(Reuters) - Four major banks pleaded guilty on Wednesday to trying to manipulate foreign exchange rates and, with two others, were fined nearly US$6bn in another settlement in a global probe into the US$5trn-a-day market.
Citigroup Inc, JP Morgan Chase & Co, Barclays Plc, UBS AG and Royal Bank of Scotland Plc were accused by US and UK officials of brazenly cheating clients to boost their own profits using invitation-only chat rooms and coded language to coordinate their trades.
“The penalty all these banks will now pay is fitting, considering the long-running and egregious nature of their anticompetitive conduct,” said US Attorney General Loretta Lynch at a news conference in Washington.
The misconduct occurred until 2013, after regulators started punishing banks for rigging the London interbank offered rate (Libor), a global benchmark, and banks had pledged to overhaul their corporate culture and bolster compliance.
In total, authorities in the United States and Europe have fined seven banks over US$10bn for failing to stop traders from trying to manipulate foreign exchange rates, which are used daily by millions of people from trillion-dollar investment houses to tourists buying foreign currencies on vacation.
The investigations are far from over. Prosecutors could bring cases against individuals, using the banks’ cooperation pledged as part of their agreements. Probes by federal and state authorities are ongoing over how banks used electronic forex trading to favor their own interests at the expense of clients.
The settlements on Wednesday stood out in part because the US$2.5bn in fines by the US Department of Justice was the largest set of antitrust fines ever obtained in its history.
In what was seen as an unusual flexing of its muscles, the Justice Department also forced Citigroup’s main banking unit Citicorp, and the parents of JP Morgan, Barclays and Royal Bank of Scotland to plead guilty to US criminal charges.
It was the first time in decades that the parent or main banking unit of a major American financial institution pleaded guilty to criminal charges.
Until recently, US authorities rarely sought criminal convictions against the parents of global financial institutions, instead settling with smaller foreign subsidiaries. That made it easier for the government and the banks to control any fallout on the financial system and bank customers.
Banks involved in the plea deals have been negotiating regulatory exemptions to avoid serious business disruptions that could be triggered by the pleas.
Citigroup and JP Morgan will receive waivers from the US Securities and Exchange Commission so they can continue to quickly issue new securities and do business with mutual funds and exchange-traded funds, according to two sources.
Barclays, which agreed to plead guilty to US criminal charges, also will receive waivers so it can continue most of its business activities, another source said.
With prosecutors and the banks working out ways for the institutions to keep doing business, analysts worried that convictions would become more routine and costly for banks.
“The broader problem is that this now sets the stage for the Justice Department to try to criminally prosecute banks for all sorts of transgressions,” said Jaret Seiberg, an analyst at Guggenheim Securities.
Lawyers said the guilty pleas would make it easier for pension funds and investment managers who have regular currency dealings with banks to sue them for losses on those trades.
“There is already a lot of work going on behind the scenes assessing how claims could be brought forward and those potential claimants will be looking to today’s announcement for evidence to support their analysis,” said Simon Hart, banking litigation partner at London law firm RPC.
Citi behaviour “an embarrassment” – CEO
Citicorp will pay US$925m, the highest criminal fine, as well as US$342m to the US Federal Reserve.
Its traders participated in the conspiracy from as early as December 2007 until at least January 2013, according to the plea agreement.
Traders at Citi, JP Morgan and other banks were part of a group known as “The Cartel” or “The Mafia,” participating in almost daily conversations in an exclusive chat room and coordinating trades and otherwise fixing rates.
The bank’s behaviour was “an embarrassment,” Citigroup Chief Executive Officer Mike Corbat said in a memo to employees, which was seen by Reuters.
Corbat said an internal investigation should conclude shortly. So far nine people have been fired.
University of Virginia law school professor Brandon Garrett said the last case comparable to Citi or JP Morgan, involving a major US financial institution pleading guilty to criminal charges in the United States was Drexel Burnham Lambert in 1989.
JP Morgan’s share of the criminal fine was US$550m, based on its involved from July 2010 until January 2013. It also agreed to pay the Federal Reserve US$342m.
JP Morgan Chase said the conduct underlying the antitrust charge was “principally attributable to a single trader” who has been fired.
In New York, shares in JP Morgan and Citigroup were down 0.7% and 0.8%, respectively.
“If you ain’t cheating, you ain’t trying”
Britain’s Barclays was fined a record US$2.4bn. Its staff continued to engage in misleading sales practices despite a pledge by CEO Antony Jenkins to overhaul the bank’s high-risk, high-reward culture.
Barclays’ sales staff would offer clients a different price to the one offered by the bank’s traders, known as a “mark-up” to boost profits. Generating mark-ups was a high priority for sales managers, with one employee noting, “If you ain’t cheating, you ain’t trying.”
Barclays fired four traders in the last month. New York state’s banking regulator Benjamin Lawsky ordered the bank to fire another four who had been suspended or placed on paid leave.
Barclays had set aside US$3.2bn to cover any forex-related settlement. Shares in the bank rose more than 3% to an 18-month high as investors welcomed the removal of uncertainty over the forex scandal.
Swiss bank UBS, which avoided a guilty plea over the forex debacle, pleaded guilty instead to one count of wire fraud and will pay a US$203m fine for its role in rigging Libor after its involvement in the forex scandal breached an earlier DOJ agreement.
UBS, Switzerland’s largest bank, will also pay US$342m to the Federal Reserve over attempted manipulation of forex rates.
The Royal Bank of Scotland will pay a criminal fine of US$395m, and a US$274m penalty to the Fed.
The US central bank fined six banks for unsafe and unsound practices in the foreign exchange markets, including a US$205m fine for Bank of America Corp, which, like UBS, avoided a guilty plea.
UBS’s penalty was lower than expected, and helped its shares rise to their highest in six-and-a-half years.
The global investigation into manipulation of foreign exchange rates has put the largely unregulated forex market on a tighter leash and accelerated a push to automate trading. Authorities in South Africa announced this week they were opening their own probe.
Reporting by Karen Freifeld, David Henry and Steve Slater; Additional reporting by Lindsay Dunsmuir, Joshua Franklin, Katharina Bart and Oliver Hirt
