Examining the duties of employers in criminal cases

In the wake of the financial crash of 2008, Mark Carney, the governor of the Bank of England used his 2015 Mansion House speech to suggest that the government should change sentencing guidelines so that the courts could impose much stiffer sentences on rogue traders. Announcing the arrival of a new era of financial probity, he declared: “The age of irresponsibility is over.”

Carney called for higher ethical standards and greater transparency in financial dealings, including those in which the Bank was itself involved – an imperative which, he insisted, should apply to all, from the Governor down. The reality has turned out to be very different.

Journalists had been briefed in advance of Mr Carney’s speech to ensure maximum publicity. He could have been not disappointed by the headlines about “bent bankers” and “crooked traders” in the following day’s newspapers – or by the impact of his words on events. His speech came half way through the highly publicised trial of Tom Hayes, a LIBOR trader who was facing eight charges of conspiracy to commit fraud. After guilty verdicts were returned by the jury on all counts, Justice P Cooke, now Sir Jeremy Cooke, promptly followed Carney’s advice. He sentenced Mr Hayes to 14 years in jail – the longest sentence ever imposed in a British court for a white collar crime.

Tom Hayes’s lawyers had protested that Carney’s words might affect the outcome of the trial – to no avail. But seven years later, on July 7th, the Criminal Cases Review (CCRC), reversing an early provisional finding, referred the case back to the Court of Appeal. The Commission – the last best hope of those who believe that they are the victims of a serious miscarriage of justice – stated that there was now “a real possibility” that the appeal judges would overturn Hayes’s conviction.

Had the CCRC reached any other decision it would have inflicted further damage on its already poor reputation because of the anger of the growing number of those who have studied the case and concluded that Hayes was innocent, that there was no crime, no victim and that no rule or convention had been violated. At least, not by Hayes or the other city traders jailed for allegedly rigging the LIBOR rate, including some who pleaded guilty. Indeed, as more becomes known about the conduct of the financial authorities in Britain and the US – along with that of prosecutors and top bankers – it is becoming clear that the so called “LIBOR scandal” was of a quite different form, but still more shocking kind than the public was led to believe. Most shocking of all is the fact that several of the traders found themselves victims of a form of judicial blackmail that forced them to admit to crimes they had not committed. At the same time the British and American financial establishments as well as the traders employers hid their own involvement in much more extensive attempts to influence the LIBOR rate. If their conduct had not been kept secret the prosecution of the traders could never have proceeded. So much for a new era of transparency and responsibility.

A full account of what one conservative peer has described as the British equivalent of the Dreyfus scandal is set out in a book by the BBC economics correspondent Andy Verity, the product of a decade of some remarkable investigative journalism based on leaked phone messages and documents as well as the testimony of those who lives and careers were destroyed by the scandal.

As Verity makes clear, the Treasury Select Committee which investigated the banks’ conduct following the financial crisis failed to call witnesses who would have confirmed the men’s innocence. At the same time , a number of those who did give evidence may have misled the committee and may consequently have been guilty of contempt of parliament.

David Davis MP, the former Brexit minister and the former Labour chancellor John McDonnell MP, who succeeded in an adjournment debate to draw attention to Verity’s claims, say they may now ask the police to review the circumstances surrounding the case in order to see whether there are grounds to bring criminal charges. They are also pressing the Treasury Select Committee chairman Harriett Baldwin to reopen its inquiry into the conduct of the banks and to recall those who they believe may have given misleading evidence to its members. Both MPs have said that their initial reaction to the revelations in the Verity book was one of shock followed by anger as they realised the scale of the miscarriage of justice and the cover-up that followed. Mr McDonnell is not known as an unqualified admirer of financial markets or capitalism generally, but is difficult to quarrel with his description of what happened as one of “collusion, conspiracy and cover-up at the heart of the financial establishment.”

In all 37 low level traders were prosecuted, 19 convicted and nine jailed, receiving in total sentences amounting to 40 years. Hayes was given a 14-year sentence, reduced to 11 on appeal. Some pleaded guilty in order to reduce their likely jail sentence and to avoid legal costs that would have resulted in financial ruin.

Hayes served five and a half years in jail, much of it in high security prisons, some of it in the company of convicted murderers and on one occasion, with a convicted terrorist. He suffered serious physical and mental health problems while in prison, his marriage collapsed and he contemplated suicide as well as being diagnosed with a mild version Asperger syndrome before his trial and with multiple sclerosis in 2021 . Released two years ago, he remains under therapy, his sleep regularly punctuated by dreams in which he remains imprisoned. Those facing similar charges have suffered comparable distress.

LIBOR – to give its full name the London Interbank Offered Rate determines the rate at which banks lend money to one another. It is regarded an important measure by which a bank’s health is judged and it is set by asking a number banks to state the rate at which they could borrow and then working out an average. The reason behind the manipulation was that banks here and in the US were becoming desperately short of cash following the crash of 2007 and LIBOR rates were consequently threatening to rocket skywards. Submitting a high rate to the British Banking Authority or its US equivalent could have been taken as an indication that a bank was in deep trouble and was about to go bust. So instead false low rates were submitted at the behest of the Government of Gordon Brown and the Bank of England in what is now termed “Low Balling”.

As the financial crisis took hold a Barclays cash trader named Peter Johnson became increasingly concerned that Low Ball – the term used to describe the practise of sharply underestimating the rates which banks are actually having to pay in order to borrow – was becoming increasingly widespread. Yet he was repeatedly told by his bosses to Low Ball himself. The instruction came from his bosses who had in turn been so instructed by the bank’s directors.

Johnson expressed his concern to anyone who would listen. But after the collapse of Lehman brothers in the US and the nationalisation of RBS and Lloyds, the deputy Governor of the Bank of England Paul Tucker – later knighted for his services to banking -had instructed Johnson’s bosses which was then passed down to Barclays executive Mark Dearlove to put LIBOR rates down. This, however, was subsequently withheld from parliament and the courts in the criminal trials.

In a leaked recording of a telephone conversation, Dearlove told Johnson and another cash trader :”… you are absolutely going to hate this, but we have had some very serious pressure from the UK Government and the Bank of England about pushing our LIBOR lower … you and I agree that it’s the wrong thing to do…these guys have just turned around and said just do it.” Johnson obeyed but wrote a furious email pointing out that the LIBOR rates he would now be submitting would not be honest ones. Faced with the misleading evidence and the costs of a defence, he pleaded guilty.

As anti-banker sentiment rose compliance officials and lawyers employed by Barclays on both sides of the Atlantic sifted through millions of LIBOR records to examine evidence of LIBOR manipulation. When they came across thousands of requests from traders requesting “high” or “low” rates they believed that would enable them to point the finger of blame at some of those responsible for a crisis that had destroyed businesses and jobs on a global scale – but without actually blaming those responsible at the top of the banking system.

What the researchers had in fact done was to conflate two quite different things: the everyday practise of traders in seeking favourable rates which would reflect their employer’s legitimate commercial interests (“Trader Requests”) and the attempt by senior bankers, under pressure from government, to falsely represent market reality (“Low Balling”). In the case of the former there was a permissible if narrow range of rates which could be declared to the British Banking Authority which has legal ownership of the LIBOR, something which was never properly explained to the judge and jury in Hayes’s case or his appeal. However, the difference between a high and low rate would be no more than fraction of one per cent. Such differences would have had negligible, if any, effect when combined with the rates of other banks and the impact on on household mortgages and small business loans was infinitesimal. It is inconceivable that those at the top in Threadneedle Street, including Carney, and his predecessor Mervyn King did not understand this crucial difference between the two. For what was being asked of Johnson by his bank bosses was to submit rates which were much lower – in some cases 100 basis points (a basis point is 1/100 of a percent) lower – than the rate at which the banks were able to borrow.

It could of course be argued that in pushing for lower rates during desperate circumstances the bank bosses and the Bank of England were merely doing their jobs at a time when there were fears that entire financial system was at the point of collapse. But in dismissing Hayes’s appeal the Court of Appeal determined that no commercial influence should be allowed in setting the LIBOR rate, that in effect, there was just one correct rate. But if was right to conclude that the trader’s routine practise of requesting marginally higher or LIBOR rates, albeit within a limited range, was criminal (which it now appears was not the case), it follows that the conduct of the Bank of England, along with that of the big bank bosses was criminal on a much vaster scale since they sought to influence the setting of a market rate quite outside the range of possible rates. And that the Governor of the Bank of England and his deputy, along with the bank bosses who appeared to have done their bidding, should have been jailed instead of the traders.

At the height of the financial crisis of 2007-8, Gordon Brown with the help his cabinet secretary Jeremy Heywood, sought to organise international coordination between the world’s central banks in setting rates as a means of bringing calm and order to the markets. The difference between managing markets and manipulating them may be difficult to define. But were they not also criminally culpable?

Appearing before Treasury Select Committee in 2012 both the Governor of the Bank of England Sir Mervyn King and his deputy Paul Tucker denied that they knew anything about Low Balling until that year. But Verity has obtained confidential BoE records that prove it was repeatedly told of Low Balling and LIBOR manipulation starting in 2007.

In 2009 the US and UK regulators fined Barclays £290 million for manipulating LIBOR and its European equivalent , Euribor but no senior officer or director faced criminal charges, many kept their bonuses indeed some were subsequently promoted.

Instead, criminal charges were brought against the traders for doing what they regarded as part of a normal day’s work and had been standard practise for many years. In all cases the evidence against them was their requests to colleagues to put in high or low estimates. In nine trials from 2015 to 2019 nineteen were convicted and sentenced. In all cases the charges related to conspiracy which meant that the prosecutors did not have to prove that a crime had been committed or even attempted. It was only necessary to show intent to commit a crime. And now it is becoming abundantly clear that there was no crime.

Remarkably, among those sent to prison was Peter Johnson, the whistle-blower who tried to call a halt to Low Balling. He received a four year sentence after pleading guilty in order to avoid a still longer period in jail and to prevent his life’s savings being eaten up by lawyers’ fees.

Colin Bermingham, another Barclays trader, who traded on Euribor suffered a similar fate after warning his employers about Low Balling; he received a five year sentence.

Thanks very largely to Verity, Hayes and the 36 other traders now stand a real chance of finally proving their innocence and of seeking to rebuild shattered lives. Britain remains the only country in which their conduct is now regarded as having been a crime, the French, German and Japanese authorities never having been in doubt about the matter, and America belatedly deciding that it had been mistaken. This situation is unsustainable in a global financial market.

Verity has written that in twenty years of investigative journalism nothing he found compared with the mind blowing greed, justice and injustice that his researches into the LIBOR scandal have exposed. But would wrong to conclude that nothing like it could happen again. Worrying similarities with the case of the wrongly convicted sub-postmasters strongly suggest otherwise.

In both cases the employers of those charged were the custodians of important evidence which would have exonerated those charged but were, in effect, the prosecuting authority. Employers have a legal and moral duty of care, but this was directly dispensed with in the interests of successful prosecutions. It is now known that members of the post-office management – and their agents -were fully aware of the faults in the accounting system which led to the charges of false accounting, but chose not to declare them. Yet it seems that the Post Office Management and its legal team – whose success was measured through the number of successful prosecutions it brought – were deemed not to have broken the law and consequently have faced no sanctions, while innocent men and women were jailed.

Similarly, in the case of the LIBOR traders it is now known that the main boards of the banks were aware of the pressure on rate setting executives from the government and the Bank of England to post LIBOR rates that did not reflect market reality. But this was withheld from the trials of the traders, many of whom were jailed as a result. Admirers of the British system of justice often lay stress on its inherent fairness. But while their bosses enjoyed the protection of expensive lawyers paid for by their banks, the traders were offered up like sacrificial lambs. Indeed, the fact that in order to settle the LIBOR dispute following discussion with the regulators the banks paid billions of dollars was subsequently used to argue that someone in the banks must have broken the law.

An institution such as a bank gains nothing and potentially suffers a great deal as the result of a long running dispute with a regulator. In many instances it is expedient to admit guilt, pay a fine and, if necessary make changes in personnel so that business can resume as usual. The situation for an individual is quite different: it can result in imprisonment, loss of assets through the Proceeds of Crime Act, loss of job and career, as well as life-long disgrace.

The reputation of British justice has suffered as a result of the callous and inhumane treatment of the sub-postmasters and is further tarnished as the complex truth about the LIBOR scandal finally emerges. It is scandalous that in both these cases relevant material was kept secret: in future it must be made clear that all relevant evidence must be made available to defence and prosecution alike as is required in the criminal justice rules. The withholding of such evidence must be made a criminal offence. It is also clear that an employer’s duty of care must be placed on a more secure footing. The prospect of a fair trial is immediately jeopardised, possibly with profound and tragic human consequences, if employers are allowed to don the mantle of prosecutor or withhold evidence that may exonerate an employee.

Thomas Walford
Gerald Frost

Dr Thomas Walford is Chief Executive of Expert Evidence International and practicing expert witness in banking, investment and regulation.

Gerald Frost is an author and former think tank director.

Expert Evidence prides itself on assisting throughout the legal process where required and is a professional firm concentrating on the four main areas of dispute resolution; acting as expert witnesses in financial litigation, mediation, arbitration and adjudication. The firm has a civil, criminal and international practice and has advised in many recent cases. Areas of specialisation include banking, lending, regulation, investment, and tax.

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