UBS settles LIBOR manipulation claims for $1.5B and one guilty plea. Looks like some individual prosecutions may follow.

By agreeing to the settlement, UBS also acknowledges that several dozen traders, managers, and senior managers tried to manipulate multiple rates, including the Yen Libor, Euribor, and 4 currencies of the Libor index.  Their subsidiary in Japan will plead guilty to one felony charge in the U.S.

This from multiple media reports. See especially the Wall Street Journal article, UBS to Pay $1.5 Billion to Settle Libor Charges (behind paywall).

One obscure part of the story may turn out to be the biggest – there may be individual prosecutions in the near future

Update:  The U.S. Justice Department has unsealed formal charges against two former UBS employees.  You can read multiple news reports, but can start at the WSJ’s Two Former UBS Traders Charged in Libor Probe, which says:

The former traders, … , who lives in England, and …  a resident of Switzerland, were both charged with conspiracy, the Justice Department said. 

Mr. … was also charged with wire fraud and price fixing.

A quick summary from the WSJ:

As part of the deal, UBS acknowledged that dozens of its employees were involved in widespread efforts to manipulate the London interbank offered rate, or Libor, as well as other benchmark rates, which together serve as the basis for interest rates on hundreds of trillions of dollars of financial contracts around the world. UBS’s unit in Japan, where much of the attempted manipulation took place, pleaded guilty to one U.S. count of fraud

The British regulator, Financial Services Authority, was able to specifically identify over 2,000 attempts to manipulate the rate with knowledge and involvement of at least 45 traders and managers.

The published reports indicate the efforts likely succeeded because of the way the Libor market works.  It is possible they were able to move the rates up or down in order to generate trading profits.  You could make good money if you knew tomorrow’s Libor was going to move a bit higher or lower.  The FSA report should provide a fruitful roadmap to the legion of attorneys interested in the overall fiasco.

The FSA settlement can be found here.

I have limited but growing experience in reading such settlements. This one makes for depressing reading. Here are a few highlights (low points?).

The report says there were 40 people actively involved plus 7 more managers who knew what was going on and another 70 people aware of the situation because it was discussed openly. From the FSA report:

18. A number of UBS managers knew about and in some cases were actively involved in UBS’s attempts to manipulate LIBOR and EURIBOR submissions. In total, improper requests directly involved approximately 40 individuals at UBS, 11 of whom were Managers. At least two further Managers and five Senior Managers were also aware of the practice of the manipulation of submissions to benefit trading positions.

19. Furthermore, the practice of attempts to manipulate LIBOR and EURIBOR submissions to benefit trading positions was often conducted between certain individuals in open chat forums and in group emails, which included at least a further 70 individuals at UBS.

The FSA report does not go so far as to say the firm as a whole was intentional.  However, it looks like they stopped a little bitty ½” short of that conclusion:

189. The FSA does not conclude that UBS as a firm engaged in deliberate misconduct. Nevertheless the improper actions of many UBS employees involved in the misconduct were at least reckless and frequently deliberate. UBS, because of a poor culture in its interest rate derivatives trading business and weak systems and controls, failed to prevent the deliberate, reckless and frequently blatant actions of its employees.

177. A number of UBS Senior Managers and Managers knew about (and in some cases were actively involved in) UBS’s attempts to manipulate LIBOR and EURIBOR submissions, as a result UBS failed to manage the relevant business areas appropriately.

The report implicates Compliance and Internal Audit, both of whom didn’t seem to have any clue what was going on. Again from the FSA report:

178. The routine and widespread manipulation of submissions was not detected by Compliance, nor was it detected by Group Internal Audit, which undertook five audits of the relevant business area during the Relevant Period.

179. UBS’s transaction monitoring systems and controls were inadequate because they failed to detect (and thus prevent) the “wash trades”, which were a device to channel corrupt payments to Brokers.

The ‘wash trades’, according to the FSA report, were used to make payments inter-dealer brokers who helped manage the rates. One email offered a payment of US$50K or US$100K for helping.

Looks like one person has been arrested in England. The WSJ article says several people may be arrested in the U.S. today.