Libor/Euribor – Endgame

In a recent article published in Law360 on June 19, 2024, we examined the alternative time-line of what would have happened had the US not intervened in the question of derivative contracts referencing Libor and Euribor rates. Since then, two additional developments have occurred, which could finally put to rest the narrative around Libor/Euribor criminality in the UK.

The first development was Matthew Connolly withdrawing a claim against Deutsche Bank for $ 150m for malicious prosecution. The terms are not known, but the fact of the settlement strongly suggests a divergence from approach a decade ago when banks clawed back bonuses and sacked Euribor and Libor traders.  The second significant development was that the UK Supreme Court granted Tom Hayes and Carlo Palombo leave to appeal their UK Criminal Court of Appeal decisions on a point of law of general public importance. The Supreme Court hearing date is now set for March 2025.

By way of recap the UK Court of Appeal (Criminal Division) in 27 March 2024[1] (“R v Hayes and Palombo”) looked at the questions of whether the Libor and Euribor convictions of Tom Hayes and Carlo Palombo respectively were “safe”.

In summary, it found that judges and jury had correctly applied the law and facts and that the two named individuals were correctly convicted.

In a detailed judgment, it relied on Tom Hayes confessions in interview in relation to Libor manipulation and in the case of Palombo went down a rabbit hole of whether Belgian contract law is applicable to the Euribor Code and thereby impacting on ISDA (International Swap and Derivatives Association  (“ISDA”) master agreements (used in international swap trading) and which are normally governed by the laws of either England and Wales, or New York, United States.

The Court of Appeal disregarded the opinion of the United States Court of Appeals, Second Circuit (US v Connolly) 2022[2], which found over a decade later after initial US investigations began that Libor “manipulation” was not a criminal offence in the US and that the Libor code should be interpreted differently, when applied in US derivative trading.

Decisions in Germany and France were also irrelevant to the Court of Appeal, which is still bound by European Court of Human Rights principles via the Human Rights Act 1998.  The Court of Appeal also disregarded the Serious Fraud Office´s initial case about applying the correct rate and came to its own conclusion that the one true Libor/Euribor rate was the lowest rate possible (see paras 91 and 95 of R v Hayes and Palombo).

The “one true-rate” theory is however the exact one dismissed by both the United States Court of Appeals, Second Circuit, US v Connolly (2022) opining about the interpretation of British Libor. This theory was posited by the US Government stating that traders and submitters did not have a subjective range to choose a rate from; “You borrow at the lowest rate. There´s no range” (Line 15 US v Connolly), giving the submitters and banks far less discretion in making their submissions.

The UK Court of Appeal considered whether the above was also compatible with the principle of legal certainty, which requires criminal law to be sufficiently clear so people know what laws they are breaking, (e.g. Belgian contract law and two to three ever evolving and almost oxymoronic definitions of Libor setting). The Court deemed it was. Take it from an EU-qualified lawyer, a European court most certainly would not.

What the Court was not required to do, but logically could have considered out of fairness and natural justice, was to examine the alternative timeline of what would have happened if the UK Financial Conduct Authority (“FCA”) and the UK Serious Fraud Office had attempted to investigate Libor/Euribor breaches with the facts and legal decisions known today., i.e. it was not a crime outside the UK, and that civil claims in all jurisdictions including the UK would be dismissed[3]. 

Applying a healthy dose of hindsight

Rolling back the calendar to 2012, when Libor and Euribor investigations were on the rise, we can now assume the US Commodity and Trading Futures Commission, (“CFTC”) and Department of Justice (“DoJ”) would not have investigated and fined US-based banks for breaches of Libor/Euribor manipulation. No US individual would have been charged, and none of the individuals in the US would have had an offence to plead guilty to.

The US would not have sought Tom Hayes´ extradition to face trial in New York. Without the kraken-like reach of US justice, the FCA and SFO, would have had to proceed unilaterally in deciding to fine banks and charge individuals or bring enforcement action against them. No impetus would have gone out from the FCA. In the absence of US pressure on the banks in the US, the same banks in the UK would not have pleaded guilty to Libor/Euribor charges, let alone given evidence in criminal proceedings against traders on both sides of the Atlantic.

One of the world’s biggest exchanges for swaps trading, the Chicago Mercantile Exchange may have given additional evidence in support of its letter to the British Banking Authority in 2008 that Libor setters had a discretion (aka “a range”) when assessing what the Libor setting could be and there was no “one true-rate”(see para 95 of R v Hayes and Palombo).

UK Parliamentary inquiries have found that the FCA underwent significant pressure from the US to act. Its predecessor, the FSA was accused of being “asleep at the wheel” in relation to Libor. The SFO would unlikely have been pressured into applying for blockbuster funding after initially refusing to take Libor cases on. Simply imagine Desert Shield, Operation Enduring Freedom or the defense of Ukraine without US input and leadership.

The Libor/Euribor trials in the UK if there had been any motivation by UK authorities to act unilaterally to the rest of the world, would have looked very different. Firstly, without the dire threat of time spent in a US prison, it is unlikely that Hayes would have made admissions in interview.  The same can be said for the guilty plea of Peter Johnson, formerly of Barclays, Johnson´s conviction was later admitted against the other Barclay´s traders as evidence in the UK trials.

None of the US-based individuals charged would have travelled to the UK voluntarily or been extradited. None of the French or German individuals would have travelled out to the UK.

If the SFO had brought cases, it would have had to put them on the basis, that the so-called range of settings an individual could choose was permissible in the US, i.e. it was not an internationally settled norm, and never a criminal offence in France or Germany from the onset.

As for Belgian contract law becoming central to the question of misconduct in Euribor reference swaps trading, between the US, UK, Germany and France, that anomaly has no place in any time-line and it is notable that it did not feature in the Euribor civil claims which were all dismissed I the UK High Court[4].

UK justice in the spotlight

 In summary, the alternative reality timeline shows that Hayes and Palombo´s decisions are anything but “safe” and the mess of a decade of wasted investigation into now non-offences, in key financial centres around the world, should finally be put to rest in the UK as well.

Hayes and Palombo´s leave to appeal to the Supreme Court was denied by the very same Court of Appeal, which found their convictions “safe”, however the Court of Appeal did open the way for the Appellants to apply for leave to the Supreme Court to raise a “point of law of general public importance”. Hayes and Palumbo will now be heard by the Supreme Court on whether the “one true rate” theory really exists or is just a construct of the UK criminal justice system.

Many in the public are supporting their case including MP David Davis (the same Mr Brexit who took us further from European criminal law and EHCR protections).

What will the Supreme Court do?

The Supreme Court now faces a huge fork in the road. Confirm the “range/discretion” argument and consign the “one-true rate” theory to history. This would leave investigatory authorities and much of the UK criminal bar looking as overzealous and draconian as their Postmaster counterparts.

On the other hand, it could uphold the “one true rate” theory leaving it out of step with the rest of the world and the UK civil courts. This would raise the ugly question about institutions looking out for themselves and the lack of natural justice and fairness in the UK.

As Yogi Berra said, “when you come to a fork in the road, take it”.