Last updated: December 19, 2012 8:24 pm

UBS pays price for ‘epic’ Libor scandal

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UBS agreed to pay a record SFr1.4bn ($1.5bn) to US, UK and Swiss regulators to settle allegations of “pervasive” and “epic” efforts to manipulate interbank lending rates as two of its former traders faced the first criminal charges in the worldwide Libor scandal.

The Swiss bank’s Japanese subsidiary pleaded guilty to criminal wire fraud as the group acknowleged that dozens of employees had attempted to manipulate the London Interbank Offered Rate and similar interbank lending rates between 2005 and 2010.

The penalty is the highest paid by a bank to US and UK regulators and signals a new front in the sprawling four-year investigation that has drawn in close to 20 banks and interdealer brokers. Both US and UK regulators said the scale of wrongdoing at UBS far exceeded that at Barclays, which settled with authorities in June for $450m.

The US Department of Justice charged Tom Hayes and Roger Darin with conspiring to manipulate yen Libor rates to benefit their trading positions. Mr Hayes, a former Tokyo-based trader at both UBS and Citigroup, was also charged with wire fraud and antitrust violations for allegedly colluding with interdealer brokers to influence other banks’ Libor submissions.

The FSA and the US Commodity Futures Trading Commission also accused UBS traders of such collusion.

“Make no mistake: for UBS traders the manipulation of Libor was about getting rich,” said Lanny Breuer, US assistant attorney-general. “As one broker told a UBS derivatives trader: ‘Mate yur getting bloody good at this libor game ... think of me when yur on yur yacht in monaco won’t yu’.”

He added: “The scheme alleged is epic in scale.”

Libor is compiled in 10 currencies from banks’ estimates of their daily borrowing rates and used to price more than $350tn in contracts worldwide.

Tracey McDermott, the enforcement chief at the UK’s Financial Services Authority, said UBS’s conduct “demonstrated a completely cavalier approach by a large number of the importance of Libor and a complete disregard for other market users as opposed to their own financial position.”

Swiss-based Mr Darin was responsible for making and supervising UBS’s submissions to the Libor rate-setting process.

Mr Hayes’ London-based lawyer did not respond to requests for comment on Wednesday. He has previously declined to comment. Mr Darin’s lawyer declined to comment. Last week, Mr Hayes and two other men – but not Mr Darin – were arrested in the UK and bailed without charge pending further investigation.

Interactive graphic

Understanding Libor

Understanding Libor

What is the London interbank offered rate and how did things go wrong?

In March 2011, UBS became the first bank to disclose it was under investigation for attempted manipulation of Libor. It has already reached a deal with Japanese regulators to settle allegations that its traders attempted to manipulate Tibor, the Tokyo based benchmark.

The UK Financial Services Authority released findings that between 2005 and 2010 “the widespread and routine nature” of attempts to manipulate Libor and Euribor rates by UBS traders and control failures meant that “every Libor and Euribor submission in currencies and tenors in which UBS traded is at risk of having been improperly influenced”.

The Swiss bank will pay $1.2bn to the US Department of Justice and Commodity Futures Trading Commission and £160m to the FSA. The bank will also disgorge SFr59m in profits to Finma, the Swiss regulator.

Sergio Ermotti, UBS chief executive, said the bank had taken action to strengthen controls. “We deeply regret this inappropriate and unethical behaviour. No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity,” he said in a statement.

UBS expects the fines to contribute to a net loss of between SFr2bn and SFr2.5bn in the fourth quarter.

Mr Hayes, a senior trader in Tokyo, “orchestrated a sustained, wide-ranging and systematic scheme to move yen Libor in a direction favorable to Hayes’ trading positions, defrauding UBS’ counterparties and harming others with financial products referencing yen Libor”, US prosecutors alleged in court documents.

From late 2006 to August 2009, prosecutors allege, Mr Hayes sought to manipulate the yen rate at least 335 of 738 trading days and at times almost daily. Mr Hayes estimated a 0.01 per cent move in the final yen Libor rate could result in a $2m profit for UBS, it is alleged.

Mr Darin at the time was a trader responsible for submitting the bank’s Libor rate to the BBA. Prosecutors allege he conspired with Mr Hayes to manipulate the bank’s submission to the rate-setting panel to benefit the bank’s trading positions.

In one exchange in May 2007, Mr Hayes asked Mr Darin, “can we go low 3 [month] and 6 [month] pls . . . 3 [month] esp.”

Mr Darin replied, “OK,” according to the criminal complaint.

Like Barclays, UBS has admitted to two kinds of manipulation. It admitted that traders tried to move the Libor rate up and down to make money on derivatives and that it understated its reported borrowing rates during the financial crisis to make the bank appear stronger.

The FSA said the bank made “corrupt brokerage payments” to reward brokers who participated in the manipulation scheme.

In one instance, the UK watchdog reports that a UBS trader told a broker that if he left a particular rate unchanged that day: “I will f***ing do one humongous deal with you . . . I’ll pay you, you know, 50,000 dollars, 100,000 dollars . . . whatever you want.”

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