious problems are identified, it may be wise to consider alerting the Justice Department and seeking a spot in the antitrust division’s leniency program. Difficult decisions like these must be made quickly, because under the program only the first company to report collusive conduct is eligible to receive immunity from criminal antitrust charges and fines.
In the wake of the Libor case, the antitrust leniency program has begun to take hold in financial services. Banks and other financial firms find themselves in a race to beat competitors to the Justice Department’s doors to report potential antitrust transgressions.
Call it yet another sign of the post-Libor times and the new normal on Wall Street. For banks and financial institutions, the unsettling reality is that antitrust enforcers have moved in on Wall Street and appear to be settling in for the long haul.
