A US federal appeals court has overturned the convictions of two former Deutsche Bank traders found guilty of manipulating interest rates, a decision that clashes with UK courts.
Matthew Connolly, 58, from New Jersey and Gavin Black, 52, from Twickenham, Middlesex, were accused in 2016 by US prosecutors of conspiring with other traders and colleagues to submit false rates in order to influence the daily London interbank offered rate, know as Libor.
The Libor benchmark has largely now been phased out but was a system to figure out how much banks should pay to borrow money from other banks. It was used to set interest rates on millions of residential and commercial loans around the world.
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The figure was released daily on an average of what 16 banks said they were willing to pay to borrow.
Prosecutors said Connolly directed subordinates to arrange false submissions consistent with his traders’ interests, while Black encouraged false submissions to benefit his own derivative trading. The alleged conspiracy ran from 2004 to 2011.
Connolly had led Deutsche Bank's pool trading desk in New York, while Black worked on the bank's money market and derivatives desk in London.
The evidence against traders, both in the US and the UK, were emails and messages requesting that colleagues publish "high" or "low" estimates of the cost of borrowing cash.
Both were found guilty in October 2018 on charges of wire fraud and conspiracy to commit wire and bank fraud.
Connolly was sentenced to six months of home confinement and ordered to pay a $100,000 fine (£74,000), while Black received nine months of home confinement and a $300,000 fine.
The trial was one of the US government’s highest-profile court victories linked to the 2008 financial crisis.
But now, a three-judge panel from the Second US Circuit Court of Appeals in Manhattan ruled the US government “failed to show that any of the trader-influenced submissions were false, fraudulent or misleading”.
All US trial convictions in the crisis-era Libor rigging have now been overturned.
The legal judgement that it was not against the rules to seek to influence the estimates a bank submits of the cost of borrowing cash clashes with a British appeal court ruling that was used to prosecute 24 traders in the UK.
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Former UBS and Citigroup trader Tom Hayes was jailed in the UK for conspiring to rig the Libor benchmark interest rate in 2015.
The first person in the world to be found guilty by a jury over the Libor scandal, Hayes was sentenced to 14 years in prison, later reduced to 11 years.
He was released from prison after serving five-and-a-half years. Eight other traders were jailed between 2015 and 2019.
According to UK judges, banks were not allowed to take into account commercial interests, such as trading positions linked to the Libor rate, when making their estimates.
In practical terms, interest rate rigging is a crime in the UK but not in the US.
Deutsche Bank in 2015 agreed to pay $2.5bn in fines to resolve Libor charges in the US and the UK, and a London unit of the bank pleaded guilty in the US to one count of wire fraud.
The scandal set in motion the end of the Libor benchmark, with the interest rates being phased out and banks banned from entering new contracts using the index.
Most countries have settled on a single replacement for Libor, such as the sterling overnight index average (Sonia) in the UK, Japan’s Tokyo overnight average rate (TONAR) for the yen, or the euro short-term rate (€STR) in the EU.
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