Serious Fraud Office (‘SFO’) vs Stylianos Contogoulas and Ryan Reich

The SFO suffered a severe setback on 7th April when it lost its case against two former Barclays traders, whom it alleged had been guilty of conspiring to manipulate the Libor rate. Stylianos Contogoulas and Ryan Reich were unanimously acquitted by a jury at Southwark County Court. Last year a jury had failed to reach a verdict in their case and ordered a retrial, whilst at the same time convicting three of their former colleagues (c.f. our report SFO v Mathew Merchant and others 21/7/16).

The SFO had had an uphill task to prove its case as the men accused had never worked at Barclays at the same time nor were they accused of actually conspiring together. The argument had been that they had “essentially cheated” other investors and acted dishonestly when they sought to move the Libor rate for the benefit of their employer. It was established during the case that there was no formal training programme and staff were expected to learn on the job from more senior members of the team. Counsel for the defence argued that the trading environment was “like learning medicine from Dr Frankenstein” and that there had been a “radical change” in attitudes to Libor over the 10 years the prosecution had taken to come to court.

Furthermore, it emerged during the trial that the prosecution’s expert witness (during this and the original trial) had been unsure of a number of technical facts and had been texting friends for definitions of various trading terms during his cross-examination in the witness box. Not only was this in contempt of court rules (Criminal Procedure Rules 2015), whereby expert witnesses must: not discuss a case during their cross examination, disclose all their sources of information and draw the court’s attention to questions outside their area of expertise. It also threw considerable doubt on the competency and credibility of the SFO’s expert, who has appeared on behalf of the prosecution in no fewer than four previous Libor-related cases. This doubt has added fuel to further appeals against convictions which are under consideration. Lawyers for both Tom Hayes and Jay Merchant consider that the directions given to this jury were markedly different from those given to the juries in their trials.

If an expert says it can’t be done, get another expert.”
David Ben-Gurion

Despite the fact that this prosecution brings to a close the three Libor cases brought by the SFO against ex-Barclays employees, more benchmark-rigging prosecutions are in the pipeline. In September six traders come to trial, alleged to have manipulated Euribor (the Brussels version of Libor). A fresh investigation into “lowballing” by Barclays during the 2008 financial crisis has also been launched by the SFO. Lowballing involves understating borrowing costs to give the impression that a bank is financially healthier than it actually is. This is backed up by newly released transcripts (see BBC Panorama 17 April 2017) of a 2008 conversation between a senior Barclays manager and his Libor submitter, which reveal that the Bank of England was felt to be pressuring the lender to submit a lower reading than they may have otherwise declared. The Bank of England has previously always denied encouraging banks to submit false readings or any other involvement. This case has done little to address the key elements of the accusation of fraud (and therefore conspiracy to defraud) against the defendants in the trials to date.

Firstly, in the early trials it was stated that there was a single LIBOR rate that would exist for each institution for each maturity and currency. It has now been accepted by the regulator that a range of LIBOR rates would have been permissible, given that there was no single agreed or British Bankers’ Association (‘BBA’) specified way of calculating the rate. Hence if a range of rates were acceptable, any rate within the range would be permissible and an institution would be able to decide where to pitch its rate for that day within the range.

Secondly, the argument has been put up by the prosecution that the book position of market participants (in this case the rate-setting banks approved by the BBA) should have no influence on the LIBOR rate submitted by the bank. It has been argued that the two should be separated by a “Chinese wall” and that any breach of this was a fraud on other users of the index who had a right to an index uninfluenced by the profit motive of the market participants. This position is to ignore the fact that the book position of the market participants (whether they be rate-setting banks, market makers or prime brokers) has an effect on all market indices (such as FTSE, S&P, Dow Jones, CAC, DAX, etc) as well as bond and unit trust indices. If the principles decided in the recent cases are applied across the financial markets, it potentially means that indices need to be calculated in a completely different way, or we dispense with them completely.

This issue is in no way complete and with reviews of historic trials and new trials scheduled, there is likely to be considerable further discussion of the principles involved.

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