The End of LIBOR: Hotel California Edition [Part V]

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UK Manipulation Case Appeals

Points of Law of General Public Importance

In 2023, the UK Court of Appeal rejected overturning Hayes’ and Palombo’s convictions based upon decisions rendered by the Second Circuit. However, the court certified two points of law that were of general public importance in connection with the proper construction of the definitions of “LIBOR” and “EURIBOR” for UK Supreme Court review.

In March, the UK Supreme Court heard Hayes’ and Palombo’s appeals.

Grounds for Appeal

The appeals of Tom Hayes and Carlo Palombo in the UK Supreme Court centered on their convictions for conspiracy to defraud in relation to the manipulation of the LIBOR and EURIBOR benchmark interest rates. The core legal arguments revolved around the directions given to the jury at their respective trials.

The prosecutors from the Serious Fraud Office (SFO) alleged that Hayes and Palombo dishonestly agreed with others to submit interest rate figures for LIBOR and EURIBOR that were false or misleading. The alleged falsity was said to arise because the submissions were not the defendants’ genuine assessments of the rates at which the banks could borrow funds. Instead, they were influenced by the submitters’ or banks’ trading interests, with the intention of creating a trading advantage.

Hayes’ and Palombo’s defense contended that the process of submitting rates for LIBOR and EURIBOR inherently involved subjective judgment, often resulting in a range of possible rates that could be honestly submitted. Counsel argued that as long as the submitted rate was within this range and genuinely believed by the submitter to be appropriate, the submission was not false or misleading — even if the choice within the range was influenced by a trading advantage. The defense further argued that the trial judges erred by directing the jury that any consideration of trading advantage automatically rendered a submission dishonest or not genuine as a matter of law, thereby removing a key factual question required to be determined by a jury rather than a judge.

UK Supreme Court Ruling

In July, the UK Supreme Court ultimately found in favor of the appellants.

• The court ruled that whether a LIBOR or EURIBOR submission was genuine or honest is a question of fact for a jury, not a matter of law for a judge. The key issue is the state of mind of the submitter, whether the stated opinion of the borrowing rate was one the submitter actually held.

• The trial judges erred by instructing the jury that any consideration of trading advantage made a submission not genuine or honest as a matter of law. This direction improperly removed from the juries the factual question of whether the submission was a genuine assessment, even if influenced by a trading advantage.

• The misdirection was material and undermined the fairness of the trials. Although there was ample evidence on which properly directed juries could have convicted, the error meant the convictions could not stand.

• The court clarified that the process of setting these rates was inherently subjective, often involving a range of reasonable estimates. The fact that a submitter chose a rate within this range, even if influenced by trading advantage, did not automatically make the submission false or dishonest.

• The court also noted that the definitions of LIBOR and EURIBOR did not create legal duties enforceable in criminal law; rather, the relevant legal duty was the general duty not to make dishonest misrepresentations.

The UK Supreme Court quashed the convictions of Hayes and Palombo. The court concluded that the trial judges’ directions to the juries were legally inaccurate and unfair because they treated the genuineness of rate submissions as a matter of law, rather than a factual question for the jury to determine. The court emphasized that, in criminal trials involving subjective assessments (such as benchmark rate submissions), the jury must decide whether the submission was genuinely believed by the submitter, even if influenced by trading advantage.

UK Supreme Court Hearing Observations

Set forth below is a brief summary of some of the critical issues discussed during the three-day hearing.

The Honorable Mr. Justice Jeremy Cooke, in his conviction of Hayes in 2015 for LIBOR manipulation and sentencing him to 14 years in prison (later reduced to 11 years), stated, “The conduct involved here must be marked out as dishonest and wrong and a message sent to the world of banking accordingly.”

As reported by The Financial Times in July, settlements in connection with the LIBOR scandal, primarily with the UK Financial Conduct Authority, the US Department of Justice, the Commodity Futures Trading Commission (CFTC), and, with respect to European Union financial institutions, the European Commission, included Deutsche Bank at $3.5 billion, UBS at $1.5 billion, RBS at $1.1 billion, Rabobank at $1 billion, Societe Generale at $600 million, Barclays at $500 million and Lloyds Banking Group at $400 million.

Relevance of Regulator Penalties

Per Hayes’ counsel, the penalization of the banks on the basis of a lack of integrity, did not imply anything about the genuineness or honesty of particular LIBOR submissions. In response, The Right Honorable Lord Hodge (Deputy President of the UK Supreme Court) concurred with respect to individual traders but, in talking about the banks, mentioned that “A lack of integrity does have some correlation to honesty, does it not?”

LIBOR Submitter Background and Influences

LIBOR submitters had minimal training, according to counsel to Hayes, who also mentioned with respect to their LIBOR submissions:

That every submitter was a trader. They would often do it very quickly. They would often do it with minimal care. Sometimes they put in the rates that the brokers suggested to them. And there was an abundance of evidence, in fact, of commercial considerations being taken into consideration.

Benchmark Integrity and Benchmark Rates

Benchmark Integrity

Making key points on the structure of LIBOR and EURIBOR, counsel to the SFO stated the following:

They are global, independent benchmarks. As such, they are designed to be relied upon by the markets as an accurate and reliable indication of interest rates/the cost of borrowing.

The required nature of the Panel Banks reflected the fact that it was precisely such a benchmark and intended to be so (in other words, reliable, accurate, independent and all of that).

It’s clear, we submit, that it was intended, they were both intended to be, and were presented by the framers of the [benchmark] code as being, presented to the world as being, reliable benchmarks set by banks of standing with the ability and attributes including specifically referred to probity, expertise and experience to contribute to the rate setting. And the framers evidently and unsurprisingly considered those features to be important…

They have to be of first class credit standing, high ethical standards and enjoying excellent reputation….[LIBOR Panel Banks under the LIBOR Code of Conduct] are selected on ‘the basis of reputation, scale of activity and perceived expertise in the currency concerned.’

With respect to ethical standards in the market, The Right Honorable Lord Leggatt stated:

Presumably there are proper standards of behavior in the market which aren’t just determined whether you’re complying with the correct construction of the code. They’re concerned with whether you behave ethically and if you behave in a grossly improper way, whether it’s contrary to the meaning of the code or not, you can be sanctioned for that.

Benchmark Rates

These LIBOR Panel Banks were to determine a benchmark rate which reflected the actual cost of borrowing of the banks. As correctly summarized by SFO counsel:

And the aim is evidently to arrive at a judgment at the rate which reflected the actual cost of borrowing, the actual cost of borrowing if you were to go into the market.

In short, and in a phrase, it is a genuine estimation of market rates.

In connection with whether taking trading advantage into account was permissible, he argued that the definitions should instead be, “What would I prefer that rate to be, having regard to my own personal profit position.”

Benchmark Manipulation

As noted by Palombo’s counsel, after the eruption of the LIBOR scandal in June 2012, there was a need for greater regulation and greater formality to the benchmarks. Consequently, in the UK, in 2012 (after the indictment period) Section 91 of the Financial Services Act was created with a specific criminal offense of benchmark manipulation.

Similar provisions had been instituted in the United States in connection with swaps through the enactment of Dodd-Frank in 2010 and promulgation of CFTC rules in 2011.

Legal Duties

As aptly summarized by Hayes’ counsel at the first hearing session, “We all agree that the submitter is under an obligation, and the bank is under an obligation, to give a genuine and honest [benchmark rate].”

LIBOR Submitters

In connection with the honesty of the benchmarks, Lord Hodge stated:

I fully submit you’ll get different answers of the question of objective honesty and also subjective honesty and also maybe the meaning of the answer given. But there’s a prior step and that is understanding what’s being asked of you. And in a case like LIBOR where you are determining the market internationally for interest rate contracts and interest rate derivatives, surely there is a strong public interest in consistency and understanding of what’s being asked of the submitter.

However, as highlighted by Palombo’s counsel, the foregoing is only relevant in a civil case and not in a criminal case, where only the beliefs of the submitter are relevant.

Panel Banks

In response to Hayes’ counsel describing benchmark determinations as a market survey, Lord Hodge responded:

Well, to describe it just as a market survey might be somewhat divorced from the reality, frankly. I mean the banks knew jolly well what they were being asked…They knew what they were being asked and they knew they were fixing an international rate which would have effect on trillions of dollars of debt. And so that’s not just a market survey.

Repercussions

As presented by the SFO, “If the rate is higher or lower [than it should objectively be], they stand directly to profit. And if they profit, because these are zero sum transactions, their [borrower] counterparties, by definition, lose.”

Lord Leggatt, the author of the court’s ultimate unanimous judgment, added that, “Because the underlying sum of money is a completely notional sum, it can be a fantastically large sum of money and a tiny difference in interest rate can result in a huge difference in outcome to profit or loss.”

Conclusions

Overly Complex Cases

Both cases highlight the dangers of oversimplifying complex trading conduct and the need for careful, fact-based assessments of individual responsibility in financial market prosecutions so that a jury can make its assessment of criminal intent.

However, the former head of the SFO recently told the press that he is in agreement with the proposal before Parliament that complex fraud trials be heard by a judge because the UK jury system is “simply not designed to cope with lengthy and complex trials.” If this proposal had been in place for these cases, this would have negated the UK Supreme Court’s decision to send the cases back to the jury for their consideration.

Delayed (But Not Denied) Justice

One of the concerns raised by counsel to Tom Hayes during the UK Supreme Court hearings was that the trial had occurred nearly 10 years earlier, with a fair trial on criminal intent being difficult due to the lapse of time.

It should be noted that:

• The SFO announced, after the UK Supreme Court’s verdict, that it was not going to ask for a retrial for Hayes and Palombo (and removed Palombo’s ban from the financial services industry).

• Hayes and Palombo had already completed their terms in prison.

Relatedly, as a result of the verdict, three former traders and one former LIBOR submitter have recently also appealed their sentences. Unrelatedly, on August 22, the Second Circuit partially reinstated a class action suit originally filed in 2013 alleging the manipulation of the price of derivatives tied to EURIBOR.

How they dance in the courtyard,
sweet summer sweat,
Some dance to remember,
some dance to forget

– Eagles, “Hotel California”