Libor Scandal Sparks Fight For Justice

Libor's Long Shadow: How Quashed Convictions Reignited a Financial Scandal

Ten years after the SFO announced a win in the Libor-rigging affair, its most important prosecutions are coming apart. The highest court in the United Kingdom has thrown out the guilty verdicts against Carlo Palombo and Tom Hayes, two well-known traders, which sent tremors through the financial and legal sectors. This shocking turnaround has led four other convicted traders to start their own challenges, which could tear down the whole story of a neat end to one of the most significant frauds in the history of finance. The situation poses deep questions about scapegoating, justice, and the hidden part that governments might have had in the same market manipulation they denounced in public.

A Decisive Ruling

The pushback started when the UK's highest court issued a collective judgment that voided the fraud convictions against former traders Carlo Palombo and Tom Hayes. The justices avoided making a determination on their innocence or guilt. They instead pinpointed a deep-seated problem in the way their trials were handled. The court determined that the trial judges provided juries with instructions that were "inaccurate and unfair" from a legal standpoint. This erroneous guidance, as the judgment noted, effectively took over the jury's function. It improperly advised them that giving weight to commercial factors when submitting rates was dishonest by definition, rather than being an issue for the jury to determine based on facts.

The Core Legal Flaw

Central to the conclusion from the nation's top court was how the trial judges dealt with a difficult subject. The justices determined that the initial charges against the individuals lacked sufficient detail, which sowed confusion right away. The subsequent directions the judges gave to the juries were classified as a "misconceived" idea. It wrongly combined two distinct issues: whether a rate entry complied with the technical guidelines, and if the individual providing it honestly felt it was valid. The top UK court maintained that assessing a trader’s mindset and integrity is a factual determination for a jury, not a point of law delivered by a judge.

An Unsafe Verdict

As a result of these major mistakes, the guilty verdicts were deemed "unsafe." The UK's highest court clarified that it was not possible to ascertain if the juries would have decided on a guilty outcome if they had received correct and balanced instructions. Lord Leggatt, in presenting the decision, mentioned that Mr. Hayes was denied a chance for his defence to get fair assessment from the jury. This point of law became the key that opened the cell doors and has now reopened the entire affair. The prosecuting body, the SFO, announced that a new trial for Mr. Hayes or Mr. Palombo would not be pursued.

Image Credit - PYMNTS

A New Wave of Appeals

Following the major ruling from the UK's highest court, four additional traders have declared their intentions to bring legal action. Christian Bittar, Jay Merchant, Jonathan Mathew, and Philippe Moryoussef are now aiming to get their own guilty verdicts thrown out. Their legal representation comes from Hickman & Rose, the same firm that supported Carlo Palombo. They contend that their situations rest on the identical faulty legal arguments that are now invalidated. The firm stated its clients plan to contest the verdicts but would offer no additional statements for now. This fresh legal development makes it clear the affair involving Libor is by no means over.

Who Are the Appellants?

The four individuals hoping to restore their reputations held various positions in the finance industry. Three of the men, Philippe Moryoussef, Jay Merchant, and Jonathan Mathew, previously worked at Barclays. Christian Bittar was an employee at Deutsche Bank. Their initial trials led to lengthy prison terms. Mr. Mathew received a four-year term, and Mr. Merchant was given six-and-a-half years, which was later reduced to five-and-a-half. Mr. Bittar accepted a plea agreement and was handed a term of five years and four months. In a surprising turn, Mr. Moryoussef was found guilty while not present, having gone to France and declining to appear at his trial.

Understanding the Scandal

The London Interbank Offered Rate, known as Libor, was previously a bedrock of the worldwide economic network. It served as a key interest rate benchmark, designed to show the typical rate at which large banks could get loans from one another. This figure was instrumental in setting prices for trillions of pounds in financial instruments, ranging from everyday home loans to intricate derivatives. The controversy began after inquiries showed that traders were routinely gaming this vital rate for financial gain. At times, traders worked together to shift the rate slightly to help their own trading books.

A System of Trust Betrayed

The process for determining Libor was built on good faith. Every day, a group of large banks would provide the interest rate they believed they would need to pay for short-term borrowing. An average was then derived from these numbers to establish the final Libor value. The controversy showed this setup was being exploited. Traders were found to be in contact with staff in charge of the submissions, requesting figures that would aid their monetary goals. This practice damaged the credibility of the whole benchmark, resulting in huge penalties for the involved banks and destroying public confidence in the finance industry.

The SFO's Post-Crisis Mission

After the economic turmoil of 2008, there was significant political and public demand for holding people responsible. A vast probe was initiated by the SFO into the manipulation of Libor, which grew into its biggest and most intricate case. This investigation led to charges against 37 individuals and achieved nine guilty verdicts for people it classified as high-level bankers. For a period, these outcomes were celebrated as a major achievement, demonstrating that the government could penalize the people behind financial wrongdoing, not merely the companies they worked for.

Tom Hayes: The 'Ringmaster'

Tom Hayes, a talented mathematician and a trader at UBS and Citigroup, was the first individual to be found guilty within the United Kingdom for manipulating Libor. The prosecution depicted him as the central figure in a worldwide scheme, liaising with traders across several banks to sway the rates. He received a severe 14-year prison term, which was later cut to 11, and he has consistently asserted his innocence. Mr. Hayes claimed his conduct was standard procedure in the sector and that he was singled out to placate the widespread fury from the public aimed at the banking sector. His extensive and difficult legal struggle led to his recent victory in the country's highest court.

Carlo Palombo's Parallel Fight

Carlo Palombo, who was a vice-president at Barclays, was found guilty in another trial for rigging Euribor, the European counterpart to Libor. He was convicted of scheming to provide false or deceptive rates from 2005 to 2009 and got a four-year prison term. Much like Mr. Hayes, Mr. Palombo insisted his conduct was not fraudulent and matched the accepted standards of the market then. His case was combined with that of Mr. Hayes before the nation's highest court, resulting in both of their guilty verdicts being nullified at the same time in a judgment that has put the SFO's management of the situation under a cloud.

A Bombshell Revelation

Several years after the first guilty verdicts, a significant BBC inquiry in 2023 revealed dramatic new information that indicated the affair was substantially more intricate than first thought. The story highlighted a hidden recording made at the peak of the 2008 economic meltdown. On the recording, a senior Barclays manager, Mark Dearlove, is heard telling a Libor submitter, Peter Johnson, to deliberately decrease the bank’s rate submissions. Mr. Dearlove explained this was because of “very serious pressure from the UK government and the Bank of England.” It was a shocking disclosure, connecting the government to the exact conduct for which traders were imprisoned.

The 'Low-Balling' Defence

This information pointing to government-approved manipulation, termed "low-balling," was a vital turn of events. During the 2008 crisis, high Libor entries were interpreted as a sign of a bank’s instability, showing it was costly for them to secure funds. The BBC's findings indicated that the Bank of England and government representatives were urging banks to file unusually low rates to create a facade of market calm and stability. This supported the traders' position that they were not mavericks but were involved in a common activity, sometimes encouraged by the same bodies that later censured them.

A Question of Scale

The information brought forward by the BBC also prompted inquiries into the manipulation's extent. Alex Pabon, who was one of the convicted traders, stated the changes sought by the Bank of England were on a totally different level compared to those from traders. He contended that while a trader might request a modification of one-eighth of a basis point, the "low-balling" directives from higher up were for changes of up to 50 basis points. He noted this was a discrepancy of roughly 400 times. This pointed to the idea that the most substantial rigging was for government policy, not trader enrichment.

Scapegoats for the System?

The new information has added weight to the claim that the convicted traders were used as scapegoats. Detractors, like BBC economics correspondent Andy Verity who reported the story, propose that lower-ranking staff were put forward for legal action to shield top bank leaders and government figures. Mr. Verity's work suggests that central banks in Europe and the United States, not only in the United Kingdom, participated in guiding banks to reduce their submissions as a way to handle the economic meltdown. However, only the traders were met with criminal prosecution for their part in setting rates.

An Unjust Law?

An additional issue is that when the supposed manipulation happened, no explicit law or rule existed to prohibit it. Campaigners and legal scholars have contended that the law was effectively applied backwards to bring charges against the traders. This results in a very troubling scenario where people were imprisoned for activities that were common and, it seems, sometimes supported by official bodies, under a legal structure that was not in place when the events occurred. The positive outcomes of appeals in US courts, which pointed out that the defendants did not violate any current regulations, hinted at similar reservations from the UK's top court.

Image Credit - BBC

The End of the Libor Era

The harm to Libor's name was beyond repair. The affair showed that a rate derived from submissions instead of real transactions was fundamentally weak and susceptible to exploitation. In reaction, international regulators, among them the UK's Financial Conduct Authority, managed a move away from Libor. This effort took years of preparation to transfer trillions of pounds in financial agreements to newer, more dependable benchmarks. Libor was formally halted for sterling-based markets at the close of 2021, signaling a major shift.

The Rise of SONIA

The replacement chosen for sterling Libor is the Sterling Overnight Index Average, or SONIA. In contrast to Libor, SONIA is calculated using information from real, verifiable market dealings, which makes it much stronger and nearly impossible to rig in a similar fashion. It is managed by the Bank of England directly and is seen as a "risk-free rate." This is because it shows the typical interest rate that banks are charged for overnight loans, removing the credit risk factor that was part of Libor. This change aimed to establish a more durable and reliable base for the financial system.

A Complex Transition

Moving the whole financial market from Libor to SONIA was an enormous task. The primary distinction is that Libor was a forward-looking rate; the interest due was known when the lending period started. SONIA, however, is backward-looking, determined by the transactions of the previous day. This demanded significant adjustments to lending contracts, IT systems, and operational methods across the sector. This change was a vital move toward reforming the financial system, yet the legal consequences of the initial affair are still unfolding, creating a difficult and intricate legacy.

A Legacy in Tatters

The judgment from the UK's highest court has left the SFO's public image badly damaged. The voiding of its most prominent guilty verdicts brings up major questions regarding the standard of the initial inquiries and legal actions. The choice not to pursue a fresh trial for Mr. Hayes and Mr. Palombo might be seen as an acknowledgment that its cases, which were based on legal arguments now debunked, are no longer practical. With four additional appeals in progress, the chance that every one of the SFO's difficult-to-obtain Libor verdicts might be nullified is quite high. This risks changing a supposed legal success into a warning about extending the law too far.

The Lingering Questions

As things calm down after this recent legal upheaval, deep uncertainties persist. Were the traders merely pawns within a significantly bigger spectacle? What was known by high-level bank leaders and government figures, and when did they know it? The proof of official pressure to submit "low-ball" rates amid the economic turmoil has yet to be properly examined in a legal setting. The narrative surrounding the Libor affair is not anymore a straightforward account of avaricious traders against the law. It has become a much more obscure issue concerning the boundary between standard market procedure and illegal acts, and whether justice was truly achieved.