[This article does not constitute a formal legal opinion. It has been written by @legalaware, a full-time #LPC student at @BPPLawSchool. It is simply an academic article, entirely based on evidence as publicly available at the time of posting. The reader is advised to consult a legal source for an authoritative opinion, if desirable.]
In its £290m settlement with the Financial Services Authority in the UK, and the Commodity Futures Trading Commission and Department of Justice in the US, Barclays has admitted that for four years between 2005 and 2009, it lied about the interest rate it was having to pay to borrow. Quoting from the CPTC report, Robert Peston provides that: “Barclays …. attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank’s derivatives trading positions by either increasing its profits or minimizing its losses. The conduct occurred regularly and was pervasive.”
Apparently last summer, according to a report in the Financial Times, the Serious Fraud Office opted against a criminal probe into whether bankers tried to rig the London interbank offered rate, or Libor, last summer after its then-director decided it would be a drag on an already limited budget and would duplicate efforts of other agencies.
Fraud is a criminal offence here in England, and carries with it the possibility of conviction. Fraud can be achieved through one of three means: section 2 (fraud by false representation), section 3 (fraud by failure to disclose information), and section 4 (fraud by abuse of position). This article will consider only potential offences under sections 2 and 4 of the Fraud Act, and s.16 of the Theft Act (obtaining pecuniary advantage by deception). In the blogosphere, it has recently been popular to try to make a case for fraud by abuse of position under section 4 of the Fraud Act (2006). This section is worded as follows:
4. Fraud by abuse of position
(1)A person is in breach of this section if he—
(a)occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person,
(b)dishonestly abuses that position, and
(c)intends, by means of the abuse of that position—
(i)to make a gain for himself or another, or
(ii)to cause loss to another or to expose another to a risk of loss.
(2)A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act.
For example, the ‘Truth Serum blog’ suggested this might have arisen through the action of bankers ‘by deliberately inflating a credit bubble, which they could do because they can create money out of thin air, but then claim bailouts which they were given thanks to Bilderbergers, and also call for world government due to the crisis that they engineered while we suffer austerity)’. It has even been mooted that this might be a section 16 offence of the Theft Act (1968) by ‘obtaining pecuniary advantage by deception‘; the current CPS guidelines are here. Sally Ramage indeed wrote an interesting review of the change in terminology of ‘theft by deception’ to ‘fraud’ in the Criminal Lawyer (No 161, April 2006): “The reasoning for changing the terminology to “fraud” ‘rather than “theft” is to remove the technical loopholes in the 1968 Act which hitherto required prosecutors to stipulate exactly what the offence(s) consisted of. This was because the 1968 Act specified the cases in which a pecuniary advantage is to be regarded as obtained for a person. By way of contrast the Fraud Bill, once given Royal Assent, will focus on the mens rea, i.e. the person’s intention. A person here means a legal person and so may be either a human being or a corporation.” Anyway, section 16 Theft Act (1968) has been officially repealed (15.1.2007) by Fraud Act 2006 (c. 35), ss. 14(1)(3), 15(1), Sch. 1 para. 1(a)(iii), Sch. 3 (with Sch. 2 para. 3); S.I. 2006/3200,art. 2
To demonstrate a financial gain, the Court would have to be satisfied that the same people who had profited had been involved in the fraud, and it may not be sufficient to show that the benefit is vicarious or distant? It is now known pursuant to the adjudication of the fine that Bob Diamond – along with senior bankers Rich Ricci, Jerry del Missier and Chris Lucas – agreed to give up his already controversial bonus for this year. The LIBOR fixing could have also exposed individuals to a loss: millions of people could have lost out by having to pay higher interest on financial products such as mortgages and loans. Nevertheless, politicians and usually defensive bank watchers queued up to criticise the leadership of the bank, with some calling for Diamond’s head. The Court would also have to be satisfied that dishonesty had occurred. The test for dishonesty (“Ghosh test”) is both subjective and objective. The jury must consider before reaching a verdict on dishonest according to whether the act one that an ordinary decent person would consider to be dishonest (the objective test), and must the accused banker have realised that what he was doing was, by those standards, dishonest (the subjective test)? I asked this test this morning, and the response was as follows.
There is a feeling that the public would like, on this #LIBOR scandal, criminal sanctions to be imposed rather than mere financial penalties (which could be quite easy for a high revenue investment bank to pay off). One is mindful of the comment made in the BIS document entitled “Regulatory Justice: Sanctioning in a post-Hampton World” (2005) in discussion of a post-Hampton era: “Regulators were concerned that financial penalties, in many cases, did not exceed the financial benefit of non-compliance, creating in effect perverse incentives for businesses not to comply with regulatory obligations.” According to a poll published on Sunday morning (1 July 2012), four out of five people want individuals to be prosecuted when banks break the law, according to a new survey; the survey was conducted by YouGov and involved 1,035 adults. Which? chief executive Peter Vicary-Smith has commented: “Consumers are clearly fed up with one banking scandal after another. Banks and bankers will continue to be seen as untouchable unless individuals are held to account for their actions and the culture of banking is changed for good. The Government needs to change the rules so that criminal prosecutions can be brought against individuals if banks have flouted the rules. We also want the banking sector referred to the Competition Commission immediately. More competition is essential to force a change in the culture of British banking.”
This morning, Andy Marr interviewed Lord Turner, Chairman of the Financial Services Authority. Lord Turner has looked at the cases – it is not a ‘qualifying instrument’ under the Act, and therefore they have brought an action under their own principles. Marr asked Lord Turner whether failing to make it a criminal offence, and Lord Turner has described that 1997 FSMA had much things much tougher. Turner says “things have not gone far enough to cover LIBOR”. Turner has ongoing cases with other banks around the world, and the evidence provides that there is some interbank discussion in 2006, 2007, 2008. Lord Turner, as a cross bench peer, conceded that the public were “justifiably angry”, but his enforcement lawyers had been working very hard. Marr discussed whether there was “collusion” between the banks. The current position according to Lord Turner is this – in relation to the FSA’s powers, they relate specifically to ‘qualifying instruments’, such as equity prices, but if there is straight fraud the SFO has the ability to bring a cause. Lord Turner explained that the FSA worked extremely closely with the SFO, but interesting did not address the “collusion” point which Marr had raised.
Critical to this, however, is the precise definition of what that the nature of position, which has been abused, is. In 2002, the Law Commission delivered its Report(number 276) on fraud which was to lay the foundations for the Fraud Act (2006). Indeed, the Report includes as an appendix a draft Fraud Bill which is similar to the current Fraud Act (2006). This report goes into meticulous detail, and, as the Act is still relatively now, provides useful guidance on the possible scope of the Act. It does not discuss raise the specific situation of bankers in an investment bank acting on LIBOR, of course, but it does state clearly the following at paragraph 3.42: “In any event, it is clear that where a benefit is obtained by an abuse of trust, and the victim remains in complete ignorance of the loss until after the event, the benefit is not obtained by deception.” The guidelines do, however, reassure that often there will be another statutory offence which would ‘cover’ that case. Applying this to the facts of the LIBOR fiddling, the victims have only become aware of the fact that they are victims after the deception.
However, there is a slight paradox in how the Law Commission have approached this arguably, as the Law Commission then report that an essential element of this fraud by abuse of position cannot be merely dishonest behaviour, but must involve an element of secrecy. They summarise this at paragraph 7.40; ” If the defendant lets the victim know what is happening, in our view the defendant’s conduct cannot properly be described as fraud.” This reasoning is continued in the subsequent paragraph (7.41): “Arguably it follows that there should be no liability if, although the victim has no knowledge of the abuse at the time when it occurs, the defendant intends to disclose it in due course.” Reassuringly, the Law Commission conclude that particular paragraph with a clear view: “We have therefore decided to recommend simply that, with one exception, the abuse of position must occur without the victim’s knowledge, or that of a person acting on the victim’s behalf.”
The notion of secrecy by the banks is pervasive throughout the timeline of the unfolding LIBOR scandal as described here. For example, it is reported that on August 19 2009, UBS, the giant Swiss bank, signed an agreement that ends a tax evasion dispute over its US customers, but breaking its banking secrecy, it hands over details of 4,450 accounts to the US in a commitment to help on the Libor probe is said to be given as well. However, it is the secret behaviour of bankers which has now been recognised as being central to this scandal: according to Sky News, “Sir Mervyn King hit out at what he called the “shoddy” behaviour of banks after revelations that a key lending rate was secretly fixed by Barclays, among others.”
Potentially, this could be much ado about nothing, in that some could argue that the most parsimonious offence which has occurred is ‘fraud by false representation‘, in this case fraudulently or deceitfully, but covered by section 2 Fraud Act (2006). To satisfy the offence, it has to be satisfied that the trader had made a false representation to make a financial gain or expose someone at least to a financial loss. Worrying for the bankers defendants, as it could be argued that there are “multiple victims” and this is a “high value transaction”, this could put the defendants in the higher bracket of sentencing if tried and if found guilty (CPS guidelines here). Furthermore, it might be easier to charge Bankers with the charge of ‘conspiracy to defraud’ (for useful information about this, please refer to this link). A definition of it is provided by Scott v Metropolitan Police Commissioner [1975] AC 819:
[A]n agreement by two or more by dishonesty to deprive a person of something which is his or to which he is or would be or might be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud.
In the absence of absolute specification of the word ‘position’ in the original Law Commission report and the Fraud Act (2006), it might seem logical then to go to the current official CPS guidance on drafting a prosecution under section 4. Promisingly from this guidance, it is made clear that Section 4 is “entirely offender focused”, in that, “it is immaterial whether or not he is successful in his enterprise and whether or not any gain or loss is actually made”. This is pivotal, regarding whether the CPS has to demonstrate whether there was an actual gain from the action of the banks, compared to the alternative scenario where the banks had not fiddled the LIBOR rate in secret. The CPS explain nonetheless that, as with all the Section 1 offences, although there need be no consequences to the offending, the existence and extent of those consequences will be very material to sentence and potential remedies.
Tolley’s Practical Audit and Accounting (June 2011) gives some examples of where an abuse of position may be held out: “This offence is committed by dishonestly abusing a position of trust recognised in certain relationships, such as exist between director and company, professional and client and employer and employee. The directors are under a duty to act in good faith and in a way which is likely to promote the success of the company, in the interests of its members as a whole.” However, it is the lack of very similar precedents which makes it extremely hard to predict whether a section 4 Fraud Act offence is satisfied, and legal bloggers who cite section 4 so confidently should in fact do so with care, in my opinion.
One final note, it is interesting to observe that there are extra-jurisdictional aspects to the enforcement of the law in this specific scenario. It has just emerged(this morning 2 July 2012) that 14 Barclays traders alleged to be at the centre of the global market-fixing scandal are being investigated by the FBI. The FBI could attempt to extradite any Britons involved in the affair to the United States if it finds there is a case to answer. It has also been claimed that the US justice department has a 28-page statement of facts disclosing how a network of traders working on both sides of the Atlantic conspired to influence the interbank lending rate. According to the Mirror on 30 June 2012, a US source said Barclays now fears senior staff could end up in the dock in a widespread probe which “could eventually lead to the top of the tree”.
The author is very grateful for helpful comments made by @felicitygerry on a previous version of this blogpost. The author should like very much to acknowledge the contribution of @jerryhayes1, @nedbar1, @frankiescar and @jamespsvine.
