Libor Trader Sentenced to 14 Years for Market Manipulation. So What About His Bosses?

On the one hand, it’s gratifying to see someone, finally, prosecuted for a highly profitable financial fraud, as opposed to “rogue traders” like Jerome Kerviel who get the book thrown at them for the crime of losing boatloads of money. On the other, it’s clear that the bosses of the trader in question, Tom Hayes, recently of UBS and Citi, had to have known what he was up to, at least if they were doing the job that supposedly goes along with their lofty pay levels.

The short version of the story: at least as the prosecution successfully told the story, Hayes was the central actor in yen-related Libor bid-rigging from 2006 to 2010, working in concert with traders and salesmen at other banks. The scale of his production makes this claim credible: $260 million in revenues for UBS over three years, which led banks like Lehman and Goldman to try to bid him away. The very fact that Hayes brought in such high levels of revenues (which I assume were gross trading profits; raw churn would not make him an Object of Poaching), presumably with some consistency, in a market with high transparency and thin spreads should be a huge red flag to management that the profits couldn’t possibly all be legit. We discussed that pattern repeatedly in ECONNED, of both bona fide “rogue traders” and suspiciously lucrative “big producers” being left more to their own devices than they should be, precisely because the higher-up benefitted from their abnormal attractive results. As long as the top brass has plausible deniability in terms of fig-leaf level risk controls, they can pretend to be have done what was prudent while actually being in on the fact that they’ve chosen to put the inmates in charge of the asylum.

In fact Citi, a bank that a colleague describes as “run by monkeys” nevertheless figured out that Hayes was up to no good less than a year after hiring him out of UBS. That demonstrates that that attentive management could have told that Hayes was up to no good. While the authorities didn’t announce their probe until March 2011, the giant American bank may have gotten wind in advance that they were sniffing around and started looking to see if its house was in order.

Part of why Hayes got 14 years looks to have been both a terrible fact set and some really bad legal judgment calls. For instance, he initially cooperated with the UK’s Serious Fraud Office and gave them 82 hours of interviews in which he admitted to trying to rig Libor fixing submissions by other banks. The reason? The US Department of Justice had filed an indictment in its own criminal case. Hayes was trying to circumvent extradition to the US because the US sentencing guidelines were tougher.

While the US has admittedly been far more willing to throw the book at foreign rather than domestic perps (witness its €8.9 billion against Paribas for money laundering), it’s hard to see the US having imposed anything like a 14 year sentence against Hayes. Even Andrew Fastow, the CFO of Enron, made a plea deal for a ten year sentence and had it reduced to six years due to cooperation in the prosecution of Jeff Skilling and Ken Lay. The magnitude of the Enron bankruptcy meant that major scalps had to be collected. By contrast, while getting Hayes would be a feather in the cap of the Justice Department, it wasn’t an imperative the way the Enron prosecutions were. And let’s face it: even a British trader getting a real sanction might force the DoJ and other prosectors to do more than engage in their usual wet noodle lashings of future US bank perps.

After giving the SFO voluminous detail about what he’d been up to, Hayes bizarrely decided to fight. That’s like closing the gate after the horse is in the next county. From the Financial Times:

But Hayes testified he co-operated with the SFO only because he was terrified of extradition to the US and wanted to face trial in his home country, where sentencing guidelines are markedly more lenient.When he became angered by the process, he reversed his decision to plead guilty, he said. He never believed he was being dishonest, despite his admission to the SFO that he was, he told the jury.

Huh? So Hayes wanted the jury to believe that he lied to the SFO because that was necessary to keep himself out of the clutches of the meanie Americans, but now he’s being truthful with them?

Hayes also got a hanging judge. Our Richard Smith tells us that it’s not usual for British judges to tell juries what they think, and that British juries often see fit to ignore them. That’s quite a contrast with the US, where judges strive to appear unbiased and juries are expected to follow judges’ instructions faithfully. Again from the pink paper:

Mr Justice Cooke, who presided over the case, clearly never warmed to Hayes. In a packed court hearing before the trial began, he said Hayes “is, by nature, a gambler”.

The feeling was mutual. Hayes tried to have the judge thrown off the case before the trial began for allegedly showing too much bias. He argued that Mr Justice Cooke — a high-court judge with 14 years’ experience on the bench — had demonstrated that he could not fairly try Hayes’s case as he had a “closed mind” to his defence arguments.

“There was dishonesty,” Mr Justice Cooke said in open court. “It’s an open-and-shut case.” Another comment to which Hayes took exception was the judge telling his former barrister that it was not too late “for your client to plead guilty”.

“The judge absolutely hates me,” Hayes wrote in a note to his legal team at the time, according to Mr Justice Cooke’s decision that dismissed the trader’s argument for a recusal.

“A fair-minded and fully informed observer would be, in my judgment, appalled at the public expense incurred and to be incurred in this matter, if he was aware that the defendant had, as it appears, fully admitted his part in the offences,” the judge wrote in his decision.

And Hayes dug his grave deeper by testifying. Was this his idea? Most US defense attorneys keep their clients off the stand unless they are pretty bulletproof or only they can provide critical information and it’s worth the risk of exposing them to cross examination. Whatever Hayes did to himself seems to have been so bad that commentators drew the veil:

David Corker, a financial crime lawyer and partner at Corker Binning, said: “One of the most difficult decisions a defence lawyer has to make in a fraud case is whether or not to put the client on the stand, particularly in those instances when clients are articulate and eager to speak to the court.

“In this case, Hayes’s pivotal decision to testify has proven disastrous.”

Corker made it clear he thinks Hayes overrode counsel. Oops.

While it’s great to see a measure of justice done, as we indicated via our headline, it’s simply not sufficient for Hayes to fry, as deserving as he seems to be. The good news is the SFO seems to enjoy having gotten its teeth into this case. Let’s hope that that 82 hours of interviews before Hayes got cold feet was enough to put the SFO well on its way to getting some of Hayes’ bosses. Only when senior level executives suffer for bonus-boosting crimes performed on their watch do we have any hope of reducing the bank fraud epidemic.

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