Swiss banking giant UBS has become the second global financial institution to enter a series of massive regulatory settlements in connection with the ongoing Libor scandal investigation. As detailed in its December 19, 2012 press release (here), UBS has agreed to pay a total of about 1.4 billion Swiss francs (about $1.54 billion at current exchange rates) in fines and disgorgements to regulators in the U.S., U.K. and Switzerland to resolve Libor-related investigations. Background regarding the Libor-scandal investigations can be found here.


The regulatory settlements include the company’s agreement to pay a $700 million penalty to settle charges with the U.S. Commodities Futures Trading Commission, as disclosed in the CFTC’s  December 19, 2012 press release (here); an agreement to pay a 160 million U.K. pound penalty (about $259.2 million) to the U.K. Financial Services Authority, as discussed in the FSA’s December 19, 2012 Final Notice (refer here); an agreement with the Swiss securities authority, FINMA, to pay a fine of about $64.3 million, as discussed in FINMA’s December 19, 2012 Press Release (here).


In addition, UBS’s wholly-owned subsidiary, UBS Securities Japan Co. Ltd., has agreed to plead guilty to one-count of a felony wire fraud in a criminal information filed in the District of Connecticut against the subsidiary. According to the U.S. Department of Justice’s December 19, 2012 press release (here), the subsidiary has agreed to pay a $100 million penalty. The Swiss parent company has also entered a non-prosecution agreement with the DoJ requiring UBS to pay an additional $400 million penalty.  The DoJ’s December 18, 2012 statement of facts in connection with the non-prosecution agreement can be found here.


The $500 million in criminal penalties together with the other amounts that the company has agreed to pay in the related regulatory settlements brings the total cost company’s total resolution costs to over $1.5 billion.


The Department of Justice press release also discloses that in addition to the criminal information filed against UBS Japan, the DoJ has also filed a criminal complaint in federal court in Manhattan against two former senior UBS traders, Tom Alexander William Hayes and Roger Darin, charging them with conspiracy, wire fraud and price fixing in connection with their alleged attempts to manipulate Yen Libor interest rates in order to produce trading profits in derivatives trading positions that Hayes maintained. A copy of the criminal complaint can be found here.


The various regulatory filings describe a course of conduct that was both extensive and enduring. For example the FSA Final Notice alleges violations over a six-year period between January 2005 and December 2010. The Final Notice alleges that the manipulation of Libor rates were “routine, widespread and condoned by a number of Managers with direct responsibility for the relevant business area.” The Final Notice “engaged in this serious misconduct in order to serve its own interests.” The misconduct “caused serious harm to other market participants.”


The regulatory filings contain particular detail regarding the alleged manipulation of the Yen Libor rate, but the UBS press release report that the alleged misconduct involve a number of different benchmark rates including, in addition to the Yen Libor: the Libor rates for the Great Britain Pound, the U.S. Dollar, the Swiss France, and the Euro, as well as Euribor rates and the Euroyen Tibor rates.


The regulatory and criminal filings not only allege that UBS attempted to manipulate Libor benchmark rates and other benchmark rates by gaming its own rate submissions to the rate-setting authorities, but also that UBS traders attempted to manipulate the rates through conversations and requests made to and through interdealer brokers and even to and through other Libor panel banks. The CFTC’s press release references “more than 2,000 instances of unlawful conduct involving dozens of UBS employees, colluding with other panel banks and inducing interdealer brokers to spread false information and influence other banks.” The CFTC filing expressly states that through these efforts UBS “at times succeeded in manipulating the fixing of Yen Libor.”


UBS’s negotiated settlements resolves the pending regulatory and criminal investigations but they hardly represent the end of the company’s Libor-scandal related woes. As the company itself acknowledges in its December 19 press release, investigations by other regulatory authorities, as well as private litigation, “remain ongoing notwithstanding today’s announcements.”


Indeed, the various filings and submissions will certainly prove to be extraordinarily helpful to the plaintiffs in the various lawsuits already pending against the company, particularly the consolidated Libor-related antitrust litigation pending in federal court in Manhattan. The regulatory filings are replete with rich details of the alleged efforts to manipulate the benchmark, some of theme quite provocative. The CFTC helpfully excerpted particularly noteworthy examples of supposedly manipulative communications in a separate page on its website; these carefully culled excerpts undoubtedly will make their way into amended pleadings in the various pending antitrust cases. In addition attached to the criminal complaint are copies of the emails and other written communications upon which the DoJ relied in bringing the criminal charges.


The extensive detail provided in the regulatory and criminal filings will substantially bolster the claimants’ allegations in the pending civil cases and could even encourage other claimants to come forward. As noted in a December 19, 2012 Economist Magazine article about the settlement entitled “Horribly Rotten, Comically Stupid“ (here), “the details in these settlements suggest that lawyers representing clients in a clutch of class-action lawsuits in America against banks including UBS will have a field day.”


Moreover, as detailed in the Wall Street Journal’s December 19, 2012 article entitled “Why the UBS Settlement Really Matters” (here), the various regulatory filings contain extensive factual material suggesting that UBS not only attempted to manipulate the benchmark rates, but that working through interdealer brokers and other Libor panel banks, actually succeeded in manipulating the benchmark rates. The regulators’ affirmative allegation that UBS “succeeded” in manipulating the Libor rates could significantly boost the antitrust claimants’ allegations. The Economist article linked above observed that “UBS tried and apparently succeeded in some cases in getting other firms to collude in manipulating rates. That collusion strengthens the case of civil litigants in America who are arguing in court that banks worked together to fix prices.”


There is another interesting aspect to the alleged involvement of the third-party interdealer brokers. These allegations suggest for the first time that the pool of potential defendants for the claimants to target potentially could go beyond just the Libor rate-settling banks themselves. Indeed, last week when British authorities arrested three individuals in connection with the ongoing Libor scandal, two of the three men arrested were employees of interbroker dealer RP Martin. (The third individual is Thomas Hayes, the former UBS and Citi trader named as one of the defendants in the DoJ’s criminal complaint mentioned above.)


The FSA Final Notice specifically alleges, without naming the interbroker dealers involved, that at least four UBS Traders made more than 1,000 requests to eleven brokers at six broker firms in connection with efforts to manipulate rates. The implication is that these six interbroker dealer firms could not only themselves become embroiled in the ongoing investigation but also that they could get drawn into related civil litigation.


Just as additional private civil litigation followed in the wake of Barclays’ entry into regulatory settlements earlier this year, it seems probable that there could be further civil litigation given the revelations and allegations in UBS’s regulatory settlements. For example, shortly after Barclays announced its settlements, there was a raft of follow-on litigation filed. In particular, the company’s shareholders filed securities litigation against the company and certain of its officers alleging material misrepresentations about the company and its internal controls. In light of the regulatory allegations against UBS, and in particular regulatory allegations about the weaknesses of UBS’s internal controls, it would not be surprising if shareholder litigation involving UBS were to be filed. (Though UBS is based in Switzerland, its shares trade on the NYSE exchange. UBS shareholders that purchased their shares on the U.S. exchange could assert claims against the company under the U.S. securities laws.)


While the factual allegations in the various regulatory filings undoubtedly will bolster the claims of private civil litigants, the factual allegations do not provide much help with regard to at least one of the barriers the antitrust claimants face. As I noted in my overview of the Libor-scandal related issues (here), the manipulation of Libor benchmark rates did not necessarily hurt everyone involved in Libor-sensitive transactions. Some market participants would have been aided by the manipulation, particularly debtors whose interest payment obligations were suppressed by benchmark manipulation. Some market participants likely were both helped and hurt across their entire financial portfolio. To further complicate things, the latest allegations seem to suggest that traders maneuvered to push rates up at times and at other times to push them down. Though the regulatory filings assert that UBS’s attempts to manipulate the benchmark rates “caused serious harm to other market participants,” these conclusory allegations, though helpful for the claimants, will not solve the claimants’ problems of substantiated how and to what extent the manipulations damaged the claimants.


(At the same time, there are some strong suggestions elsewhere that some investors were significantly hurt by the manipulation of Libor and other benchmark rates. For example, the Wall Street Journal is reporting in a December 19, 2012 article that, according to an as yet unpublished internal report from the inspector general for the agency’s regulator, the interest income losses on mortgage backed securities held at Fannie Mae and Freddie Mac due to the manipulation of the benchmark rates may have exceeded $3 billion. The report supposedly recommends that the agencies consider their legal options.)


One particular aspect of the UBS regulatory settlements that the other banks involved in the scandal will want to note is the fact that, as massive as were the fines and penalties to which UBS agreed, the fines and penalties could have been even higher were it not for UBS’s cooperation. The FSA final notice specifically states that UBS received a 20% discount for its cooperation; without its cooperation, UBS’s 160 million pound settlement would have been 200 million pounds. The CFTC also acknowledged UBS’s cooperation. The message to the other Libor panel banks is not only that it could be very costly for them to extricate themselves from the regulatory investigations but also that if their cooperation is not forthcoming it could be even worse for them.


The guilty plea of the UBS subsidiary is obviously a significant development as well, but it is not unprecedented. In September 2009, in connection Pfizer’s agreement to pay what was the largest criminal fine in U.S. history in connection with the alleged misbranding of certain pharmaceuticals, one of Pfizer’s subsidiaries agreed to plead guilty to one count of misbranding of a pharmaceutical. 


Alison Frankel has a particularly strong commentary on the factual allegations in the regulatory filings relating to UBS’s regulatory settlements in a December 19, 2012 post on her On the Case blog (here).