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FSA: Barclays fined £59.5 million for significant failings in relation to LIBOR and EURIBOR

Posted on June 27, 2012 by devonllpblogger

The FSA has issued the following release in relation to its ongoing LIBOR manipulation investigation:

The Financial Services Authority (FSA) has today fined Barclays Bank Plc (Barclays) £59.5 million for misconduct relating to the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR). This is the largest fine ever imposed by the FSA.

Barclays’ breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a number of years. Barclays’ misconduct included:

making submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays’ interest rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays’ trading positions;
seeking to influence the EURIBOR submissions of other banks contributing to the rate setting process; and
reducing its LIBOR submissions during the financial crisis as a result of senior management’s concerns over negative media comment.

In addition, Barclays failed to have adequate systems and controls in place relating to its LIBOR and EURIBOR submissions processes until June 2010 and failed to review its systems and controls at a number of appropriate points.

Barclays also failed to deal with issues relating to its LIBOR submissions when these were escalated to Barclays’ Investment Banking compliance function in 2007 and 2008.

Tracey McDermott, acting director of enforcement and financial crime, said:

“Barclays’ misconduct was serious, widespread and extended over a number of years. The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets. Firms making submissions must not use those submissions as tools to promote their own interests.”

“Making submissions to try to benefit trading positions is wholly unacceptable. This was possible because Barclays failed to ensure it had proper controls in place. Barclays’ behaviour threatened the integrity of the rates with the risk of serious harm to other market participants.”

“The FSA continues to pursue a number of other significant cross-border investigations in this area and the action we have taken against Barclays should leave firms in no doubt about the serious consequences of this type of failure.”

The BBA is currently undertaking a review of the way LIBOR is set and will publish its findings shortly. The FSA, along with the other tripartite authorities, is working to support market-led reviews of existing arrangements, with the goal of ensuring such arrangements continue to command the confidence of all stakeholders.

Barclays co-operated fully during the FSA’s investigation and agreed to settle at an early stage. The firm qualified for a 30% discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £85 million.

This was a significant cross-border investigation and the FSA would like to thank the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Department of Justice (DoJ) (together with the Federal Bureau of Investigation (FBI)) and the Securities and Exchange Commission (SEC) for their co-operation.

The CFTC brought attempted manipulation and false reporting charges against Barclays for similar failings, which the bank agreed to settle. The CFTC imposed a penalty of US$200 million. In addition, as part of an agreement with the DOJ, Barclays admitted to its misconduct and agreed to pay a penalty of US$160 million.

Link to the FSA release here.

Notes for editors

The Final Notice for Barclays Bank Plc.

LIBOR and the EURIBOR are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. They are fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
LIBOR and EURIBOR are used to determine payments made under both over the counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities. Benchmark reference rates such as LIBOR and EURIBOR also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR and EURIBOR is therefore of fundamental importance to both UK and international financial markets.
LIBOR is published on behalf of the British Bankers’ Association (BBA) and EURIBOR is published on behalf of the European Banking Federation (EBF). LIBOR and EURIBOR are calculated as averages from submissions made by a number of banks selected by the BBA or EBF. There are different panels of banks that contribute submissions for each currency in which LIBOR is published, and for EURIBOR.
LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts. The notional amount outstanding of OTC interest rate derivatives contracts in the first half of 2011 has been estimated at 554 trillion US dollars. The total value of volume of short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euro including over 241 trillion euro relating to the three month EURIBOR futures contract (the fourth largest interest rate futures contract by volume in the world).
Until February 2011 the US dollar LIBOR panel consisted of 16 banks and the rate calculation for each maturity excluded the highest four and lowest four submissions. An average of the remaining eight submissions was taken to produce the final published LIBOR.
Throughout the Relevant Period, the EURIBOR panel consisted of at least 40 banks and in each maturity the rate calculation excluded the highest 15% and lowest 15% of all the submissions collated. A rounded average of the remaining submissions was taken to produce the final published EURIBOR.
The FSA Enforcement Conference 2012 – ‘Credible deterrence: Here to stay’ takes place on Monday, 2 July, 2012.
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.

New York Times Reports: Barclays Settles Regulators’ Claims Over Manipulation of Key Rate

Posted on June 27, 2012 by devonllpblogger

BY BEN PROTESS AND MARK SCOTT (New York Times/Deal Book)

Barclays has agreed to pay hundreds of millions of dollars to resolve accusations that it attempted to manipulate a crucial interest rate, the first settlement in a sprawling global investigation targeting many of the world’s biggest banks

The British bank struck a deal with regulators in Washington and London, as well as the Justice Department. The Commodity Futures Trading Commission, an American regulator, levied a $200 million penalty, the largest in the agency’s history. The Financial Services Authority in London imposed a record $92.8 million fine on Barclays.

The broad investigation centers on the way Barclays and other big banks set a key benchmark for borrowing known as the London Interbank Offered Rate, or Libor. Regulators have questioned whether the banks attempted to improperly set the rate at a level that was favorable to their own institutions.

The settlement with Barclays is seen as the first in a series of potential cases against other major financial firms, the people said. Regulators are also investigating HSBC, Citigroup and JPMorgan Chase, among many other firms.

“Banks that contribute information to those benchmarks must do so honestly,” David Meister, the C.F.T.C.’s enforcement director, said in a statement. “When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined.”

In all, Barclays said it will pay more than $450 million to settle the investigations by the two regulators and the Justice Department. As part of the deal, the Justice Department agreed to not prosecute the bank.

“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” Barclays chief executive, Bob Diamond said in a statement. “When we identified those issues, we took prompt action to fix them and co-operated extensively and proactively with the authorities.”

In the aftermath of the financial crisis, global regulators started looking into whether many of the world’s largest banks attempted to manipulate Libor, a measure of how much banks charge each other for loans.

At least nine agencies, including the Justice Department, the Financial Services Authority of Britain and Financial Supervisory Agency of Japan, have centered their investigations on Libor. Authorities are also looking into the activity surrounding similar benchmarks known as Tibor and Euribor, or the Tokyo and euro interbank offered rates.

Libor is an important barometer of market interest rates and of the health of the financial system, and it is used to price more than $350 trillion worth of financial products, including complex derivatives and home loans.

Libor and the other interbank rates provide benchmarks for global short-term borrowing, and are published daily based on surveys from banks about the rates at which they could borrow money in the financial markets. Currently, more than a dozen financial firms, including JPMorgan, Bank of America and HSBC, provide information to set the daily American dollar Libor rate.

According to disclosures by a number of financial firms, regulators are investigating whether banks shared information between their treasury departments, which help to set Libor, and their trading units, which buy and sell financial products on a daily basis. Financial institutions are expected to maintain so-called Chinese walls between the two divisions to avoid confidential information being used to turn a profit as part of banks’ daily trading operations.

Analysts say the Libor system, which was created in 1986 and is overseen by Thomson Reuters on behalf of the British Bankers’ Association, does not provide sufficient transparency about how banks set their daily interest rates for borrowing in the financial markets.

When many banks were unable to borrow in the financial markets during the financial crisis, authorities raised concerns about the figures that firms were using to set Libor.

As bank funding costs rose to historic highs after the collapse of Lehman Brothers, regulators started to worry that financial firms might have submitted low interest rate figures that underpin Libor to appear in stronger financial positions than they actually were. With limited oversight over how banks set the rates, analysts say a bank could have provided lower figures in an effort to artificially keep its actual borrowing costs down.

Since then, regulators in the United States have issued subpoenas to several banks, including Bank of America, UBS and Citigroup, about how Libor was set. The Competition Bureau of Canada is investigating the activities of JPMorgan, Deutsche Bank and several other major banks about their activities around Libor. Japanese, Swiss and British authorities are also conducting their own inquiries into how the interbank rates have been set over the last five years.

In 2011, Charles Schwab, the brokerage firm and investment manager, sued 11 major banks, including Bank of America, JPMorgan Chase and Citigroup, claiming they conspired to manipulate Libor.

Last August, Barclays said that American and European authorities were investigating the activities of the British bank and other financial institutions surrounding the setting of Libor. The probes had been focused on accusations that Barclays and other firms suppressed interbank rates between 2006 and 2009, according to a statement from the British bank. The financial firm had said it was cooperating with the investigation.

The British Bankers’ Association, which sponsors the interbank rate, defends its rate-setting process, though the trade body established a committee earlier this year to revise how Libor was set. The changes are expected to focus on establishing guidelines, including which bank employees can be told about the daily interbank rates and which specific financial instruments can be used to set Libor.

The Darwinian Economy — BBC Radio 4 (Reith Lecture – Niall Ferguson)

Posted on June 26, 2012 by devonllpblogger

BBC Radio 4 has just broadcast an excellent lecture by Niall Ferguson on the Darwinian Economy making a compelling argument that over regulation led to the financial crisis. The podcast is available for download from BBC Radio 4’s dedicated webpage — link here.

SUMMARY :

There will always be greedy people around banks,” says Niall Ferguson “after all they are where the money is – or should be.”

“But greedy people will only commit fraud or negligence if they feel their misdemeanour is unlikely to be noticed or severely punished.”

In the second Reith Lecture in his series The Rule Of Law And Its Enemies economic historian Prof Niall Ferguson tackles the subject of financial regulation – and the need to drastically prune it.

Prof Ferguson argues that the financial crisis that began in 2007 had its origins in over-complex regulation.

Many economists – and members of the public – disagree and believe lax regulation was a major cause of the financial crisis. They blame President Clinton’s repeal of the restrictive Glass-Steagall Act in particular.

But they have misunderstood the problem, says Ferguson. He says the major events of the crisis would still have happened even with Glass-Steagall in place. Instead, he says, misconceived regulation was a large part of problem.

Because de-regulation is not bad. It is bad regulation that is bad. Banks were key to the financial crisis – and banks were regulated, he observes.

The more serious failing, Ferguson continues, is the feeling of impunity within the banking industry. This is not an issue of deregulation, but non-punishment. There was a failure to apply the law. The list of people jailed for their role in the USA’s sub-prime crisis is “laughably short,” says Prof Ferguson.

Extra compliance is not the solution, he says, because adding rules upon rules upon rules removes the need for banks to simply ask themselves “are we doing the right thing?”

Link here to BBC Radio 4’s podcast (BBC Radio 4)

ISDA Helps Prepare OTC Swaps Market for Sovereign Default — "Force Majeure" Protocol Published

Posted on June 25, 2012 by devonllpblogger

With the possibility of a Eurozone break-up and the attendant imposition of foreign exchange controls market participants have been expecting the Internatilnal Swaps and Derivatives Association (“ISDA”) to provide some useful guidance through these uncharted waters. However, their guidance to date has been quite limited at best. On 19 June ISDA published a “force majeure” protocol to assist banks and other counterparties to deal with certain unforeseen contingencies. (Link here for the protocol). However, its is unlikely that any counterparties in states that have the remotest possibility of exiting the Euro would sign-up to the protocol absent a gun to their head.

The problem ISDA seeks to address stems from the the absence of a “force majeure” clause in the 1992 ISDA Master Agreement. The 2002 version of the ISDA Master Agreement addressed this however the vast majority of counterparties still trade under the 1992 ISDA Master Agreement. The protocol imports the 2002 provisions into the 1992 through a letter of adherence which both parties to the swaps must sign.

However the “Force Majeure Event” under the protocol is not precisely defined – it is simply defined as a force majeure event or act of state occurring after a Transaction is entered into (after giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere).

Force majeure events are events that free both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term act of God (such as hurricane, flooding, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. They must be unforeseeable – meaning that if you live in Louisiana a hurricane is not unforeseeable, if you live on the slopes of Mt. Vesuvius an earthquake or volcanic eruption is not unforeseeable.

In order to trigger the termination event, three conditions must be satisfied:

(a) an event of force majeure or act of state occurs;

(b) the Force Majeure event is beyond the control of the party (or its credit support provider) and that party (or its credit support provider) could not overcome the event of force majeure by using all reasonable efforts; and

(c) a waiting period of eight business days has expired (unless the event of force majeure affects a payment or delivery under a credit support document, in which case no waiting period applies).

We know from the infamous Goldman Sovereign Debt Swap that the Greeks will sign-up to some pretty stupid swaps, but with the risk of a Grexit at better than even odds it is hard to see any club-med counterparties signing on. This is why:

(1) No deﬁnition of “force majeure” other than the occurrence of an event of force majeure which prevents or makes it impossible or impracticable to make or receive payments or deliveries.

(2) a party is obliged to attempt to overcome the event of force majeure using all reasonable efforts, the protocol states that the party need not incur a loss in doing so, effectively rendering the obligation useless

(3) The force majeure event applies to the Affected Party and that party that determines the Close-out Amount.

The “Illegality” provisions of the ISDA Master Agreement provide much greater certainty when dealing with the risks of a Eurozone exit and the attendant fx controld. However, there are, as Dick Cheney put it, a multitude of unkown unknowns in a euro exit scenario. Clifford Chance covers 20 “what if” questions however there are no bankable answers. The Clifford Chance paper is available here.

20 Questions:

Question 1: I have entered into an ISDA Master Agreement with a private company incorporated in a Eurozone country (my counterparty). I am worried the country (the Departing State) may leave the Eurozone. If the Departing State were to leave and establish its own currency, would I still be entitled, and my counterparty still be obliged, to make payments in Euro?
Question 2: Neither I nor my counterparty are incorporated in or acting from an office in the Departing State. Would the Departing State’s exit from the Eurozone affect my right to receive, or obligation to make, payments in Euro?
Question 3: I have an ISDA transaction with a private company incorporated in a Departing State which provides for payments in Euro. Would the Departing State’s exit from the Eurozone trigger a Termination Event or Event of Default under the 1992 or the 2002 ISDA Master Agreement?
Question 4: When might an Illegality Termination Event apply?
Question 5: Before the affected ISDA transactions can be terminated, would the non-Affected Party have to keep making payments to the Affected Party?
Question 6: How is the amount payable on termination for Illegality calculated?
Question 7: Can both parties be Affected Parties for the purposes of Illegality?
Question 8: Can the same event lead to an Illegality and an Event of Default?
Question 9: What is an applicable law for the purposes of Illegality?
Question 10: Where there is no Illegality and the payment obligations are denominated in Euro, but the counterparty makes payment to me in the new currency of the Departing State, would this constitute a failure to pay or deliver Event of Default under section 5(a)(i) of the 1992 or the 2002 ISDA Master Agreement?
Question 11: If the counterparty defaults on any other obligations, will this constitute an Event of Default?
Question 12: I have obtained a judgment from an English or a New York court. Can I enforce it against my counterparty’s assets located in the Departing State?
Question 13: Does the currency indemnity at section 8(b) of the 1992 and the 2002 ISDA Master Agreement help?
Question 14: My counterparty’s obligations under our ISDA transaction are guaranteed by a guarantor in the Departing State. Would the Departing State’s exit from the Eurozone impact the guarantee obligations?
Question 15: What if my counterparty is the Departing State itself?
Question 16: Are there any other ISDA documentation points I should be thinking about?
Question 17: I also have FX/equity/credit derivatives trades outstanding under a 1992 or a 2002 ISDA Master Agreement with a counterparty in the Departing State. How does the analysis above change and what else might I need to think about?
Question 18: For new deals, what should I be putting in my ISDA transaction documentation?
Question 19: Are there any other steps I should take?
Question 20: If my ISDA transaction satisfies the conditions as to governing law, submission to jurisdiction, currency and place of payment so that (absent any EU Supporting Monetary Legislation) it is likely that an English or a New York court would give a Euro denominated judgment on its terms, notwithstanding a currency redenomination by a Departing State, is that an end to my concerns?

Class Action Shareholder Suit against Goldmans linked to toxic CDOs given Greenlight.

Posted on June 22, 2012 by devonllpblogger

The U.S. district court has said that a class action suit by shareholders of Goldman Sachs can proceed against the company for a drop in share value due to the company concealing conflicts of interest in several collateralized debt obligation transactions. U.S. District Judge Paul Crotty ruled that investors could proceed with claims that Goldman should have disclosed those positions to clients, as well as hedge fund Paulson & Co’s alleged role in hand-picking risky subprime mortgages that went into one of the CDOs, known as Abacus.

The lawsuit in Manhattan federal court consolidates claims from Goldman shareholders who said the firm failed to disclose it was betting against its clients by taking short positions in four CDO transactions it sold to investors.

Goldman’s actions caused its shares to trade at inflated levels. The shares fell 12.8 percent on April 16, wiping out more than $12 billion of value, after the SEC filed a civil fraud lawsuit against Goldman over the Abacus CDO. Goldman settled the lawsuit for $550 million. The shares fell another 3 percent on April 25 and 26, 2010, when the U.S. Senate released internal emails from Goldman reflecting its practice of taking short positions against securities sold to investors and again by 2 percent on June 10, 2010, when the U.S. Securities and Exchange Commission announced an investigation into the Hudson CDO transaction, according to the complaint.

Lawyers for Goldman argued the lawsuits and investigations themselves caused the stock price to drop, not its alleged omissions. But “these suits and investigations can more appropriately be seen as a series of ‘corrective disclosures,’ because they revealed Goldman’s material misstatements – and indeed pattern of making misstatements – and its conflict of interest,” Crotty wrote.

Crotty did dismiss a separate claim that the company should have disclosed Wells notices received by Fabrice Tourre and Jonathan Engol, two employees involved in the Abacus transaction.

The SEC issues Wells notices to any targets of its investigations when a preliminary decision has been made to recommend an enforcement action. However, it does not always lead to litigation and does not necessarily need to be disclosed to shareholders, Crotty wrote.

In re Goldman Sachs Group Inc Securities Litigation, in the U.S. District Court for the Southern District of New York, no. 10-3461.

Milan’s Fraudulent Swaps – UK Courts block SFO’s Bank Probe on behalf of Italians

Posted on June 21, 2012 by devonllpblogger

The Serious Fraud Office has been blocked by the UK Courts in their attempts to assist Italian investigators in connection with an alleged multi-billion euro fraud against the City of Milan.

Lord Justice Gross

Lord Justice Gross said the SFO had an “obvious lack of authority” to act on the Italian prosecutors’ requests, and quashed its decision on grounds of unreasonableness. But the judge said he has a “considerable degree of sympathy” with the SFO’s actions and those of the home secretary, who passed on the Italians’ requests to the SFO.

The case relates to a criminal and civil investigation into debt swaps arranged for the City of Milan between 2005 and 2007. Italian prosecutors argue that the banks did not tell officials at the City of Milan what they were charging for the swaps. The banks deny charges of fraud and settled a separate civil case earlier in the year, agreeing to cancel some of the swap transactions.

The SFO wrote to the banks in 2011 demanding production of accounting information and correspondence linked to their dealings with Milan, at the behest of Italian prosecutors.

In 2010 a judge in Milan charged Deutsche Bank, Germany’s Depfa, UBS, and JPMorgan with fraud and ordered 11 bankers and two former municipal employees to stand trial for their roles in a €1.7bn bond issue. While, on the face of ti the deal looked straight forward — the four banks were mandated by Milan to underwrite a €1.7bn issue of 30-year bonds at a fixed rate of interest. However, the banks also sold Milan a swap agreement that enabled Milan it to exchange the fixed rate for a floating rate, in the belief that it would be able to take advantage of falling interest rates over a period of time.

From the start the interest rates went against the city At issuance the ECB’s interest rate was 2 per cent, then climbed to 4 per cent by the middle of 2007. The city of Milan now claims that the four banks misrepresented to the city the financial benefits of the debt restructuring exercise, of which the bond issue and the swaps agreement were part.

The second is that the banks misled officials at the City and failed to explain the terms and conditions of the swaps agreement. As a result the City incurred at least €56m of hidden costs.

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Please visit http://www.devonllp.com for more information on swaps misselling cases.

Blue Index – SEC and FSA put Insider Trading Family behind bars

Posted on June 20, 2012 by devonllpblogger

Miranda Sanders and husband, James Sanders, a former director of London based broker Blue Index, were sentenced before Southwark Crown Court in London for insider dealing activities. Miranda Saunders was given a 10 month sentence while James was given a 4 year sentence.

The confidential information was sourced from Miranda’s sister in the United States, Annabel McClellan, who is the wife of a partner at Deloitte specializing in merger and acquisitions. The illegal trading was was used to prop up poor trading at the now defunct broker Blue Index. Its owner, James Sanders, 32, was reported to enjoy a lavish lifestyle, driving a Porsche and buying a house near author JK Rowling’s London home.

The accused traded on US companies including Getty Images, aQuantative and Kronos. Deloitte mergers and acquisitions partner Arnold McClellan worked on all four takeovers. The court heard how Mr McClellan was linked to Sanders by marriage, their wives being sisters. Mr Sanders pleaded guilty to 10 charges of insider dealing. His wife Miranda, who pleaded guilty to five charges, was sentenced to 10 months. Passing sentence, Mr Justice Simon said Mr Sanders had carried out “repeated and flagrant acts of dishonesty” and acted out of “greed, arrogance and a sense of invincibility”.

However, two other co-defendants, Blue Index senior trader Christopher Hossain, 36, and Sanders’ close friend Adam Buck, 35, pleaded not guilty and beat the charges before a jury. It was alleged that Mr Hossain made £140,000 and Mr Buck, who traded on just one company, made £45,000.

In a parallel case in the USA the Securities and Exchange Commission accused Annabel McClellan of passing confidential inside information to James and Miranda Sanders on at least seven occasions. She was not required to enter a plea and instead settled the case by paying a $1 million fine. She was separately charged with lying to the SEC during the course of their investigation and is currently serving an 11-month sentence after pleading guilty. A wealthy broker and his wife who netted £1.5m through insider dealing have been jailed.

The four-year jail term for James Sanders, who ran Blue Index, a specialist contract for difference brokerage, is the longest handed out in recent years for insider trading, which carries a maximum sentence of seven years. It exceeds the three-year sentence handed down in 2011 to Christian Littlewood, a former Dresdner Kleinwort banker who netted £590,000 by trading on secret merger information.

James and Miranda Sanders

He also handed a 10-month jail term to James Swallow, a co-director of Blue Index, who pleaded guilty to three charges of insider dealing. His profit from insider dealing was £382,253. During the sentencing hearing, Peter Carter QC, prosecuting for the FSA, told the court that Mrs Sanders was “at the centre of the obtaining and use of inside information”.

The court was read transcripts of telephone calls between Mr Sanders and his father Tim. On one call about the stock Per Se, his father asked: “Is this not insider dealing?” Mr Sanders replied: “Urm, no, not really. Well [laughs].”

In another conversation read out to the court, Mr Sanders said: “I’m the golden boy coming smelling of roses.” Mr Carter said: “This is no doubt the impression he wanted to create.” The court was told there was evidence that the Sanders planned to use the proceeds of insider dealing to purchase a house, and substantial sums were placed in Mrs Sanders’ savings account. The court heard that the couple had two houses in an exclusive area of London. One was bought for £3.9m, and Mr Sanders claimed he had spent almost £1m renovating it and was considering spending £35,000 on installing a wine cellar, the court heard.

The court also heard that they had two substantial mortgages – requiring payments of £15,000 and £10,000 a month. “This is the most significant case we have seen come to conclusion so far,” said Tracey McDermott, acting FSA enforcement director, adding that “real groundbreaking work was done by the team by making it work with” US authorities.

The FSA had spent “millions” on the probe, combing through 800,000 recorded telephone calls and 26m emails.

Source: The Financial Times (London) – 2012

Interestingly, the legal fees for the cross-border prosecution dwarfed the amounts earned by the insider dealing ring. Some estimated put the combined legal and investigation fees at over USD 50 million. The UK legal lineup was:

Representing the FSA

Peter Carter QC — 8 Red Lion Court
Sarah Clarke — 3 Serjeants’ Inn’s
Ruby Hamid — 18 Red Lion Court
instructed directly

Representing James Sanders

Andrew Radcliffe QC — 2 Hare Court’s
Siobhan Grey — Doughty Street Chambers
instructed by Kevin Robinson — Irwin Mitchell

Representing Miranda Sanders

Henry Blaxland QC — Garden Court Chambers
Adrian Eissa — Garden Court Chambers
instructed by Robyn Walters — Irwin Mitchell

Representing Christopher Hossain

Mukul Chawla — 9-12 Bell Yard’s
instructed by Jill Lorimer — Kingsley Napley

Representing James Swallow

Matthew Ryder QC — Matrix
Helen Law — Matrix
instructed by David Corker — Corker Binning

Representing Adam Buck

Ken Macdonald QC — Matrix
Julian Knowles QC — Matrix
instructed by Neil O’May — Bindmans

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Devon Capital LLP has been providing consulting and testifying experts in relation to complex financial disputes for over 10 years. For further information on our services please visit our website at www.devonllp.com or contact Saul at saul.haydon-rowe@devonllp.comor Michael at michael.mcnicholas@devonllp.com

ISDA: Section 2(a)(iii) — Lomas v. Firth Rixon : UK Court of Appeal Rules on FFAs.

Posted on June 19, 2012 by devonllpblogger

The UK Court of Appeal has handed down a consolidated judgment in four related appeals concerning the proper construction of certain key provisions of the 1992 ISDA Master Agreement (sub nom Lomas v Firth Rixson and others [2012] EWCA Civ 419).

One of the cases considered by the Court of Appeal was an appeal from a decision of Flaux J in Pioneer v Cosco [2011] EWHC 1692 (Comm). That case arose out of a series of 11 forward freight agreements (FFAs) entered into between the parties, each of which was on the 2007 terms of the Forward Freight Agreement Brokers Association and incorporated the terms of the 1992 ISDA Master Agreement. In November 2008 Pioneer failed to make a payment which was due to Cosco under the FFAs. That was an Event of Default under the ISDA Master Agreement, the effect of which was to entitle Cosco to withhold any payments which would otherwise have been due under the FFAs for so long as the Event of Default was continuing, by virtue of section 2(a)(iii) of the Master Agreement. After that date, neither party made any payment to each other until, in December 2009, Pioneer went into liquidation. That was also an Event of Default, but significantly, one which brought about the Automatic Early Termination (AET) of all “outstanding transactions” between the parties, pursuant to section 6(a) of the Master Agreement.

The principal question in the case was how many of the FFAs between the parties could be regarded as “outstanding transactions” as at December 2009. Pioneer contended that all of the FFAs between the parties were “outstanding transactions” at that date, and that all of the FFAs were therefore subject to AET. If that was right, it would follow that approximately $16 million would be due from Cosco to Pioneer under the close out provisions of section 6(e) of the Master Agreement. However, Cosco contended that in fact, not all of the FFAs were subject to AET. In particular, as at December 2009 some of the FFAs had reached the end of their natural term. Cosco contended that those FFAs could not be regarded as “outstanding transactions”, and were therefore not the subject of AET. If that was right, Cosco contended that it would follow that a payment of about US$7 million would be due from Pioneer to Cosco.

The Court of Appeal held that all of the FFAs were “outstanding transactions” as at December 2009, and were therefore subject to AET. In reaching that conclusion the Court of Appeal overturned the decision of Flaux J at first instance, as well as that of Briggs J in the case of Lomas v Firth Rixson [2010] EWHC 3372 (Ch), to the effect that payment obligations which were suspended by virtue of section 2(a)(iii) of the Master Agreement were extinguished once and for all at the end of the term of the transaction. It was held that there was no language in the Master Agreement to support that conclusion, and that on a proper analysis payment obligations which were suspended under section 2(a)(iii) remained suspended for so long as the relevant Event of Default was continuing, whether or not the term of the transaction had passed. It followed that, as at December 2009, even those FFAs whose natural term had passed were “outstanding transactions”, as they were transactions under which there remained obligations which were capable in the future of arising for performance. The result was that Pioneer’s claim succeeded in full.

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110 Years for Bank Fraudster Allen Stanford

Posted on June 14, 2012 by devonllpblogger

HOUSTON — R. Allen Stanford, the Texas financier convicted of fleecing 30,000 investors from 113 countries in a $7 billion Ponzi scheme, was sentenced on Thursday to 110 years in jail.

A defiant Mr. Stanford, in a rambling statement to the court before the sentencing, intermittently fought back tears and shuffled papers, and said, “I’m not up here to ask for sympathy or forgiveness. I’m up here to tell you from my heart I didn’t run a Ponzi scheme.”

He blamed the government for the collapse of his businesses and asserted that “we could have paid off every depositor and still have substantial assets remaining.”

In response, federal prosecutor, William J. Stellmach, called Mr. Stanford’s version of events “obscene.”

“This is a man utterly without remorse,” Mr. Stellmach said. “From beginning to end, he treated all of his victims as roadkill.”

“He went after the middle class, including people who didn’t have money to lose. People have lost their homes. They have come out of retirement.”

A federal jury in March convicted Mr. Stanford of 13 out of 14 counts of fraud in connection with a worldwide scheme over more than two decades in which he offered fraudulent high-interest certificates of deposit at the Stanford International Bank, which was based on the Caribbean island of Antigua.

Prosecutors argued that Mr. Stanford had consistently lied to investors, promoting safe investments for money that he channeled into a luxurious lifestyle, a Swiss bank account and various business deals that almost never succeeded.

Mr. Stanford’s defense lawyers pleaded for a sentence effectively of time served because of the three years he spent in prison waiting for his trial. Prosecutors recommended 230 years, the maximum according to sentencing guidelines for his crimes of conspiracy, wire and mail fraud, obstruction and money laundering. He was acquitted of one count of wire fraud.

The prosecutors heavily relied on James M. Davis, Mr. Stanford’s former roommate from Baylor University, who served as his chief financial officer. Mr. Davis testified that the Stanford business empire was a fraud, complete with bribes paid to Antiguan regulators and schemes to hide operations from federal investigators. He described how Mr. Stanford had sent him to London to send a fax to a prospective client from a bogus insurance company office to reassure him that his investment would be safe.

For Mr. Stanford, the verdict and sentencing represented the end of a remarkable career that began with a Texas fitness club venture. After it went bankrupt, he tried offshore banking and lived a life of glamour. Mr. Stanford is now a shadow of the swaggering financier who only three years ago had an estimated fortune of over $2 billion, a knighthood awarded by Antigua and a collection of yachts and a fleet of jets. He even owned his own professional cricket team and stadium on Antigua, which according to prosecutors he treated like his personal business haven in the West Indies, with politicians in tow, through bribes and political campaign contributions.

The defense denied those charges, basing its case on the fact that Mr. Stanford’s clients had been paid on schedule until the Securities and Exchange Commission made the first accusations three years ago, destroying the value of his businesses. His lawyers repeatedly pointed out that his investment literature said a loss of principal was possible and that Mr. Stanford’s assets still had value when his businesses were shut down by the federal government. They argued that Mr. Davis had often acted without Mr. Stanford’s knowledge.

In his testimony, Mr. Davis portrayed his former boss as a bullying manager who manipulated him to lie and cheat investors. He described how Mr. Stanford had invited him to drive with him in his new Mercedes-Benz on a highway outside Houston and floored the accelerator until the car reached 170 miles an hour. “He instilled intimidation and fear,” Mr. Davis said.

It took three years to bring Mr. Stanford to trial because he was severely beaten in a 2010 brawl with another federal inmate in a prison outside Houston and then became addicted to prescription antistress drugs. He underwent a year of therapy before United States District Court Judge David Hittner ruled that he was fit to stand trial. The defense said he could not properly defend himself because he had lost much of his memory.

Avoiding Qualcomm’s Discovery Debacle – 5 Things to Keep in Mind

Posted on June 14, 2012 by devonllpblogger

Though one could view Qualcomm as a “perfect storm” of discovery missteps, and therefore an aberration, it is also possible to view Qualcomm as a portent of things to come in the era of e-discovery. In view of the latter possibility, this section focuses on lessons that can be learned from Qualcomm and steps that companies and their attorneys can take to avoid becoming the next subject of a highly publicized sanctions order.

1. LITIGATION HOLD:

Put a litigation hold in place.As soon as litigation is anticipated, be sure that a thorough litigation hold is put in place to preserve relevant evidence. It is important that the hold action is communicated to all custodians likely to have relevant documents. The hold should include clear instructions to custodians on what materials should be held. Follow up periodically to ensure compliance.

2. PLANNING:

Carefully plan for document gathering. Have a proactive plan for document gathering. In-house and outside counsel should communicate with the company’s IT department to ensure that correct locations are being searched and the right electronic materials are being viewed. Questionnaires asking custodians to identify potentially relevant documents and ﬁles are also recommended as a way to obtain the best results in document collection. The document-gathering process needs to be comprehensive and exhaustive, in both the locations to be searched and any search terms used. And it is important that the search be well documented in case questionsarise about what was done.

3. CROSS-CHECK:

Cross-check and double-check results. Checking search results is absolutely critical. For example, if a company employee is interviewed and shows up with relevant documents from his or her own ﬁ les, check whether those documents are already part of the master set of documents collected
from the company. If not, be sure that they are incorporated into the master set, and follow up with that witness to ensure that his or her computer and other ﬁles were adequately searched. It is also important that search terms are reﬁned as more is learned about a case.

4. RED FLAGS

If red ﬂags appear, investigate.It is vitally important that both in-house and outside counsel follow up on any red ﬂags that suggest possible omissions in a production. In Qualcomm, one of the court’s biggest criticisms of the attorneys was their failure to investigate when red ﬂags suggested that responsive documents were not produced. It is worth remembering that when Qualcomm ﬁ nally did conduct additional searches, it discovered more than 230,000 pages of additional responsive documents.

5. AVOID REPS:

Do not make representations to the court before conducting a reasonable investigation. The court censured Qualcomm’s outside counsel for making representations to it about Qualcomm’s document productions that were not accurate. The court showed no sympathy for claims by sanctioned lawyers who had relied on information provided by other lawyers on their team or by co-counsel. The court made clear that any lawyer making a representation to it—whether in a pleading, brief, or even in a sidebar—has a duty to conduct a reasonable inquiry before making representations to the court. As Qualcomm makes clear, it is not enough to simply say that you were not the attorney handling discovery.

6. MEASURED APPROACH – AVOID BOILERPLATE

Take a measured approach to written discovery responses. Lawyers often like to answer document requests by listing a string of boilerplate objections, then stating something to the effect that, “Subject to the foregoing objections, Party X will produce all nonprivileged documents that are responsive to this request.”
Qualcomm suggests that a new approach may be needed. The court was very critical of Qualcomm’s use
of boilerplate objections and excoriated the company for having stated in its responses that it would produce all nonprivileged responsive documents, and then failing to do so. To avoid such a scenario, some commentators have suggested that it may be advisable for a party responding to document requests to state speciﬁcally what it will do to search for responsive documents (i.e., the locations to be searched and the search terms to be used) rather than broadly stating that it will produce all nonprivileged documents responsive to a request.

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