ICAP fined as U.S. says ‘Lord Libor’ sought pay for trades

Three men face 30 years in prison

Three former ICAP Plc employees were charged by U.S. prosecutors in a scheme to manipulate Libor as the interdealer broker was fined $88 million in a five-year international probe of rigging of benchmark interest rates.

The brokers, who regulators said took advantage of a poor compliance culture at ICAP to manipulate yen Libor in exchange for money, dinners and champagne, face two counts of wire fraud and one count of conspiracy. The three men -- two former derivatives brokers and an ex-cash broker prosecutors said they called ‘lord Libor’ -- face as long as 30 years in prison if convicted of the most serious counts.

ICAP, the world’s largest broker of transactions between banks, was also fined $65 million by the U.S. Commodity Futures Trading Commission and 14 million pounds ($22.5 million) by the U.K. Financial Conduct Authority, the regulators said today. Mythili Raman, acting assistant attorney general of the Justice Department’s criminal division, said the ICAP probe is ongoing.

“No one is out of the woods at this point,” Raman said. U.S. Attorney General Eric Holder, at a press conference in Washington, called the brokers’ conduct “egregious” and “an attempt to manipulate markets to try to enrich clients.”

First Penalties

London-based Barclays Plc, Zurich-based UBS and Royal Bank of Scotland Group Plc have previously been fined as part of the probe. Firms including Rabobank Groep, Lloyds Banking Group Plc and Deutsche Bank AG are still under investigation.

The monetary penalties against ICAP are the first for an interdealer broker in the global rate-rigging investigation. Seven people have been charged and four financial institutions have been fined about $2.6 billion. Barclays Chief Executive Officer Robert Diamond was forced to resign last year after the lender became the first institution penalized in the scandal.

“We deeply regret and strongly condemn the inexcusable actions of the brokers who sought to assist certain bank traders in their efforts to manipulate yen Libor,” Michael Spencer, chief executive of ICAP, said in a statement. He said no provision has been made by the company for Libor.

Besides the three brokers, charged with colluding with traders at UBS AG in a complaint filed in Manhattan federal court, another seven ICAP employees were “congenitally involved,” Spencer said during a conference call. Of them, “the majority are no longer with the firm,” and the ones who are have been “appropriately disciplined,” he said.

‘Collusion’

The FCA said today in a statement that “three brokers, including one manager, were central to the collusion, although at least seven other individuals, including another manager, spanning three desks also participated.”

Spencer said in July of last year that probes into Libor were “not a high priority or a high concern” as ICAP wasn’t “front and forward” in the investigations.

ICAP rose 3.6 percent on the announcement of the charges and settlements, to 392.70 pence. It closed at 388.40 pence.

The FCA said that ICAP failed to have effective oversight of the brokers involved. The misconduct “was exacerbated by a poor compliance culture” at the firm which focused on revenue over regulatory requirements.

The firm is also under investigation by the CFTC over allegations that ISDAfix, the benchmark for the $379 trillion swaps market, was manipulated by brokers.

Daily E-Mail

The three former ICAP employees, Darrell Read, of New Zealand, and Daniel Wilkinson and Colin Goodman, both from England, were charged with helping senior UBS trader Tom Hayes rig rates. Goodman, the cash broker, sent out a daily e-mail to his contacts outside of ICAP, including derivatives traders at large banks and people responsible for providing the British Bankers Association with Libor submissions, the U.S. alleged in its complaint.

The note, where Goodman would allegedly include his suggestions on where yen Libor would be each day across eight borrowing periods, was used to disseminate misinformation to help Hayes, according to the complaint.

The FCA said that UBS made more than 330 written requests to ICAP brokers over a four-year period to help them with inappropriate rate submissions.

A “significant part” of Read and Wilkinson’s compensation was tied to the brokerage fees generated by a UBS trader and paid to ICAP, the U.S. said.

‘False Information’

“These three men are accused of repeatedly and deliberately spreading false information to banks and investors around the world in order to fraudulently move the market and help their client fleece his counterparties,” Justice Department official Raman said in a statement.

The three defendants aren’t in custody, she said, declining further comment on their whereabouts.

Arrest warrants issued Sept. 13 for the men in London and Wellington, New Zealand, remain unexecuted, according to court records. Goodman and Wilkinson didn’t immediately respond to e- mails seeking comment. Read couldn’t be immediately reached.

The U.S. charged Hayes and Roger Darin in December as part of the Libor probe. Hayes was also charged in the U.K. by the Serious Fraud Office, along with two former brokers at RP Martin Holdings Ltd. He faces eight charges of conspiracy to defraud for assisting employees at 10 banks and brokerages, including ICAP, to manipulate yen Libor rates over a four-year period.

Hayes is scheduled to enter a plea Oct. 21 in London.

Fix Rates

According to the CFTC, a broker at ICAP also asked a yen Libor submitter at Royal Bank of Scotland Group Plc to fix rates on their behalf to benefit a UBS trader, which the regulator didn’t name. In one note, a sterling broker offered the submitter a steak for his help, the CFTC said. The regulator today closed its five-year probe of silver market manipulation without bringing any enforcement actions.

Richard Morton, a spokesman for UBS, and Debbie Phillips, a spokeswoman for Edinburgh-based RBS, declined to comment on the ICAP settlements or the U.S. allegations.

Interdealer brokers such as ICAP act as go-betweens for banks that trade bonds, stocks, currencies, energy and derivatives. Brokers assumed greater influence as credit markets froze during the early stages of the financial crisis in 2007. Bankers who made submissions to Libor increasingly relied on information from the brokers to determine what figures to contribute because there were no trades on which to base them.

That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives.

‘Sheep’ Panel

The former ICAP brokers charged today referred to the panel bank submitters as “sheep” when they copied their suggestions on Libor, according to the CFTC. The regulator found that at least two banks’ submissions mirrored the ICAP brokers’ suggestions as much as 90 percent of the time.

The brokers provided the help on Libor to keep the business of the UBS employee, a senior yen trader, which accounted for as much as 20 percent of the Yen derivatives desk’s revenue, the CFTC said.

ICAP employees allegedly conspired with Hayes to manipulate yen Libor, according to the SFO.

Separately, Hayes is also accused of working with employees of the interdealer brokers RP Martin and Tullett Prebon Plc to manipulate rates, according to court documents.

Brokers at some firms took bribes as payment for the services in the form of so-called wash trades, where counterparties place two or more matching trades through the broker that cancel one another out while triggering payment of fees to the middle man, regulators have said in earlier cases.

Champagne Shipment

In one e-mail in the ICAP case, in which six-month Libor wasn’t being rigged how Hayes allegedly wanted it, Read told Wilkinson that “this is getting serious Tom is not happy with the way things are progressing” and to fix it, according to the U.S. complaint. “This is very important because Hayes is questioning my (and our) worth.”

In another exchange where Hayes allegedly said he thought he owed Goodman, Read responded that Goodman was “ok with an annual champagne shipment, a few piss ups with Danny and a small bonus every now and then,” according to court papers.

At the request of the ICAP brokers, UBS agreed to raise their monthly fixed fee in mid-2007 by about 5,000 pounds. About 5,000 pounds per quarter of the additional funds was paid to Goodman at Wilkinson’s request, the U.S. said.

The CFTC said “the yen cash broker who disseminated the false suggested Libors demanded compensation from the yen derivativesdesk for his ‘Libor services’ or ‘no more Mr. Libor.’”

Dinners, Kickbacks

The regulator said that the cash broker’s demands “grew from dinners and champagne, to additional commission-generating trades, to ‘kickbacks’ totaling $72,000.”

“Here, certain ICAP brokers were anything but honest,” said David Meister, the CFTC’s director of enforcement, said. “They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of Libor.”

CFTC Commissioner Bart Chilton agreed, saying in an interview today that the “brazen” effort to fix the benchmark rate and the “success at manipulation were crazy.”

In the Justice Department complaint, prosecutors refer to an unidentified junior trader at UBS who is cooperating as part of a non-prosecution agreement in the continuing investigation.

Raman, the acting U.S. assistant attorney general, said at a press conference that, while she couldn’t speak about the UBS trader, “it is one way of securing cooperation under appropriate circumstances depending on the level of culpability.”

The case is U.S. v. Read, 13-mag-02224, U.S. District Court for the Southern District of New York (Manhattan).

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