Credit Suisse and Barclays have been fined a total of $154 million over their “dark pool” trading operations in the US.
“Dark pool” operations allow investors to trade large blocks of shares but keep the prices private.
Barclays has admitted misleading investors and violating securities law in the way it operated the pool. The bank will pay a $70 million fine.
Credit Suisse will pay $60 million and another $24.3 million relating to other violations.
The fines will be split between the State of New York and the Securities and Exchange Commission (SEC).
The New York Attorney General and the SEC have both censured the two banks for their misconduct.
New York Attorney General Eric Schneiderman said: “These cases mark the first major victory in the fight against fraud in dark pool trading that began when we first sued Barclays.”
He added that “co-ordinated and aggressive government action” had led to “admissions of wrongdoing, and meaningful reforms to protect investors from predatory, high-frequency traders”.
“We will continue to take the fight to those who aim to rig the system and those who look the other way,” Eric Schneiderman said.
Andrew Ceresney, director of the SEC’s enforcement division said: “Dark pools have a significant role in today’s equity marketplace, and the firms that run these venues must ensure that they do not make mis-statements to subscribers about their material operations.”
Credit Suisse will neither admit nor deny the allegations.
A spokeswoman said the bank was “pleased to have resolved these matters” with the SEC and the New York attorney general.
A Barclays representative said: “The agreement will enable us to focus all of our efforts on serving our clients.”
In 2015, Barclays lost an attempt to have the case dismissed.
Part of the point of dark pool trading systems is to allow institutions to sell large numbers of shares privately, helping to make sure their actions don’t result in a cut in the price they can get.
JPMorgan, UBS, Barclays, Citigroup and RBS have been fined $5.7 billion in the US for charges including manipulating the foreign exchange market.
Four of them – JPMorgan, Barclays, Citigroup and RBS – have agreed to plead guilty to US criminal charges.
UBS will plead guilty to rigging benchmark interest rates.
Barclays was fined the most, $2.4 billion, as it did not join other banks in November to settle investigations by UK, US and Swiss regulators.
The bank is also sacking eight employees involved in the scheme.
US Attorney General Loretta Lynch said that “almost every day” for five years from 2007, currency traders used a private electronic chat room to manipulate exchange rates.
Their actions harmed “countless consumers, investors and institutions around the world”, Loretta Lynch said.
Separately, the Federal Reserve fined a sixth bank, Bank of America, $205 million over foreign exchange-rigging. All the other banks were fined by both the Department of Justice and the Federal Reserve.
Regulators said that between 2008 and 2012, several traders formed a cartel and used chat rooms to manipulate prices in their favor.
One Barclays trader, who was invited to join the cartel, was told: “Mess up and sleep with one eye open at night.”
Several strategies were used to manipulate prices and a common scheme was to influence prices around the daily fixing of currency levels.
A daily exchange rate fix is held to help businesses and investors value their multi-currency assets and liabilities.
Until February, this happened every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.
In a scheme known as “building ammo”, a single trader would amass a large position in a currency and, just before or during the fix, would exit that position.
Other members of the cartel would be aware of the plan and would be able to profit.
The fines break a number of records. The criminal fines of more than $2.5 billion are the largest set of anti-trust fines obtained by the Department of Justice.
Meanwhile, the $925 million fine imposed on Citigroup by the Department of Justice was the biggest penalty for breaking the Sherman Act, which covers competition law.
The guilty pleas from the banks are seen as highly significant as banks have settled previous investigations without an admission of guilt.
The Attorney General warned that further wrongdoing would taken extremely seriously: “The Department of Justice will not hesitate to file criminal charges for financial institutions that reoffend.
“Banks that cannot or will not clean up their act need to understand – it will be enforced.”
Price fixing, although it resembles the strong-armed business approach one might associate with the criminal underworld, is a white collar crime often perpetrated by company executives.
Just as a few local gangs might get together to agree on who gets to operate in which turf or who might handle the prostitution in a certain area, corporate executives get together in conference calls or at high-powered business powwows and settle secret deals on how pricing for various goods and services might be controlled.
That said, price fixing scams can be so far-reaching into a business sector that they can reach gigantic proportions involving some of the world’s best-known companies and some of the biggest dollar amounts ever associated with crime.
Rolling Stone Magazine recently ran a lengthy article on the Libor fixing scandal that could be the largest crime in terms of dollar losses ever committed. The world’s largest banks in the United States, Europe and Asia, including Barclays, UBS, Bank of America, JPMorgan Chase and the Royal Bank of Scotland ,have been caught up in that mess. The actual misdeed was bankers reporting false data to British regulators to try to manipulate the London interbank offered rate, which is supposed to be the average rate banks use when they loan money to each other. But some bankers tried to tip the scales their way to enhance specific deals or to make the bank appear healthier than it was, because a better position is appealing to stockholders.
Price fixing is a white collar crime often perpetrated by company executives
The problem is that an estimated six trillion dollars in commercial and consumer loans use the Libor as a benchmark rate. Tips the rate one way or another and it affects millions of consumers around the world.
Price fixing scams are frequently put into action by companies that are not exactly household names. Look for Ford Motor Company and price fixing online, for example, and you will see Ford is suing auto part suppliers for price fixing. That’s because companies like Ford are too much in the public eye to fix prices. If they change the headlight design of a car that becomes headline news, let alone trying to sneak a price-fixing scheme past the public.
Instead companies like Toyo Tire & Rubber Co., a Japanese company with a client list that included Toyota, Subaru and Nissan, was charged with fixing prices of anti-vibration rubber parts. In November 2013, Toyo settled with the U.S. Justice Department, agreeing to pay $120 million to have an investigation against it dropped..
A series of settlements over price fixing involving well-known and lesser-known airlines has been announced in recent years, but here, again, it is the air cargo side of the business — a little less visible to the average consumer — that has included, to date, 23 settlements by companies that colluded to control prices on air shipping services.
In February, the global law firm Hausfeld LLP, announced that Cathay Pacific had agreed to pay $65 million to settle charges of price fixing for its shipping services. That added to an already impressive list of class action victories that involved All Nippon Airways, American Airlines, British Airways, SAS, Cargolux, Lufthansa and 15 others who paid fines of $3.2 million (Malaysia Airlines) to $115 million (Korean Air) to settle charges against them. In total, the conspiracy has resulted in $758 million in fines that largely get dispersed to Hausfeld’s class action clients who were cheated by the collusion.
Price fixing impacts consumers in two ways. First, controlling prices generally results in artificially high prices for goods or services. Secondly, price fixing can box out competing companies, which hurts their business, resulting in fewer jobs.
Regulators have recognized that Libor fixing has the potential to due considerable harm to consumers as a class and have doled out fines that are among the largest ever meted out for corporate malfeasance. By the end of 2013, financial firms had coughed up $2.3 billion to settle charges of rate manipulation, including Deutsche Bank and Société Générale, which paid fines of $633 million and $606 million, respectfully, to settle charges against them.
Martin Taylor, the former chief executive of Barclays, says the bank has engaged in “systematic dishonesty”.
It comes after Barclays was fined $450 million for trying to manipulate interest rates at which banks lend to each other.
Martin Taylor, who was chief executive of the bank from 1994 to 1998, said that Barclays’ deception looks like a deliberate strategy as it had been going on for years.
Other banks are also being probed.
The chief executive of Barclays, Bob Diamond, has come under pressure to resign.
Barclays has said its actions “fell well short of standards”.
In response, chief executive Bob Diamond and three other top executives at the bank are to give up their bonuses this year.
Investigators say that Barclays’ traders lied to make the bank look more secure during the financial crisis and, sometimes – working with traders at other banks – to make a profit.
Tracey McDermott, director of enforcement at the FSA, which imposed fines alongside the US financial regulator, said: “We have a number of investigations that are ongoing.
“Obviously we need to look at each case on its own particular facts but the initial indications are that Barclays was not the only firm that was involved in this.”
The US Department of Justice also said criminal investigations into “other financial institutions and individuals” was ongoing.
Martin Taylor, the former chief executive of Barclays, says the bank has engaged in "systematic dishonesty"
Other big names believed to be under investigation include Citigroup, JP Morgan, Deutsche Bank, HSBC and Royal Bank of Scotland.
Barclays’ misconduct relates to the daily setting of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).
These are two of the most important interest rates in the global financial markets and directly influence the value of trillions of dollars of financial deals between banks and other institutions.
They can also affect lending rates to the public, for instance with some mortgage deals.
It is not yet clear whether Barclays staff actually succeeded in manipulating the interest rates to the bank’s advantage and therefore whether it had any impact on borrowers.
While the FSA said only that the Barclays employees had attempted to do so, the US Department of Justice said that on some occasions they did affect the LIBOR and EURIBOR rates.
The fine imposed on Barclays is part of an international investigation into the setting of interbank rates between 2005 and 2009.
Each day the British Bankers’ Association (BBA) and the European Banking Association publish the LIBOR and EURIBOR rates by taking an average of the estimated rates submitted to them by leading banks.
Between 2005 and 2008, the Barclays staff who submitted estimates of their own interbank lending rates were frequently lobbied by its derivatives traders to put in figures which would benefit their trading positions, in order to produce a profit for the bank.
And between 2007 and 2009, during the height of the banking crisis, the staff put in artificially low figures, to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.
The FSA pointed out that Barclays traders were quite open about their routine attempts to lobby their colleagues who submitted the bank’s estimate of its borrowing costs to the BBA.
It was particularly concerned because it appeared to be “accepted culture” among some staff.
“Requests to Barclays’ submitters were made verbally and a large amount of email and instant message evidence consisting of derivatives traders’ requests also exists,” the FSA said.
In one instance, a trader recounted a conversation in which he had “begged” the submitter to put in a lower LIBOR figure.
“I’m like, dude, you’re killing us,” he said.
His manager replied: “Just tell him to… put it low.”
In turn, the staff submitting the data would respond to the traders’ requests.
“For you…anything,” said one.
“Done… for you big boy,” said another.
And: “I owe you big time… I’m opening a bottle of Bollinger.”