Bankers without ethics

2012 was the year global banks paid hefty fines for lofty hubris

By Richard Hurley, Ph.D., J.D., CFE, CPA; Tim Harvey, CFE, JP

richard-hurley-80x80.jpg   tim-harvey-80x80.jpg   Global Fraud Focus: Examining cross-border issues 


Tchaikovsky’s “1812 Overture,” which he wrote to commemorate Russia’s defense against Napoleon’s invading Grande Armée, is no match for prosecutors’ and regulators’ cannon fire lodged against banks and bankers some 200 years later. Case in point: the Swiss UBS. In November of 2012, the bank agreed to pay a record 1.4 billion Swiss francs or US$1.5 billion to U.S., U.K. and Swiss regulators to settle allegations in what has been described as a “pervasive” and “epic” plot to rig worldwide interest rates tied to trillions of dollars in loans and financial products. (See the Dec. 19, 2012, Financial Times article, “UBS pays price for ‘epic’ Libor scandal,” by Kara Scannell, Brooke Masters, Carolin Binham and Tom Burgis.)  

The amount of the regulatory fines levied on UBS for rigging the London InterBank Offered Rate (Libor, see sidebar at end of article) could be a small percentage of the total payments it and other banks may face in private civil litigation. (See “UBS Admits Rigging Rates in ‘Epic’ Plot,” The Wall Street Journal, Dec. 20, 2012, by David Enrich and Jean Eaglesham.) The reporters wrote that “Fannie Mae and Freddie Mac, the two U.S. mortgage giants, might have lost more than $3 billion as a result of banks’ alleged Libor manipulation.” (Libor is the average interest rate estimated by leading London banks that they would be charged if borrowing from other banks.)

Plaintiff’s counsel will find a treasure trove of emails and other assorted communication between and among traders and brokers in the documents released in connection with the UBS settlement.  

According to the Financial Times article, “The Swiss bank’s Japanese arm pleaded guilty to criminal wire fraud” that the UK Financial Services Authority released findings that between 2005 and 2010 control failures and “the widespread and routine nature” of UBS traders attempts to manipulate Libor and Euribor rates (in Europe) meant that “every Libor and Euribor submission in currencies and tenors in which UBS traded is at risk of having been improperly influenced,” wrote the reporters. 

On Nov. 20, 2012, The Wall Street Journal reported that UBS ex-trader Kweku Adoboli was found guilty of fraud and sentenced to seven years in prison for his involvement in a $2.3 billion trading loss within the equity-trading desks at the Swiss bank’s London office. The prosecution described Kweku as a rogue trader who incurred losses and then tried to “win it back” with more unauthorized trades. The Wall Street Journal reported that in his own defense Kweku admitted to “circumventing UBS’s rules but insisted it was common practice at the firm and that he got in trouble only because he lost money.” (See “Former UBS Trader Adoboli Is Jailed for Seven Years,” by Dana Cimilluca, Vivek Ahuja and Richard Partington.)

Although we’re not sure yet if violating trading limits at UBS and recording fictitious entries to cover unauthorized trades is common practice at UBS, the Swiss bank agreed to pay $47.5 million in penalties to British authorities in connection with the trading losses. The U.S. Financial Services Authority (FSA) and the Swiss Financial Market Supervisory Authority (FINMA) determined that UBS had exhibited deficiencies in risk management and internal controls. Paying fines for lack of adequate controls at the Swiss bank will add to the legal arguments on behalf of plaintiffs in what is certain to be a treasure trove of civil suits. (See “UBS Fined $47.5 Million in Rogue Trading Scandal,” by Mark Scott, DealBook in The New York Times, Nov. 26, 2012.)

UBS was not the only bank caught in the web of deception in rigging interest rates. You might recall in June of 2012 Barclays settled with regulators for $450 million for its involvement in the Libor scandal. (See “Barclays Settles Regulators’ Claims Over Manipulation of Key Rates,” by Ben Protess and Mark Scott, June 27, 2012, The New York Times.) 

The New York Times reported that “regulators in the United States have issued subpoenas to several banks — including Bank of America, UBS and Citigroup — to understand how Libor was set. The Competition Bureau of Canada is investigating the activities of JPMorgan, Duetsche Bank and several other major banks.” 


The Libor scandal was not the only bad news for banks in 2012. Bank of America (BofA) was hit with a $1 billion suit over home loans. The U.S. Department of Justice said that because BofA purchased Countrywide in 2008 it was liable for the so-called “hustle” and “high-speed swim lane” tactic of processing loans. (See “US sues BofA for $1bn over home loans,” by Tom Braithwaite, The Financial Times.) It would appear that in the loan business quantity trumped quality. The Securities and Exchange Commission (SEC) and other regulatory agencies are investigating Regions Financial Corp. for improperly classifying loans that went bad during the financial crisis. (See “Regions Financial bad loans probe widens-WSJ.”)

On Dec. 11, 2012, Reuters reported that another British bank, HSBC, acknowledged that it transferred money for Mexican drug cartels and for countries that are under international sanctions, such as Iran. HSBC agreed to pay $1.9 billion to settle money laundering claims brought by U.S. regulators. (See "HSBC to pay record $1.9 billion U.S. fine in money laundering case,” by Carrick Mollenkamp and Brett Wolf.) 

In December of 2012, Morgan Stanley paid $5 million to the state of Massachusetts “to settle allegations that one of its highest-profile investment bankers tried to ‘improperly influence’ research analysts days before Facebook Inc. went public in May,” according to “Morgan Stanley Gets Facebook Fine,” by Aaron Lucchetti and Jean Eaglesham. According to the article, Facebook’s discussions about declining revenues with the investment banks’ research analysts prior to the company’s initial public offering “were relayed to the banks’ large clients but not small investors.” The offering price of $38 for Facebook fell to $20 shortly after the IPO. 


Morgan Stanley’s settlement with Massachusetts regulators isn’t the end of the Facebook fallout for Morgan Stanley. The SEC and Financial Industry Regulatory Authority are both continuing to investigate the circumstances surrounding Facebook’s IPO.  

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