NY Judge challenges US Govt wire fraud allegations in LIBOR-rigging case

The United States Government should do more to convince Judge Colleen McMahon of the New York Southern District Court that Matthew Connolly and Gavin Campbell Black, former derivative product traders at Deutsche Bank, have committed wire fraud. In a document, presenting her thoughts on the case, captioned USA v. Connolly (1:16-cr-00370), the Judge outlined the areas where the Government’s argumentation is insufficient and more work needs to be done.

Let’s recall that the Indictment alleges that the ex-Deutsche Bank traders schemed to manipulate LIBOR by making false and fraudulent submissions that were intended to increase the profits (or reduce the losses) owed to Deutsche Bank at the expense of the bank’s counterparties to the derivatives-based contracts. The Government has charged the defendants with use of the wires in connection with a scheme to defraud.

According to the indictment, the defendants were part of a scheme, carried out between 2004 and 2011, to cause Deutsche Bank, their employer-one of the sixteen “Submitter” banks whose estimated borrowing costs were used by the British Bankers’ Association (BBA), a private entity, to set LIBORs in USD – to submit “false and fraudulent USD LIBOR submissions” to BBA. The Indictment charges that the LIBOR submissions were “false and fraudulent” because they were not “unbiased and honest,” in that they took into account considerations other than the true cost for Deutsche Bank to borrow from other banks at some future date certain-most notably, the trading positions of the defendants and their co-conspirators. Assuming that the Deutsche Bank LIBOR submission was factored into any particular LIBOR, this had the potential to “benefit their trading positions” at the expense o f counterparties to those trades.

In the document, filed on Thursday, March 29, 2018, the Judge notes that her thoughts do not represent a ruling on any motion and that they are a series of observations.

“I have some qualms about the Government’s understanding of the reach of the wire fraud statute”, the Judge says.

She notes that not all sharp business practices that make use of the wires violate the federal wire fraud statute. Sometimes, a sharp business practice is just a sharp business practice – unethical, dishonest, but not criminal. Putting it otherwise, the defendants may well have intended to “cheat” the counter-parties, but “cheat” is not a synonym for “defraud”.

Given that, the Judge argues, the Government’s assertion that it does not need to prove that defendants tried to deceive the BBA, and that it does not need to call a witness from the BBA in order to prove its case, is indeed troubling.

In order to convict the defendants of conspiracy to commit wire fraud, the Government must prove that the statements made by Deutsche Bank’s representatives to the BBA, for the purpose of affecting the level at which various LIBORs were to be set by the BBA, were false. The allegedly false statements were DB’s answers on particular days to the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?” The indictment states that DB made misrepresentation by not always giving “honest and unbiased” responses to that question.

The Judge asserts that the Government would need to establish that the BBA harbored an expectation that LIBOR submissions were not to be shaded by purely self-interested considerations. The Court does not see how the BBA’s expectations could be proved through expert testimony and not through BBA’s testimony.

The Government would also have to work harder with regard to proving materiality. In line with this classic formulation of materiality, the Government would need to prove what statement was made to the BBA, what decision of the BBA the statement was trying to influence (answer: the setting of LIBOR on a particular day at a particular tenor); and whether the false statements made by the co-conspirators on behalf of their employer, DB, were material to the BBA’s decisions on setting particular LIBORs.

The Judge notes one crucial question: whether a defendant can be convicted of violating the federal wire fraud statute by the making of false statements if the Government does not prove that those false statements were “material” to the person to whom they were made. Simply asserting that market participants would have wanted to know about the alleged scheme – which is all the Government has done to date – is not enough of an answer.

In conclusion, the Judge agrees that:

“The defense is right about one thing: “fraud in the air” is not criminally actionable as wire fraud”.

The Judge states that she is open to being convinced that the charged conduct falls within the wire fraud statute but the Government will have to articulate its position far more clearly to overcome her skepticism.