This issue of the Credit Crunch Digest focuses on ongoing investigations into Libor manipulation by Deutsche Bank; fines against Barclays stemming from manipulation of the gold market; a warning by the SEC regarding Bitcoins; accounting errors by Bank of America and Fed stress tests; and New York State regulators using Dodd-Frank to enforce consumer protection lawsuits.
Libor and Foreign Exchange Litigation
Deutsche Bank Libor Manipulation Investigation Ongoing
Although a previous report from German magazine WirstschaftWoche stated that Deutsche Bank concluded its internal investigation of Libor manipulation and found no misconduct, sources close to the investigation have refuted this assertion. According to reports, the investigation has not been concluded, nor is there a set schedule to end the investigation. Deutsche Bank has already forfeited over 5 billion euros (approximately $6.9 billion) in settlement costs and fines in connection with the financial crisis. The bank anticipates paying approximately 1.8 billion euros in additional settlements and fines. (“No End In Sight For Deutsche Bank Libor Probe: Sources,” Reuters, May 12, 2014).
Litigation and Regulatory Investigations
Gold Trading Manipulation Results in Large Fine
The U.K. Financial Conduct Authority (FCA) fined Barclays Plc £26 million ($44 million) following one of its trader’s 2012 manipulation of the gold markets. The FCA admonished the bank for “failing to adequately manage conflicts of interest” with its customers during the period of 2004 to 2013. The FCA also banned the trader, Daniel Plunkett, from the industry and levied a £95,600 fine against him.
According to the FCA, the trader located “weaknesses” in the bank’s internal controls, which allowed Barclays to manipulate the gold market and ultimately avoid making a $3.9 million payment to a client. Barclays notified the regulators of the trades following its own probe. The client was later compensated the full amount, and Barclays has stated that it has engaged in efforts to improve its internal systems following this episode.
Barclays and other banks are also currently subject to a March 2014 civil suit in the U.S. District Court for the Southern District of New York, in which it is alleged that various banks colluded to fix gold prices. (“Barclays Fined $44 Million for London Gold Fix Failings,” Bloomberg, May 23, 2014).
Bank of America Accounting Error Goes Undetected for Years
Bank of America has announced that it made a $4 billion accounting error related to its financial strength, resulting in lower capital than previously indicated. In response, the Federal Reserve halted the bank’s plan to engage in a share buyback and canceled an increase in quarterly dividends. Despite the error, regulators continue to believe the bank has sufficient capital.
The error has also prompted federal regulators to considered altering the “stress tests,” which were instituted following the financial crisis to gauge big banks’ ability to absorb capital shocks. Bank of America, for its part, passed its last test in March, which led the bank to move forward with buybacks and dividend increases. These plans are on hold subject to further discussions with the Federal Reserve.
The error originated with Merrill Lynch, which was acquired by Bank of America during the financial crisis. As part of that acquisition, Bank of America assumed bonds that Merrill had issued, including a $60 billion portfolio of so-called structured notes. Bank of America’s capital should have been reduced by losses stemming from a $60 billion Merrill Lynch portfolio of structured notes, after payouts related to the notes were higher than what was assumed by the bank. According to the bank, the error did not affect its earnings. However, it does call into question the competency of its internal accountants. (“Bank of America Finds a Mistake: $4 Billion Less Capital,” NY Times Dealbook, April 28, 2014).
Frauds and Ponzi Schemes
SEC Issues Warning to Bitcoin Investors
The SEC recently issued an alert (found here) to investors that “cryptocurrency,” such as Bitcoin, puts investors at potentially high risk for fraud. The SEC believes that potential investors may not only be induced by high investment returns when using the new currency, but may also be less questioning about them as investments because they are viewed as cutting edge. If a fraudulent transaction occurs, the SEC warns that investors are less likely to recoup any money due to a Bitcoin’s digital-only nature, which makes tracing it difficult.
Moreover, the SEC warns that Bitcoins are not regulated by any governmental authority, are extremely volatile, and raises security concerns. This warning follows the February bankruptcy of Mt. Gox, one of the premier Bitcoin exchange networks. Other regulatory agencies, including Financial Industry Regulatory Authority and the North American Securities Administrators Association, have also issued similar warnings about the risks of investing in Bitcoins. (“Don’t Be A Sucker For Bitcoin Scams, SEC Warns,” NBC News, May 8, 2014).
Government and Regulatory Intervention
New York State Regulator Uses Dodd-Frank for Consumer Protection Lawsuit
Benjamin Lawsky, New York’s financial regulator, filed a lawsuit in the U.S. District Court for the Southern District of New York against Condor Capital Corporation alleging violations of the Dodd-Frank Act in connection with the issuance of certain subprime auto loans. The lawsuit alleges that Condor took millions of dollars from borrowers’ accounts without the account holders’ knowledge by blocking access to the accounts so that the borrowers could not see whether any excess money was leftover after the subject loans were repaid. This lawsuit is one of the first cases where state regulators are using Dodd-Frank to prosecute consumer protection claims.
After filing suit, a judge subsequently granted Lawsky a temporary restraining order to freeze Condor’s accounts to allow for regulators to review the company’s finances. Condor issued approximately 7,000 loans to New York state residents for a total balance above $97 million. For loans issued countrywide, that figure increases to $300 million.
Analysts believe that this lawsuit will encourage more state regulators to become aware of their ability to prosecute under Dodd-Frank. The only prior consumer protection lawsuit filed by a state regulator that used Dodd-Frank occurred in March 2014 in Illinois, when its Attorney General pursued a payday lender for intentionally deceiving borrowers. (“New York Financial Regulator Uses Dodd-Frank To Sue Auto Lender,” The New York Times, April 23, 2014).