Blurred Lines - Regulatory Sanction & Civil Claims in Banking

Regulatory investigations are an increasingly common part of corporate life, particularly in the financial services sector.  In addition to large fines, civil claims may also be launched off the back of public criticism from a regulator in the knowledge that whistle-blowers or sensitive documents from the investigation already exist.  Therefore, what is good strategy on the one hand may not be good strategy on the other.

Risk management is made more complex by the fact investigations can emanate from overseas regulators across jurisdictions - particularly the US.  Since 2010, the volume of requests from the US Securities Exchange Commission (SEC) for co-operation from foreign regulators has increased by 59% and the volume of requests received by the Financial Conduct Authority (FCA) from foreign regulators has increased by 36%.  

This throws up a number of difficult issues to navigate.  Do you turn yourself in to the regulator and self-report in return for a lower fine and immunity?  The price to pay for public acknowledgment of wrongdoing might be increased levels of civil claims.  If so, do you categorise and volunteer all relevant emails and data, in a timely fashion instead of opting for a 'document dump'?  Co-operating with the regulator means claimants will more easily be able to find and identify the most sensitive evidence and courts will decide if an attempted selective waiver of legal privilege is effective.

Deutsche Bank is a case in point.  It received a record $2.5bn of fines following an admission of guilt under a deferred prosecution agreement (DPA) with US authorities relating to alleged Libor rigging.  The FCA said that the Bank repeatedly misled it during Libor investigations, took too long to produce relevant documents and was slow to fix inadequate systems and control which contributed to an enhanced fine.  The two joint Chief Executives of the Bank are also to stand down.

This is all grist to the mill for civil claims being played out in the High Court.  Unitech Global is pursuing Deutsche Bank for damages, and resisting enforcement of $150m of loans, relating to the alleged mis-sale of interest rate swaps linked to Libor.  In the wake of regulatory sanction, it was able to successfully amend its claim to allege that the bank impliedly represented that it would not falsely or fraudulently manipulate the benchmark.   The courts have compared the case to a diner sitting down at a restaurant who makes an implied representation that he or she can pay for their meal - a reasonable person in either scenario would not infer or suspect dishonesty.

Similarly, and having been fined £290m by UK and US authorities in relation to Libor fixing, Barclays is defending a £50m damages claim brought by its customer Rhino Enterprises, which claims false Libor submissions undermined various swap arrangements which triggered administration.  It has also alleged the bank engaged in anti-competitive behaviour by colluding with other banks to manipulate Libor.  This is separate to the $2.43bn of fines Barclays received for allegedly rigging Forex and Isdafix benchmarks.

In a further lawsuit brought by Property Alliance Group against RBS relating to swaps for damages of £30m, RBS has been ordered to handover documents setting out its negotiations with the FCA over its £390m fine for Libor manipulation and which are also kept confidential under seal as a condition of its DPA with US regulators.  The papers will be inspected by a Judge before ruling on whether they are admissible.  This case re-affirms the general approach of the English Courts - that confidentiality does not trump a litigant's obligation of full and frank disclosure or the principle of open justice.  

The disclosure of papers handed over in confidence or inadvertent waiver of privilege is problematic where it forms part of negotiations with regulators, duties to statutory auditors must be discharged, conflict of interests arise with directors or senior managers who are implicated and internal audit, risk and compliance functions generate significant levels of detailed analysis and guidance.  Governance protocols and training programmes can help identify those with authority to liaise with counsel and the allocation of tasks during an investigation.

Technology also has to be understood as IT infrastructure and software which underpin data storage and security systems are a target for investigators.  A leading provider of data recovery, forensics and e-disclosure services recently carried out a survey in which 44% of UK respondents had been involved in an internal investigation and 33% in a regulatory investigation during the last 12 months.  Where are your servers or data managers based?  Are they backing-up data in multiple jurisdictions where the rules on confidentiality, privilege and disclosure are different?

"Wire Fraud" is a US federal crime which includes devising a scheme to obtain money on false pretences in communications sent via e-mail servers.  This has been relevant to traders engaged in Forex manipulation who became infamous for the use of online chat-rooms to exchange confidential client information.  From a legal point of view, the boundary between a legitimate exchange of publically available information and market manipulation is the element of collusion and dishonesty, which is not always easy to evidence but has been dredged from servers.  Traders facing disciplinary action may look for whistleblowing angles or state that a number of practices, such as "layering" or "front-running", were commonplace and an accepted part of the culture.

There is no indication of any let-up.  The Governor of the Bank of England Mark Carney has promised a crackdown on rogue traders and declared the "age of irresponsibility is over".  The outcome of the Fair and Effective Markets Review published on 10 June 2015 recommends more wide ranging regulation of derivatives and Forex markets and longer jail sentences for financial crime to correct "ethical drift".  This is on top of tougher regulatory rules already on the way for senior management on boards, operating committees, in-house lawyers and those with "Significant Influence Functions".  The Senior Managers Regime (SMR) will enable regulators to fine individuals and ban them from working in the industry.  

These are very complex inter-related issues to grapple with.  In terms of setting priorities, managing cross-border privilege whilst undertaking an internal investigation, possibly as a pre-cursor to self-reporting, is high up the list.  In particular, because US regulators still hold a certain fear factor where co-operation is advisable if non-criminal outcomes are to be negotiated.  Legal counsel can also be used to devise pre-emptive risk management strategies or when necessary, to avoid misunderstandings about the basis on which employees or ex-employees co-operate with an internal investigation or a regulatory fact-find.  

In relation to civil actions, regulators have paved the road and litigants pursuing Libor related misrepresentation claims in the High Court have sign-posted the way for others to follow (even if they never get to trial).  Libor, Forex and Isdafix manipulation all have the potential to cast a very long shadow by virtue of the fact claims based on fraud will not be time barred, settlements based on fraud can be revisited and documentation from regulatory fact finds or negotiations is available to call upon.  For example, it is now known that the former Chief Operating Officer of Barclays Capital once described the Libor curve as being based on "fantasy rates".  It remains to be seen whether the current litigation climate is the beginning of the end or the end of the beginning.  In the meantime, the line between regulatory investigations and civil claims has never been more blurred.