US Government, ex-Deutsche Bank traders clash over BBA witness testimony in LIBOR case

Maria Nikolova

The defendants argue that only a BBA witness can testify on its expectations about LIBOR submissions.

Matthew Connolly and Gavin Campbell Black, former derivative product traders at Deutsche Bank, have clashed with the United States Government over the necessity of testimony of a witness from the British Bankers’ Association (BBA) in LIBOR manipulation case.

The case, captioned USA v. Connolly (1:16-cr-00370), 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 stated that at trial it will present evidence that:

  •  the BBA published a definition of LIBOR which made clear that submissions were supposed to represent the submitter’s assessment of the bank’s borrowing costs;
  • Deutsche Bank LIBOR submitters, who will testify as cooperating witnesses, understood that the direction in which a trader wishes LIBOR to move in order to make money had nothing to do with the Bank’s borrowing costs and that they viewed their submissions as being dishonest, biased and inconsistent with this definition;
  • notwithstanding their understanding of LIBOR’s definition, Deutsche Bank’s submitters agreed with the defendants to change their submissions to suit the defendants’ trading positions; and
  • Deutsche Bank’s counterparties will testify that they believed that LIBOR was an impartial benchmark and the knowledge of Deutsche Bank’s efforts to skew the number against them would have been important to their decision making regarding their trading and trades with Deutsche Bank.

According to the US government, this evidence proves a scheme to defraud and that each point above may be established without the testimony of a BBA witness.

The US Government insists that it is not going to characterize the BBA as a victim at trial and is not suggesting that the BBA was complicit in the scheme. In short, the Government argues that it does not need to call a witness from the BBA because its theory of prosecution is that the defendants intended to trick their counterparties, not the BBA. Whether or not the BBA was deceived, indifferent, or complicit does not matter.

On Monday, January 8, 2018, Defendants Matthew Connolly and Gavin Campbell Black submitted a memorandum of law in response to the Government’s memorandum of law concerning the British Bankers’ Association.

The ex-traders argue that the Government’s statement does not address a key point in the case, that is, the definition of LIBOR used by the BBA. In particular, the defendants argue that the Government cannot establish that the LIBOR submissions were “false and fraudulent” without showing that they violated the BBA rules because, as alleged, the BBA both established and administered the rules governing LIBOR submissions. This establishment cannot happen absent evidence of the BBA’s expectations.

According to the defendants, given that the alleged misrepresentations were made only to the BBA, the Government must also prove that the alleged misrepresentations were material to the BBA.

Matthew Connolly worked as the Director of Deutsche Bank’s Pool Trading Desk in NewYork from at least in or about January 2005 through in or about March 2008. During that period, certain traders that Connolly supervised traded derivative products that referenced USD LIBOR, among other products. Because these trades were settled based on the published USD LIBOR, the profitability of Connolly’s traders’ trading positions depended on the direction in which USD LIBORs moved.

Gavin Campbell Black worked as Director on Deutsche Bank’s Money Market Derivatives and Pool Trading Desks in London from at least in or about February 1997 through at least early 2015. During that period, he traded derivative products that referenced USD LIBOR among other products. Because these trades were settled based on the published USD LIBOR rate, the profitability of Black’s trading positions depended on the direction in which USD LIBORs moved.

According to the Indictment, from at least 2005 through at least in or about 2011, Connolly and Black , the defendants, together with other traders, engaged in a scheme to obtain money and property by making false and fraudulent USD LIBOR submissions to the BBA for inclusion in the calculation of USD LIBOR representing that the rates submitted were an unbiased and honest estimate of the bank’s borrowing costs when in fact the submissions reflected rates that were designed to benefit their trading positions.

The scheme had an effect on one or more financial institutions, within the meaning of Title 18, United States Code, Sections 20 and 3293(2). The conduct of the conspirators caused financial institutions to be susceptible to substantial risk of loss and to suffer actual loss. Deutsche Bank conducted a substantial internal investigation, risked sustaining significant harm to its commercial and financial reputation, and agreed to pay approximately $625 million in penalties to the United States Department of Justice as a result of the conduct alleged in this Indictment, and DB Group Services UK Limited, one of its subsidiaries, agreed to pay an additional fine of approximately $150 million.

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