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WSJ: Banks to Pay $5.6 Billion in Probes

May 20, 2015
In The News

Wall Street Journal original article here.

Five global banks agreed to pay more than $5 billion in combined penalties and plead guilty to criminal charges to resolve a long-running U.S. investigation into whether traders colluded to move foreign-currency rates for their own financial benefit.

The settlements largely close the book on the latest industrywide investigation, one of a steady stream of probes into mortgage misdeeds, manipulative trading behavior and tax evasion. The biggest global banks have paid more than $60 billion in penalties over the past two years to resolve allegations of wrongdoing.

Four of the banks, Barclays PLC, Citigroup Inc., J.P. Morgan Chase & Co. and Royal Bank of Scotland Group PLC, pleaded guilty on Wednesday to conspiring to manipulate prices in the $500 billion-a-day market for U.S. dollars and euros, authorities said.

The fifth bank, UBS AG, received immunity in the antitrust case but pleaded guilty to manipulating the London interbank offered rate, or Libor. It will pay a fine for violating an earlier accord meant to resolve those allegations of misconduct, bringing the total the five banks agreed to pay to $5.6 billion.

The possibility of five large banks pleading guilty to criminal charges in a single day—including the largest and third-largest U.S. banks by assets, J.P. Morgan and Citigroup—would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business. But other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations. The five banks said they expected little disruption to business.

The size and scope of the resolutions reflect authorities’ attempts to crack down on what they called “breathtaking” misconduct, with some of the largest fines levied to date by the Justice Department for antitrust violations. Prosecutors also took the unusual step of ripping up a prior agreement with UBS as a result of subsequent violations and extracted the first criminal guilty pleas from big U.S. banks in decades.

“These unprecedented figures appropriately reflect the conspiracy’s breathtaking flagrancy, its systemic reach and its significant impact,” Attorney General Loretta Lynch said.

The Justice Department didn’t announce charges against individuals at any of the banks, with Ms. Lynch saying only “that investigation is ongoing.” New York’s financial regulator said it required Barclays to fire eight employees in connection with its resolution.

All five banks secured necessary waivers from the Securities and Exchange Commission that allow companies convicted of criminal charges to continue operating certain businesses, including running mutual funds and issuing stocks, without deep regulatory review, people familiar with the matter said.

Shares of the U.S. banks fell slightly, while the stocks of the European banks rose.

The agreements wrap up the biggest piece of the foreign-exchange investigations and largely end, at least for the banks, the biggest remaining industrywide probe of misconduct. Other global regulators have active investigations, and the U.S. is continuing to pursue individuals. The banks are also still exposed to private lawsuits, and Citigroup said on Wednesday that it would settle a suit from investors that levied similar accusations.

The penalties extracted on Wednesday by the Justice Department and Federal Reserve are expected to be routed to the U.S. Treasury Department.

Separately, Barclays was fined $115 million on Wednesday by the Commodity Futures Trading Commission for allegedly attempting to manipulate a benchmark interest rate, the International Swaps and Derivatives Association Fix, from 2007 to 2012. The benchmark is widely used in setting payout rates on pension funds and determining the cost of real-estate loans.

In the currencies probe, the banks blamed the conduct on a small group of traders and suggested the problems weren’t systemic throughout their firms.

“The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us, and have significant ramifications for the entire firm,” said J.P. Morgan Chief Executive Officer James Dimon, who added that the bank is working to fortify its controls.

Authorities said traders at each bank communicated through an online chat room dubbed the “Cartel,” working to execute trades that would benefit others in the group. “If u bigger. He will step out of the way…We gonna help u,” one Barclays trader told one from Citigroup in 2011, according to documents released in connection with one of the settlements.

The currency traders communicated through coded language in the chat room to coordinate attempts to move rates set at 1:15 p.m. and 4 p.m., authorities said. Officials said a 19-month investigation showed traders withholding bids or offers to avoid moving the rate in directions that would hurt positions held by other members of the group, in violation of antitrust laws.

Members of the group discussed whether to allow one Barclays trader to join the chat room and ultimately decided to let him in for a “1 month trial,” but advised him: “mess this up and sleep with one eye open at night,” according to the New York State Department of Financial Services.

The fines, which include penalties from the Federal Reserve and other regulators, come on top of a combined $4.3 billion many of the same banks paid in November to resolve similar charges from U.K. regulators and other U.S. agencies.

Bank of America Corp. will also pay a $205 million penalty to the Fed to resolve the regulator’s foreign-exchange probe. Bank of America didn’t face similar action from the Justice Department. The bank said it would pay for the settlement out of existing reserves.

Citigroup, which was accused of being involved in the misconduct from December 2007 through January 2013, is paying the largest criminal fine of $925 million, in addition to a Fed penalty of $342 million. The other banks were accused of engaging in the conduct for various periods within that time frame. Citigroup is among the biggest currency-trading banks.

“The behavior that resulted in the settlements we announced today is an embarrassment to our firm, and stands in stark contrast to Citi’s values,” CEO Michael Corbat wrote in a memo to employees, adding its internal investigation has so far resulted in nine terminations.

Under its settlement with the Justice Department, J.P. Morgan will pay a fine of $550 million, while the Fed penalty is $342 million. The bank said in a statement that it has previously set aside reserves for the settlements. Banks typically don’t disclose specific figures for legal provisions.

One bank, Barclays, pulled out at the last minute of the November settlement with regulators and is now paying $2.38 billion to the Justice Department, the Federal Reserve, the Commodity Futures Trading Commission, the New York State Department of Financial Services and the U.K. Financial Conduct Authority.

It also agreed that its foreign-exchange trading and sales practices violated its 2012 Libor agreement and agreed to pay an additional $60 million penalty.

Prosecutors said UBS similarly engaged in foreign-exchange trading and sales practices after its 2012 agreement, including by adding undisclosed markups to certain customers’ transactions in which traders and sales staff told customers there were no markups added.

In July 2013, one of the bank’s salespeople in Stamford, Conn., described plans in a chat room to let a client listen over an internal communication system without telling the customer traders had already agreed on a marked-up price. One UBS trader also engaged in the same collusive behavior in the euro and dollar market, but the bank wasn’t charged over that conduct because it had obtained immunity by being the first bank to report the possible antitrust violations.

In statements, Barclays, RBS and UBS condemned the actions of a small number of employees and said they are working to improve compliance and controls.

The five banks will be under a three-year period of probation, overseen by federal judges.