Justice Department Promises Arrests In “Libor” Financial Fraud Case: Haven’t We Heard This Tune Before?

Lee Farkas, the sole financial executive prosecuted after the 2008 financial crisis

Days after systematic rate-fixing of the London exchange responsible for setting most of the world’s lending rates was uncovered at Barclays, leading to the resignation of that bank’s top executives, the scope of the “Libor” — “London interbank offered rate” — scandal has spread to more banks and could generate criminal charges on both sides of the Atlantic.

Uncovered in the wake of the Barclays mess, where traders and executives at one of Britain’s largest banks stand accused of rigging interests rates and reaping additional profits for years, is a “multiyear” investigation of at least 10 major banks in the United States and Europe. All are alleged to have engaged in the same rate-rigging as Barclays, tampering with the world’s largest interest rate exchange under the noses of regulators.

Barclays has already taken a public hit from the fiasco, seeing its well-known CEO Bob Diamond resign and facing questions from lawmakers in America and the UK, the hunt for answers in the Libor scandal appears to be entering a more aggressive stage.

While US and British regulators continue to uncover details of the alleged rigging, the Justice Department is said to be on the verge of pressing criminal charges against banks and executives or their role in what may be a crime. Charges against at least one bank may be filed by the end of the year, according to the New York Times. 

Bankers and financial executives are said to be “rattled” by the quick response to the Libor scandal by US and UK authorities as well as the prospect of a criminal case, something that not even the 2008 financial meltdown generated. 

 As regulators ramp up their global investigation into the manipulation of interest rates, the Justice Department has identified potential criminal wrongdoing by big banks and individuals at the center of the scandal.

The department’s criminal division is building cases against several financial institutions and their employees, including traders at Barclays, the British bank, according to government officials close to the case who spoke on the condition of anonymity because the investigation is continuing. The authorities expect to file charges against at least one bank later this year, one of the officials said.

The prospect of criminal cases is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. Collectively, the civil and criminal actions could cost the banking industry tens of billions of dollars.

Authorities around the globe are examining whether financial firms manipulated interest rates before and after the financial crisis to improve their profits and deflect scrutiny about their health. Investigators in Washington and London sent a warning shot to the industry last month, striking a $450 million settlement with Barclays in a rate-rigging case. The deal does not shield Barclays employees from criminal prosecution.

The multiyear investigation has ensnared more than 10 big banks in the United States and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, according to lawyers close to the case. In part, they are trying to avoid the public outcry that stemmed from the Barclays case, which prompted the resignation of top executives. 

Financial regulators are working simultaneously on the alleged Libor rigging, building cases against multiple banks and preparing fines and other action to punish those found responsible — Barlcyas has already been levied a fine of roughly $450 million by British authorities.

But the threat of criminal prosecutions is more “potent” to scare and shame banks into changing the way they do business after the lack of criminal action against the financial sector for the mortgage crisis and 2008 crisis preserved the status quo.

With civil actions, regulators can impose fines and force banks to overhaul their internal controls. But the Justice Department would wield an even more potent threat by bringing criminal fraud cases against traders and other employees. If found guilty, they could face jail time.

The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan Chase, have only further fueled the anger of consumers and investors.

But the Libor case presents a potential opportunity for prosecutors. Given the scope of the problems and the number of institutions involved, the rate-rigging investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis.

“It’s hard to imagine a bigger case than Libor,” said one of the government officials involved in the case.

The financial companies and bankers at the heart of the  rigging scandal are now facing a swift response from American and British authorities, but left unanswered are serious questions about the role regulators on either side of the Atlantic played in allowing the Libor scandal to perpetuate since the early 2000′s.

The familiar question of ‘who knew what, and when’ are looming over the Libor case even as the same regulators mete out punishment to banks like Barclays.

Reports indicate that top financial regulators and government officials were aware of suspicious anomalies with the Libor and potentially directly involved in giving banks the authority to set interest rates, priming the system for abuse.

US Treasury Secretary Timothy Geithner may have known about the Libor problems as early as 2008, when he was still president of the New York Federal Reserve . Geithner is alleged to have directly warned British regulators of potential rate-setting abuse on the Libor, but then failing to act for years once he joined President Obama’s administration.

 As long ago as June 2008, New York Federal Reserve President Timothy F. Geithner was warning the Bank of England that letting bankers set the benchmark interest rate for global finance was open to abuse.

…….

 The U.K. central bank has so far defended itself by saying it thought the system was dysfunctional rather than dishonest and that it lacked the powers to effect change. Geithner, now the U.S. Treasury secretary, nevertheless put its officials back on the defensive at the end of last week with the release of a 2008 memo listing ways to make Libor more transparent. 

Among the advice given, Geithner sought new procedures to “prevent accidental or deliberate misreporting” of Libor. While King called the recommendations “sensible,’ he left it to the British Bankers’ Association, which compiles Libor and was reviewing Libor at the time, to decide on whether they should be implemented. The Bank of England said in a statement last week that it didn’t have “any regulatory responsibilities in this area.”

Barlcys and the other banks facing suspicion in the Libor case have actually been the most aggressive in pointing fingers at  regulators and central banks — mainly in the UK but also in America —  for possible complicity in rate manipulation dating back as far as 2005, seeking to shift blame to the government and away from the complicated maze of  tricks that has given the private sector unprecedented power over financial markets.

While details remain sketchy, an undeniable conclusion to be taken from the wreckage of yet another financial scandal is that there has been little reform to a system of cooperation and alliance between private financial companies and the public regulators charged with their oversight.

The protection of this regulatory status quo has accomplished little in the way of meaningful change even after global embarrassments and catastrophes that so many observers predicted would lead to a transformation in the complicated world of finance. Many factors are to blame for this, but one of the most highly visible has been the overwhelming lack of criminal accountability for the veritable avalanche of wrongdoing to come out of the various facets of the ’08 financial crisis.

Some may find it difficult to treat the threat of criminal action by the government against banks and bankers associated with Libor as credible following the almost complete failure by federal agencies to enforce similar accountability against nearly identical targets accused of similar fraud and abuse connected with the global financial mess.

Even today, the Obama administration cannot calculate the number of prosecutions generated from cases associated with the nationwide epidemic of mortgage abuse or other financial wrongdoing stemming from the ’08 crisis.

Unlike previous scandals that plagued Wall Street and corporate boardrooms, the Justice Department has failed to keep a record of individuals brought to justice for crimes connected to the global financial crisis. Critics of the current regulatory system and the government’s handling of cases of financial fraud says this oversight may not be an innocent mistake, as such a list of  ’08-related prosecutions would be “really embarrassing” for the government.

Indeed, most of the thousands of criminals cases and successful prosecutions the Justice Department has publicly touted as connected to the  2008 crisis and subsequent mortgage fraud scandal are merely small-time players or individuals accused of financial crimes only loosely connected to the roots of the abuses that nearly brought down the global economy.

 It is a question that has been asked time and again since the financial crisis: How many executives have been convicted of criminal wrongdoing related to the tumultuous events of 2008-2009?

The Justice Department doesn’t know the answer.

That is because the department doesn’t keep count of the numbers of board-level prosecutions. In a response earlier this month to a March request from Sen. Charles Grassley (R.,Iowa), the Justice Department said it doesn’t hold information on defendants’ business titles.

………

Adding up the numbers of financial chief executives and chief financial officers put behind bars for their role in the crisis shouldn’t be too difficult, they say.

“It’s not a big number to count, that’s for sure,” said Chris Swecker, who ran the Federal Bureau of Investigation’s criminal division from 2004 to 2006.

William Black, a former bank regulator, said the government used to keep these figures.

He points to a 1993 report by the Government Accountability Office on the savings-and-loan crisis of a generation ago. Commenting on the report, the Justice Department rejected any suggestion that “the major crooks responsible for the S&L failures are escaping prosecution.”

Instead, it said, “30 percent of those prosecuted are the major corporate insiders—CEOs, presidents, shareholders, directors and officers” of the affected firms. Some other law-enforcement agencies are keeping a similar tally for the latest financial crisis.

The Securities and Exchange Commission highlights on its website its civil crisis-related enforcement actions against senior corporate officers—a total of 55 so far. Mr. Black, an associate professor of economics and law at the University of Missouri-Kansas City, said it seems “smart” of the Justice Department to no longer keep score of boardroom prosecutions. “I can tell you why you wouldn’t keep the data,” he said. “Because it would be really embarrassing.”

Even the handful of prosecutions directly connected to the fallout from 2008′s market meltdown are mainly of companies and individuals on the fringe of the wider scandal. Not a single executive from some of the most notorious firms at the heart of Wall Street’s implosion or the nationwide mortgage scandal have faced prosecution, let alone arrest.

Countrywide, Lehman Brothers, AIG and other now-infamous companies have been wholly ignored by the Justice Department, facing not a single criminal case stemming from their significant roles in the events of 2008 and beyond.

If you’re looking for arrests and prosecutions against executives associated with the biggest banks, you won’t find them. And we found no arrests of execs with the firms most widely associated with the financial crisis such as Countrywide, AIG or Lehman Brothers.

The highest-profile convictions we found were from Taylor, Bean & Whitaker, which was a mortgage lending firm based not on Wall Street, but in Ocala, Fla. Its former chairman, Lee B. Farkas, was convicted of directing nearly $3 billion in fraud that put thousands out of work and contributed to the collapse of Colonial Bank. The collapse was the sixth-largest bank collapse in U.S. history. A judge sentenced Farkas to 30 years in prison on June 30, 2011. Several other executives associated with the firm pleaded guilty in related cases.

There were also criminal charges brought against two hedge fund managers at Bear Stearns, who were accused of lying to investors and put on trial for securities fraud. But a jury acquitted them in 2009, and the two men were mid-level managers, not top executives.

And while promises are made to bring the perpetrators of the Libor rigging scandal to justice, the federal government has just recently let traders and executives at JPMorgan Chase off the hook for controversial trades that cost the bank a nearly $6 billion loss.