In the wake of Barclays being hauled over the coals by a parliamentary committee, the Serious Fraud Office (SFO) has announced that it will open an investigation to probe untoward conduct by any of the 16 banks who were on the LIBOR panel during 2008. But the SFO would be wise to tread very carefully and make sure that, before it rushes in, it has the necessary sharp teeth to do so effectively. Whilst it clearly has the power to prosecute, the legal terrain upon which to bring a case is challenging. An ignominious failure to convict a banker after an inevitable high-profile trial would stain the reputation of its new director and spark fresh calls for its abolition. The last time the SFO brought a case which alleged price-fixing (R v Goldshield), it misunderstood the law so badly that the case collapsed at the first hurdle.
What offences are in play? There is false accounting created by s17 of the Theft Act 1968. LIBOR submissions are a mass of financial data all on one sheet which would be alleged to be false or misleading. The problem, however, is that this information is not created for an accounting purpose which the offence requires a prosecutor to prove. All parties know the submission is composed of estimates and not necessarily based on any real activity, so the alleged illegal conduct is outside the scope of this offence.
How about the cartel offence created by s188 of the Enterprise Act? This offence proscribes four defined types of cartellist behaviour and only one of these could potentially apply: an arrangement which the parties intend if carried out would directly or indirectly fix a price for the supply of a product or service. “Price” is not defined and so the word must be given its natural meaning. So were the collusive LIBOR banks fixing a price?
LIBOR does not sell or supply anything. The Act refers only to a price which LIBOR is not and so the offence will have to be related to how LIBOR acts as a pricing component for other financial products. The SFO would have to prove the impact of what the alleged colluders intended on those collateral contracts. Maybe this is possible but a wise prosecutor would see the warning-lights: heavy reliance on expert evidence to show impact and a case relying for its vitality on bringing complex derivative contracts to life before a jury. If the SFO builds its case on these foundations, by the time of the trial they may turn out to be sand not rock.
Another problem arises because of the way the LIBOR is calculated. With 16 banks providing their estimates with outlier submissions at the bottom and top of the range excluded, the colluders know that it will be impossible to fix it to a specific rate unless almost all of the banks are in their number. That has never been suggested and so if the colluders number only three or four they know that they cannot fix LIBOR but only influence it.
As a result of s188 criminalising only a narrow range of anti-competitive conduct, the nature and complexity of LIBOR takes alleged manipulation outside its ambit. Moreover alleged collusive banks could never face prosecution for alleged price-fixing as the offence only applies to individuals. S2-4 of the Fraud Act 2006 define three ways in which a person can act fraudulently. Of this trio only one is really apposite to alleged false LIBOR submissions – dishonest misrepresentation, or perhaps fraud by abuse of position. Whilst these might seem to fit the facts of the alleged malpractice, the SFO would be obliged not only to identify dishonest conduct but also show some proof of actual gain or loss.
Can a misrepresentation be inferred from the fact that a bank claimed at 1100 in its LIBOR submission that it would expect to pay X rate yet by noon it was agreeing to pay Y? Put another way, can this submission be judged a false or misleading bid in the light of subsequent conduct? An appreciation of the LIBOR system reveals that there is no inconsistency. A disconnect between the benchmark and the actual cost of borrowing shows only that there is no necessary link between the bank’s estimate and market prices.
Presumably, evidence of foul play would be revealed by contemporaneous emails etc which suggest that the bank’s submission was at odds with what its LIBOR submitters believed it could borrow for. So the misrepresentation is of an individual’s true state of mind or opinion. Whilst the Fraud Act makes it permissible to prosecute for this, the problem is that both the submitter and the intended recipient or victim, in this case the market, knows that the submitter is only making a guess about something hypothetical. Moreover the question the submitter has to give an answer to leaves plenty of scope for doubt: what rate would you pay to borrow in “reasonable market size”? This term is not defined yet presumably the size of a deal will affect its price. What it is which has allegedly been misrepresented becomes a difficult issue. Can you have a misrepresentation amounting to an offence about something so nebulous?
If the answer is yes, the issue becomes whether the submitter was acting dishonestly or not. The fact that with LIBOR submissions and market prices there is no cause and effect, everyone knows they are a guess and that the question which the submitter answers is inherently vague, suggests that the SFO would have an uphill struggle in proving dishonesty.
That leaves the common law offence of conspiracy to defraud. This offence is committed when two or more persons agree dishonestly to prejudice the economic interests of another. There is no need to prove that the conspiracy had any effect in terms of harming anyone and the intended prejudice can be ephemeral or potential. As to identifying who the intended victim was, a broad class of persons will suffice.
The usefulness of this offence to a prosecutor is that, unlike the offences above, the emphasis is almost entirely on what was agreed. The intended means of implementation, whether or not they could have sufficed and the extent of any loss inflicted are all immaterial and so, whilst they are distinct legal concepts, in a trial the alleged agreement and the alleged dishonesty usually become conflated. Of all the offences, this is the one least vulnerable to technical objection.
The breadth of this offence, however, is also its weakness. To prove its case, the SFO would have to show that there was a single overarching conspiracy and all the alleged manipulations are referable to that. So evidence of ad hoc requests, of different traders drifting in and out and the lack of a prime mover are all features which suggest the absence of a conspiracy. Moreover the alleged conspirators must all be motivated by the same intention so if the evidence revealed that their manipulations were for different reasons, the conspiracy count will founder. Based on the evidence provided by Barclays to date, there seems to be some evidence supporting the theory that Barclays perceived its manipulations were tacitly approved by the Bank of England. Such a version of events, if credible, would destroy the SFO’s case.
The SFO has a difficult task ahead in deciding whether the criminal law can be used to sanction this latest outburst of financial misconduct. The greatest deterrent is the threat of imprisonment; corporate fines may fail to offset benefits and provide a far weaker impulse to directors not to choose the opportunity to mis-sell a product or form a cartel. But criminal litigation can take years to resolve and often turns out to have a disappointing and ineffectual outcome. The truth is that the criminal law is not equipped to prosecute the conduct revealed by the LIBOR investigation and what will inevitably follow is a call for a new offence to fill the gap, thus rather belatedly shutting the stable door.
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