In recent years, there have been an increasing number of instances where banks have been implicated in foul play, particularly concerning the manipulation of the London Inter-bank Exchange Rate (LIBOR). Up until now, the vast majority of legal proceedings have been confined to the civil courts, where a bank found to have manipulated the financial markets has been issued with a substantial fine. However, the financial sector has recently bore witness to the first ever criminal prosecution of an individual for manipulation of LIBOR. Last month, Mr Tom Hayes, a former trader at leading financial institutions Citi and UBS, was convicted for 8 counts of conspiracy to defraud.
This case is likely to leave a lasting impression among many who work in the financial sector. At Lewis Nedas, we specialise in providing expert advice in respect of allegations of financial crime. In this blog post, we highlight the background to this prosecution, and give an overview of the final judgment in this case.
What was Tom Hayes being prosecuted for?
This case had its roots in the early days of the financial crisis in 2008, when banks first began to stop lending to one another.
Banks traditionally rely on LIBOR rates to be able to determine the financial health of the sector, which is also taken into account when banks are deciding to lend to one another – and how much these loans will be. It is important to note, however, that LIBOR is essentially a collation of information that banks, or more specifically their staff, provide on a daily basis. In hindsight, this fact exposed a fundamental flaw in the financial system: traders have a vested interest in the rate at which LIBOR is set.
Following collaboration between regulatory agencies in both the US and the UK, a number of individuals, including Mr Hayes, were identified as having been involved in the manipulation of LIBOR across various currencies.
There was a school of thought that prosecution in the case of Mr Hayes, and his colleagues, would prove difficult: the prosecution would have to demonstrate to a jury, beyond reasonable doubt, that Mr Hayes knew that what he was doing was illegal at the time. But at the time when Mr Hayes was alleged to have engaged in market manipulation, the legal position on LIBOR interference was rather unsettled. The defence that Mr Hayes attempted to run was based on this very fact – that manipulation of LIBOR was commonplace in the market at that time and not perceived by those involved to be wrong.
What did the court say about the case?
The prosecution of Mr Hayes was heard before Mr Justice Cooke at Southwark Crown Court, who issued his sentencing remarks on 3 August 2015 (available here). The jury in Mr Hayes’ prosecution found him guilty of eight counts of conspiracy to defraud. Mr Cooke was direct on his description of Mr Hayes’ activities:
“There is no separate standard of dishonesty for any group of society and what you did, with others, was dishonest, as you well appreciated at the time. What you did was blatant with those who shared your approach, but where you knew others would not approve, at Citi for example, you sought to manipulate by more subtle and more surreptitious means, in the same way as you used the brokers with some of their contacts. All this was done to benefit the trading profit of your book or hat of your desk.”
The court reiterated the fact that Mr Hayes had admitted that he had worked with others at various other banks to influence the submissions that they made in respect of LIBOR, each of whom he rewarded. Mr Justice Cooke was particularly unimpressed with Mr Hayes’ conduct:
“The seriousness of this offence in the context of the LIBOR benchmark and banking is hard to overstate. High standards of probity are to be expected of those who operate in the banking system, whether they are bankers involved in dealing with deposits and the lending of money or traders in an investment context. What this case has shown is the absence of that integrity which ought to characterise banking.”
The court also had little sympathy for Mr Hayes, or his defence that the manipulation in the markets was commonplace:
“The fact that others were doing the same as you is no excuse, nor is the fact that your immediate managers saw the benefit of what you were doing and condoned it and embraced it, if not encouraged it.”
The court heard evidence that there was some internal manipulation at UBS prior to Mr Hayes’ arrival, but not of the kind that Mr Hayes engendered in relation to the Yen LIBOR. Furthermore, it was pointed out that it was Mr Hayes that developed the practice of Yen LIBOR manipulation amongst the traders, and attempted to do the same at Citibank – notwithstanding the fact that at Citi the court pointed out that the ethos was quite different.
Despite the fact that Mr Hayes was noted to have received various warnings from many in the financial world regarding what he was doing, the court heard evidence that he pursued in his determination for personal gain. Mr Justice Cooke commented:
“The conduct involved here must be marked out as dishonest and wrong and a message sent to the world of baking accordingly. The reputation of LIBOR is important to the City as a financial centre and of the banking industry in this country. Probity and honesty are essential, as is trust which is based upon it. The LIBOR activities, in which you played a part, put all that in jeopardy.”
In his sentencing remarks, Mr Justice Cooke sentenced Mr Hayes to what amounted to 14 years imprisonment for his activities. Mr Hayes will be required to serve half of the sentence in custody before being released on license.
The case of Mr Hayes will send an important message to the financial sector, and provide evidence of the approach taken by the courts and regulatory authorities in respect of instances of alleged financial market manipulation. Lewis Nedas are specialist city lawyers that are regularly sought to provide expert advice in respect of allegations of financial crime. If you need advice on how the law applies to you, contact our team now.