In the first of this three-part series, we explored how LIBOR worked pre-2008 and outlined how submitting commercially-minded rates was normal market practice. The first time the practice was outlawed was by a non-expert judge in 2015, at which point the law was applied retrospectively. In this second part, we look at some more issues arising out of the LIBOR trials.
The conduct of the Serious Fraud Office (SFO) and their witnesses during the trials raise some serious questions about the safety of the LIBOR convictions. The prosecution’s case relied heavily on the evidence of two “expert” witnesses. The first was John Ewan, the former Director of LIBOR at the BBA. He claimed under oath that taking commercial interests into account was not allowed. In Hayes’ words, he subsequently changed his position “180 degrees, by saying if it had been a rule, it would’ve been written down and published.” Indeed, during the later trial of Reich and Contogoulas, his evidence completely contradicted what he had previously said. Ewan has also admitted on numerous occasions – both in private emails and publicly recorded minutes – that traders were perfectly entitled to submit rates within an acceptable range depending on market conditions and trading positions. As Matt Connolly noted: “in 2004 and 2005 John Ewan was told that banks shade their own submission in their commercial interest, and he never blinked an eye. We have it in writing. In addition, we have an audio tape of senior panel bank executives and John Ewan again agreeing to this from 2008.”
At the Hayes trial, the SFO also presented an individual named Saul Haydon-Rowe as an expert on LIBOR. Haydon-Rowe runs a consultancy firm that has earned hundreds of thousands of pounds from work commissioned by the SFO. His job was to explain to the jury how LIBOR was meant to work. As part of his explanations, he told the jury that commercially-minded submissions were banned. This is simply untrue. But it was undoubtedly a key influence in the jury’s decision to find Hayes guilty.
Haydon-Rowe was also used during both the trial and retrial of Reich and Contogoulas. Reich told us that after he read the “expert” report Haydon-Rowe produced for the first trial, he was instantly aware that he was far from an expert on LIBOR issues. Although his legal team raised the issue with the judge, Judge Anthony Leonard, this was dismissed. However, during the retrial, Reich and Contogoulas’ legal representatives managed to expose Haydon-Rowe. Contogoulas recalls that “his understanding of many issues related to LIBOR was very poor, and he didn’t even seem to grasp some very basic concepts.” Indeed, while the trial was ongoing, he was found to be texting acquaintances asking for advice so he could “look knowledgeable.” Haydon-Rowe faltered significantly under cross-examination, as did Ewan, and the SFO’s case collapsed. Reich and Contogoulas were both acquitted.
Falsely presenting oneself to a court as an expert, and communicating in this fashion during an ongoing trial, are both criminal offences. However, the Metropolitan Police has failed to pursue any enquiries into his conduct. This is despite Reich paying for his legal team to submit an extensive document to the police outlining, with evidence, the illegality of Haydon-Rowe’s conduct. The Metropolitan Police have suggested that no criminal inquiries have been opened because the prosecution knew he was not an expert. But rather than absolving Haydon-Rowe of any wrongdoing, this line of argument simply implicates the prosecution in knowingly conspiring with him to act dishonestly at the trial.
What would Ewan and Haydon-Rowe’s motivation to behave dishonestly be? As no investigations have been launched into their conduct, it is impossible to know for sure. But Reich offered what seemed to be a reasonable explanation. “Ewan is a coward […] rather than simply doing the right thing, he was probably threatened. And he became a witness for them because either he was going to be a witness, or he was going to be exposed to a charge himself. Because he was in charge of this process and didn’t do anything.”
Reich told us that, during cross-examination, “at some points you couldn’t even hear what he was saying, he looked like he was going to cry – it was an embarrassment […] he seemed like a slimy little puppet.” As for Haydon-Rowe, somebody paid hundreds of thousands to produce reports and give evidence in trials, he may have been motivated by sheer greed. In order to win their case, the SFO needed “a guy who’s kind of dishonest to begin with, who’s sleazy – somebody who actually understands the business and has integrity, is not going to do that [testify that commercial rates were not allowed].”
Responding to a Freedom of Information request, the SFO denied that Haydon-Rowe had ever been presented as an expert on LIBOR. They told DisruptionBanking that he was instructed as “an expert on general banking matters.” Hayes responded that this was “bullshit,” and pointed out that Haydon-Rowe “spoke extensively about LIBOR […] he spoke about the rules, he spoke about how all my trades were attached to LIBOR, he spoke about the profitability of my trades.” The SFO refused to disclose which official was responsible for the decision to rely on Haydon-Rowe’s evidence. However, Hayes has email evidence that shows it was the prosecuting Queen’s Counsel, Mukul Chawla, who allowed Rowe to continue. This was despite the reservations of SFO staff, who became concerned after Rowe sought permission for others to check his report for “howlers,” and told them it would be good for a “specialist” to look over it.
It would be impossible to cover all of the dirty tricks used against the traders throughout their various trials, but Merchant told us of another particularly shocking episode. On his jury was “a disgruntled ex-bank employee, who had recently been fired and was facing immigration issues since he was not even a UK citizen.” While his legal representatives raised this issue – a clear conflict of interest – he was not only allowed to remain on the jury, “but he became the foreman and was given an extension of his stay in the UK just for the trial.”
Something similar happened in Palombo’s trial. He had a juror who had been an intern on the UBS trading floor in 2012, right at the time when the LIBOR issue exploded. The juror informed the judge that this may be a conflict of interest, but he was allowed to continue and also became the foreman because of his supposed expertise in the matter. He knew various people personally connected in the matter and gave the jury a whole swathe of extraneous and prejudicial information. Although juries are not allowed to consider information that has not been discussed in court, this is likely to have influenced their decision. Even more so given the foreman of the jury was an intern at the very bank where the scandal exploded to start with. The Court of Appeal dismissed the appeal on the basis that there is no evidence that jury deliberations were affected.
This is all extremely concerning. Did the authorities simply use every trick in the book, to try and satisfy the public mood for a few bankers to be locked up? Or were they under extreme political pressure to find some scapegoats? Either way, innocent people have paid the price.
Everybody would accept that it was essential to hold some bankers to account for the chaos that engulfed the world as a result of the financial crisis. But what is interesting is the bankers the authorities chose to pursue. All were well-paid, as practically every banker is, but were ultimately relatively junior. From a UK perspective, many of those prosecuted – including Hayes, Reich and Merchant – worked abroad. Others had already left their banks, like Merchant, or were in the process of leaving the sector completely. Palombo, for example, had decided shortly before to go back to university and become an academic. All worked either for foreign banks, or Barclays, which had not been bailed out by the taxpayer and therefore implicated no taxpayer-funded officials. While the SFO insisted at the Hayes trial that senior managers would also face legal consequences for their actions, this never transpired. Given that this kind of activity was so widespread, isn’t it all a bit too convenient that the authorities focused their attention on these men?
As we explored in Part One, submitting a “high” or “low” LIBOR rate depending on a commercial position was never considered to be against the rules. The first time it was outlawed was by Mr Justice Cooke in the 2015 Hayes trial: a decision he came to unilaterally and against all expert advice. However, once you have decided it is illegal, it would make sense to go for those practicing the activity on the widest scale. To do that, the SFO would have needed to prosecute senior officials at the Bank of England and Barclays.
Thanks to the “Lowball Tapes,” obtained by the BBC’s Andy Verity, we now know that the Bank of England deliberately pushed LIBOR rates much lower during the financial crisis, in an attempt to prevent liquidity drying up. Banks, including Barclays, were also concerned that they would look vulnerable if the market knew they were paying significantly more to borrow money than had previously been the case. Senior management therefore conspired, with the encouragement and backing of the Bank of England, to push rates much lower. As Connolly told us, this was done on a scale “300-400 times the magnitude any single trader could dream of.” Recordings of phone conversations contradict various statements made by officials to parliament, such as those of former Barclays CEO Bob Diamond, that insisted they had no idea that this practice was going on.
Reich “hates” the argument that senior officials acted “worse” than those convicted. “I don’t want to point the finger at somebody else,” Reich told us. “Yes, it is worse and now that some guys have been found guilty, that’s an OK argument to run with. But I don’t ever want to leave the starting point that we did nothing wrong […] It was part of the market. It was standard practice. The rates were never false. We can talk about lowballing but that has nothing to do with what we were doing. We did nothing wrong – period.”
He is, of course, correct. The LIBOR traders did not commit any offence in the first instance. But the fact that the SFO went for relatively junior traders, rather than the senior officials doing the same thing on a much larger scale, must raise serious concerns. Andy Verity’s evidence suggests that there has been a cover-up to protect high-ranking officials at the Bank of England, Barclays and perhaps the UK government, all of whom conspired to manipulate LIBOR rates massively in the immediate aftermath of the financial crisis. Meanwhile, innocent men have been locked up for crimes they did not commit and had their lives destroyed. The authorities clearly wanted to hold somebody accountable for the crash: just not somebody too important.
This is the second article in a three-piece series, to be continued on Tuesday 10th May. You can see the first piece by following the link here.
Author: Harry Clynch
#LIBOR #FinancialCrisis #SFO #BBA #BankofEngland #Barclays