Posted on 12 Feb 2013 by Neilson
U.S. regulators are widening their probe of global interest-rate-rigging by scrutinizing what they claim is a pivotal role of two U.K. brokerage firms in the scandal, people close to the investigation say.
The Justice Department and Commodity Futures Trading Commission are examining ICAP PLC and R.P. Martin Holdings Ltd., so-called interdealer brokers that are go-betweens for banks seeking buyers or sellers for hard-to-trade assets.
The brokers, both with headquarters in London, also help some banks decide their submissions for the London interbank offered rate, or Libor, and other benchmarks that underpin trillions of dollars in mortgages and other financial contracts.
While neither firm has been accused of wrongdoing, regulators allege that some of their employees were crucial in helping specific traders rig submissions by banks of estimated borrowing costs in different currencies.
U.S. officials made references to ICAP and R.P. Martin in documents released as part of recent settlements by UBS AG and Royal Bank of Scotland Group PLC, without identifying the brokerage firms. For example, brokers at ICAP got more than $216,000 for what regulators called a "fixing service," people close to the probe said.
The people said ICAP also is the firm that employed a broker who sent a trader an electronic message in September 2007 that said: "just starting to worry about how I am going to push them lower next week!!"
ICAP reiterated its chief executive's remarks last week that the company is taking the matter "extremely seriously" and won't hesitate to take "extremely firm" action against employees involved in wrongdoing. ICAP has suspended one employee and put three more on administrative leave.
The brokerage firm disclosed last month that it is under scrutiny by the U.K. Financial Services Authority. ICAP has received requests for information from the Justice Department and CFTC, according to a person familiar with the matter.
A spokesman for R.P. Martin declined to comment. Canadian regulators have disclosed in court documents an investigation of ICAP and R.P. Martin.
Spokesmen for the Justice Department and CFTC declined to comment.
In the most extreme examples, brokerage employees planted phony prices in computer systems that then flashed the fake information to banks, regulators allege in settlement documents with banks. Bank officials sometimes relied on the counterfeit data when making submissions to panels that set interest rates.
In late December, the CFTC said in UBS settlement documents that the moves "had the potential of improperly influencing many of the yen Libor submissions on any given day."
"It's very clear the brokers were an important part of this," said Andrew Verstein, executive director of the Yale Corporate Law Center.
Regulators began the rate-rigging probe more than four years ago, initially focusing on bank executives and traders suspected of conspiring to nudge rates, either to boost trading profits or make banks look healthier. Regulators now believe the middleman role of interdealer brokers puts them at the center of the scandal, according to people close to the investigation.
Even honest bank employees were vulnerable to manipulation, regulators say, because interdealer brokers are constantly talking to traders and offering their views of Libor. Corrupt brokers helped small rings of traders rig the entire market, U.S. and U.K. officials said when announcing settlements with UBS and RBS.
Barclays PLC, UBS and RBS paid a total of about $2.5 billion to settle allegations by the Justice Department, CFTC and FSA. As previously reported, about a dozen other banks still are under investigation.
Regulators believe interdealer brokers helped former UBS and Citigroup Inc. trader Thomas Hayes become the alleged ringmaster of a long-running plot to manipulate Yen Libor. Mr. Hayes, nicknamed "Rain Man" by colleagues and the subject of a page-one article Friday in The Wall Street Journal, was arrested in December and charged by U.S. prosecutors with fraud, conspiracy and an antitrust violation. His lawyer couldn't be reached Monday.
A spokeswoman for Citigroup declined to comment.
Mr. Hayes arranged payments totaling more than $500,000 to reward brokers for helping him, regulators said as part of UBS's settlement.
One broker received commissions of about $286,000 from "wash" trades, or improper buy and sell orders that cancel each other out. Regulators didn't say where the broker worked, but it was R.P. Martin, according to people close to the investigation.
U.K. prosecutors arrested two R.P. Martin employees in December. A lawyer for one of the employees, Terry Farr, said his client has been "interviewed by the FSA and CFTC as part of their wider investigations into Libor."
Neither of the two R.P. Martin employees who were arrested have been charged. Mr. Farr is cooperating with the probe, his lawyer said.
U.S. officials said the alleged scheme to use brokers to help manipulate yen Libor was so effective that some banks simply submitted the fake rates suggested by brokers. In 59% of the 523 trading days in 2008 and 2009, yen Libor submissions by an unnamed bank were identical to one broker's "suggested Libors," or a supposed forecast of that day's rates, according to U.S. regulators. The broker worked for ICAP, and the bank was Citigroup, people close to the investigation said.