The Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Société Générale S.A. (Société Générale or the Bank) for attempted manipulation of and false reporting in connection with the London Interbank Offered Rate (LIBOR) for U.S. Dollar, Yen and Euro, and the Euro Interbank Offered Rate (Euribor), certain instances of manipulation of Yen LIBOR, and aiding and abetting traders at another bank in their attempts to manipulate Euribor.
The Bank’s misconduct spans more than six years, from 2006 through mid-2012. The CFTC Order requires Société Générale to pay a civil monetary penalty of $475 million, cease and desist from further violations as charged, and adhere to specific undertakings to ensure the integrity of its LIBOR, Euribor, and other benchmark interest rate submissions in the future.
James McDonald, CFTC Director of Enforcement, commented: “Today’s action shows the CFTC’s continued commitment to ensuring the integrity of global benchmarks that impact the U.S. markets. During the course of these Libor investigations, we have seen some market participants knowingly make false reports in an effort to increase their trading profits or misrepresent their financial health. But we also have seen the Commission and its staff work tirelessly to identify this misconduct, root out the bad actors, and to ensure those responsible are held accountable.”
LIBOR and Euribor are global interest rate benchmarks that act as the basis of pricing for trillions of dollars of financial instruments, including U.S. based exchange-traded futures contracts and swaps transactions. Markets, investors, and consumers in the United States and around the world rely on the integrity of these benchmark interest rates.
LIBOR and Euribor are fixed each day based on rates submitted by a select panel of banks. They are supposed to reflect or relate to the true costs of borrowing unsecured funds in the relevant interbank market. In determining what rates to submit, each panel bank is to make an honest assessment of those costs. Benchmark submissions thus convey market information about borrowing costs for unsecured funds, the liquidity conditions and stress in the money markets, and a bank’s ability to borrow funds in the particular markets. As reflected in the CFTC’s Order, at various times during the relevant period, Société Générale made its submissions for U.S. Dollar, Euro and Yen LIBOR and Euribor based on impermissible factors.
The Order finds that Société Générale engaged in misconduct that undermined the integrity of LIBOR and Euribor for two distinct purposes. From May 2010 through mid-2012, during a period of market strain due to the Greek sovereign debt crisis, Société Générale made false reports of U.S. Dollar and Euro LIBOR and Euribor to protect its reputation from speculation that it was having more difficulty borrowing unsecured funds than other banks. Société Générale made these false reports at the direction of certain members of executive management, including the Chief Financial Officer and Head of Corporate Investment Banking, as well as senior Treasury managers, including the Global Head of Treasury.
At other times, as detailed below, Société Générale made false reports concerning U.S. Dollar, Yen, and Euro LIBOR and Euribor in attempts to manipulate the setting of those benchmarks, and for Yen LIBOR was, at certain times, successful in its attempts to manipulate, in order to benefit trading positions that were priced based on LIBOR or Euribor, or in other words, for profit.
As the Order finds, Société Générale engaged in misconduct even after it knew that the CFTC was investigating the Bank’s Euribor and LIBOR submission practices as of July and September 2011. Société Générale continued to make false U.S. Dollar LIBOR submissions by submitting rates lower than its true costs of borrowing funds in order to protect its reputation. Moreover, in early 2012, Société Générale conducted an internal audit of its LIBOR submission process, which produced an anemic report that failed to identify glaring improprieties and concluded the Bank’s submitted rates were “consistent with” British Bankers’ Association guidelines despite an abundance of evidence to the contrary.
Société Générale Makes False Submissions to Protect Reputation As Directed by Executive Management from May 2010 through Mid-2012
The CFTC Order specifically finds that in May 2010, during a period of market strain due to the Greek sovereign debt crisis to which Société Générale had exposure, Société Générale’s U.S. Dollar LIBOR submissions garnered the attention of press and market analysts because the submissions were consistently higher than the submissions of many other banks, reflecting to the market that the Bank was paying higher interest rates than other banks in order to borrow unsecured funds. This raised the concerns of certain members of Société Générale’s executive management that the relatively higher U.S. Dollar LIBOR submissions were creating an impression that the Bank was struggling to finance itself and the Bank would appear less financially stable compared to its competitors, especially the French banks.
Certain members of executive management expressed anger over the Bank’s submissions having a negative impact on its reputation. They instructed the Bank’s Global Head of Treasury that Société Générale’s submissions should not be among the highest of the non-eliminated banks and should not raise questions about the Bank’s financial stability. Société Générale’s Global Head of Treasury conveyed these executive managers’ concerns and instructions to the members of Treasury responsible for making the submissions. At the direction of these managers, the Bank’s LIBOR and Euribor submitters were to lower the Société Générale’s LIBOR submissions to ensure that there was no further scrutiny from the press or market analysts and to assuage the concerns of the executive management. Société Générale’s submitters followed the instructions, with one manager noting that it was “a total charade.” Société Générale also lowered its Euribor submissions to match the Bank’s lower Euro LIBOR submissions to avoid detection of their false depression of Euro LIBOR because the benchmarks tended to move in tandem.
The Order finds that at times, members of Société Générale’s Treasury Desks expressed discomfort and concern about Société Générale’s submission practices. “We have increased our market funding levels without moving our LIBOR contribution I think we are leaving ourselves exposed to a possible claim of market manipulation … I am extremely uncomfortable with this situation.” Certain members of executive management were informed that submissions did not match what the Bank was paying in the market, being told at one point, “we remain in breach,” “we’re very far away from reality,” and “we’re in cloud cuckoo land with our contributions.” The Bank made false U.S. Dollar LIBOR submissions until at least July 2012 and made false Euro LIBOR and Euribor submissions until at least July 2010.
According to the Order, as scrutiny of panel banks LIBOR submissions practices intensified and Société Générale’s fear of exposure grew, Société Générale started to gradually increase its submissions, hoping to avoid any market reaction. Société Générale also took steps to conceal its misconduct, including preparing fictitious borrowing costs data to submit to the LIBOR administrator to justify the Bank’s submissions, discussing, dissembling and justifying aberrant deals done at levels above the submissions, and sending false bids for U.S. Dollars into the wider market while telling potential lenders one-on-one that the Bank was willing to pay much higher rates.
These tactics were meant to hide the disconnection between the costs of funds and its U.S. Dollar LIBOR submissions. The Order also finds that upon facing inquiry into their misconduct, members of the Bank’s Treasury desks wanted indemnification letters, discussed that they “played dumb” when questioned about the Bank’s LIBOR submission process and joked that, “I don’t want to go to prison by myself…” and, “You’ll have to bring us oranges when we’re in prison.”