Credit Crunch Digest -- July 2014

This issue of the Credit Crunch Digest focuses on upcoming Libor-related litigation before the Supreme Court and a recent Libor settlement; Citigroup’s $7 billion settlement with the Department of Justice; BNP Paribus’ guilty plea to criminal charges; European banks’ increasing litigation expenses; a ruling against Madoff Trustee Irving Picard with respect to his effort to recover overseas money; and the Securities and Exchange Commission’s enforcement of anti-retaliation provisions in the Dodd-Frank Act.

Libor and Foreign Exchange Litigation

  • Lloyds Banking Group Plc Reaches $370 Million Libor Settlement
  • Supreme Court Agrees to Hear Libor Manipulation Antitrust Suit 

Litigation and Regulatory Investigations 

  • Citigroup Settles Mortgage Securities Investigation for $7 Billion
  • BNP Paribus Fined $8.9 Billion for Dealings With Blacklisted Countries 
  • New York AG Accuses Barclays’ Dark Pool System of Promoting Predatory Trading 
  • European Banks Catching Up to U.S. Banks in Litigation Expenses 

Fraud and Ponzi Schemes

  • Rakoff’s Ruling Limits Picard’s Trustee Authority to Domestic Recovery Only 

Government and Regulatory Intervention

  • Paradigm Capital Management Faces Dodd-Frank Anti-Retaliation Charges From SEC 

Libor and Foreign Exchange Litigation

Lloyds Banking Group Plc Reaches $370 Million Libor Settlement
It was announced that Lloyds Banking Group Plc agreed to settle with various regulators relating to the manipulation of the London interbank offered rate commonly referred to as Libor.  Lloyds is the seventh company to reach a settlement with U.S. and U.K. regulators.  Lloyds agreed to pay £105 million to the U.K. Financial Conduct Authority, $105 million (U.S.) to the Commodity Future Trading Commission and $86 million (U.S.) to the U.S. Department of Justice.  There have been 12 ex-traders charged as part of the U.K. Serious Fraud Office’s investigation.  The first trial against one of those individuals is currently set for January 2015.  (“Lloyds Attacked by Carney as Bank Fined for Libor-Rigging,” Businessweek, July 28, 2014)

Supreme Court Agrees to Hear Libor Manipulation Antitrust Suit
The U.S. Supreme Court has granted certiorari on behalf of a class of bond investors alleging damages resulting from defendant banks’ alleged anticompetitive Libor manipulation.  The lower court previously dismissed plaintiffs’ claims alleging antitrust violations, concluding that Libor was not a competitive process, rather a “cooperative endeavor.”  The investors appealed this decision to the Second Circuit Court of Appeals, but the Second Circuit dismissed the appeal for lack of appellate jurisdiction.  According to the Second Circuit, it did not have jurisdiction to hear the investors’ appeal on the antitrust ruling because there were other related consolidated complaints that had not yet been dismissed.  In their Supreme Court petition, the plaintiff investors argue that the appeals courts are conflicted over “whether and when the dismissal of an action that has been consolidated with other actions is an appealable final order.”  The plaintiffs will argue their antitrust claims before the high court during the Supreme Court’s next term beginning in October.  (“U.S. Supreme Court to hear Libor antitrust appeal,” Reuters, June 30, 2014)

Litigation and Regulatory Investigations

Citigroup Settles Mortgage Securities Investigation for $7 Billion
Citigroup has agreed to a $7 billion settlement with the U.S. Department of Justice in a federal investigation into the bank’s sale of mortgage securities just before the financial crisis.  Originally, Citigroup had hoped to settle for the much smaller sum of $363 million, arguing that it had a relatively small share in the mortgage securities market. However, the Justice Department viewed the bank’s conduct as particularly egregious and sought far higher damages, despite Citigroup’s market share in mortgage securities.  Attorney General Eric H. Holder Jr. said that the bank and its employees were aware of underwriting defects in the loans the bank was packaging and selling to investors.  One Citigroup trader even opined that he “went thru Diligence Reports and think that we should start praying. . . I would not be surprised if half of these loans went down.”  Despite this knowledge, the bank proceeded with securitizing the loans.  (“Citigroup and U.S. Reach $7 Billion Mortgage Settlement,” The New York Times Dealbook, July, 14, 2014)

BNP Paribus Fined $8.9 Billion for Dealings With Blacklisted Countries
BNP Paribus SA has agreed to plead guilty to criminal charges and pay an $8.9 billion penalty in connection with its business dealings with several countries blacklisted by the United States.  BNP admitted to actions dating at least as far back as 2002 and continuing through 2012, when the investigation into its behavior was already far along.  BNP is the first bank of seven to plead guilty to charges of criminal sanctions violations.  The guilty plea will have an ongoing effect on BNP’s business, as several BNP units will now be prevented from clearing dollar transactions for one year beginning in January 2015.  This will reportedly result in a cut in revenue, as the bank will have to outsource the banned business to other banks.  No BNP employees were individually criminally charged in this matter, although several employees were required to leave the bank.  (BNP Paribas Admits Guilt and Agrees to Pay $8.9 Billion Fine to U.S.,” New York Times Dealbook, June 30, 2014)

New York AG Accuses Barclays’ Dark Pool System of Promoting Predatory Trading
Barclays is once again facing accusations of misconduct as New York Attorney General Eric Schneiderman has accused Barclays of misrepresenting the safety of its dark pool, a private trading system that allows investors to buy and sell stocks anonymously.  Barclays is accused of having created a trading system that favors high-frequency trading firms, which take advantage of small changes in share prices by buying and selling large volumes of stocks in milliseconds.

Barclays’ surveillance service, Liquidity Profiling, is responsible for tracking every trade that occurs within Barclays’ dark pool in order to identify predatory traders.  The program is supposed to rate traders based on their trading conduct and report any person suspected of engaging in predatory practices.  Schneiderman accuses Barclays of not regularly updating the ratings of high-frequency firms monitored by Liquidity Profiling, and of overriding certain ratings given by the surveillance company by assigning safe ratings to traders that were given poor ratings on account of their harmful behavior.

Schneiderman has accused Barclays of “a systematic pattern of fraud and deceit.”  The bank is working closely with the Attorney General and other regulators to ensure that Barclays’ integrity within the market remains intact.  These charges follow recent fines imposed on Barclays related to Libor rigging, as well as a recent £26 million fine for manipulating the gold market and a  £50 million fine from the Financial Conduct Authority.  (“Barclays investigated in US over ‘dark pool activities,” The Guardian, June, 26, 2014)

European Banks Catching Up to U.S. Banks in Litigation Expenses
Financial analysts at Morgan Stanley predict that European banks will face a further $50 billion in legal fees, and will have paid, by year-end, approximately $130 billion in litigation and settlement costs since 2009.  In comparison, U.S. banks have already paid or stipulated to approximately $125 billion in litigation expenses, and only have an additional $25 billion set aside for these charges.  

Among European banks, Barclays Plc and Royal Bank of Scotland Group Plc face the largest increases in legal costs.  Both banks are expected to spend more than $11 billion combined in legal fees in the upcoming years.  Analysts connect these increasing expenses for European banks to tighter regulations on capital and leverage requirements.  Also, penalties for bank misconduct have risen in recent weeks (as detailed in the above articles).  (“European Banks Seen Facing $50 Billon More in Legal Expenses,” Bloomberg, July 7, 2014)

Fraud and Ponzi Schemes

Rakoff’s Ruling Limits Picard’s Trustee Authority to Domestic Recovery Only
U.S. District Court Judge Jed Rakoff recently ruled that Madoff Trustee Irving Picard cannot attempt to recover assets from customers and banks of overseas funds that invested with Bernard Madoff.  According to Judge Rakoff, the legal title Picard possesses from the U.S. Bankruptcy Court establishing him as proprietor of Madoff’s assets and granting him the right to collect said assets “wherever located and by whomever held” only applies to the collection of assets domestically.  The judge noted that Congress did not specifically note that Picard’s legal title and ability to collect assets applied to foreign nations.

This ruling follows the June 30, 2014 decision by the U.S. Supreme Court declining Picard’s appeal of a lower court order blocking him from recovering funds from several banks he accused of enabling Madoff’s scheme.  Thus far, Picard has recovered approximately $14 billion of the suspected $20 billion loss.  (“Judge: Madoff Trustee Can’t Chase Foreign Funds,” USA Today, July, 7, 2014)

Government and Regulatory Intervention

Paradigm Capital Management Faces Dodd-Frank Anti-Retaliation Charges From SEC
The Securities and Exchange Commission (SEC) has, for the first time, charged a financial firm with violating the anti-retaliation provisions in the Dodd-Frank financial reforms.  Paradigm Capital Management, and its owner, Candace King Weir, have agreed to pay $2.2 million to the SEC in connection with the firm’s demotion of a head trader who previously reported suspected wrongdoing by the firm to the SEC.  According to Sean McKessy, chief of the SEC’s Office of the Whistleblower, “for whistleblowers to come forward, they must feel assured that they’re protected from retaliation and the law is on their side should it occur.” Although a relatively small settlement was reached in this case, it makes clear that the SEC is willing to act under Dodd-Frank’s anti-retaliation provisions to protect future whistleblowers.  (“The SEC Puts Teeth into Dodd-Frank, Takes A Bite for Whistleblowers,” Forbes, June, 27, 2014)


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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