The Blotter: Rabobank hit with Libor charges, $475 million fine

November 1, 2013 07:15 AM
Also, AlphaMetrix ordered to liquidate funds, shutters trading

Rabobank to pay $475 million to settle Libor and Euribor charges 

The U.S. Commodity Futures Trading Commission (CFTC)  issued an order against Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank), bringing and settling charges of false reporting and attempted manipulation of the London Interbank Offered Rate (Libor) for U.S. Dollar, yen and sterling, and of the Euro Interbank Offered Rate (Euribor) and charges of successful manipulation of yen Libor. The CFTC also settled charges that Rabobank, at times, aided and abetted the attempts of derivatives traders at other banks to manipulate yen Libor and Euribor. These violations, which spanned nearly six years, involved more than two dozen employees working out of six offices on three continents. Rabobank is obligated to pay a penalty of $475 million, and the company is ordered to take further steps to ensure the integrity of its Libor and other benchmark interest rate submissions in the future.  

David Meister, director of enforcement stated, "The CFTC has now charged five global financial institutions for Libor manipulative schemes, with nearly $1.8 billion in penalties imposed by the Commission alone. The sheer number of institutions and individuals involved in these cases reflects a truly shocking and brazen degree of unlawfulness, warranting the historic enforcement response we bring forth today and in our prior cases."


Rabobank was one of the global banks that submitted borrowing rate information on a daily basis for use in the calculation of Libor for various currencies and for Euribor. Rabobank also traded and held cash and derivatives positions whose value depended on these same benchmarks.

From at least mid-2005 through early 2011, Rabobank traders engaged in hundreds of manipulative acts undermining the integrity of U.S. dollar and yen LIBOR, Euribor and, to a lesser extent, Sterling Libor. The violations took various forms:

 ·Rabobank traders, some of whom doubled as Libor and Euribor submitters, regularly made and accommodated their fellow traders’ requests to make favorable rate submissions to benefit their trading positions through attempts to manipulate U.S. dollar and yen Libor and Euribor.  On occasion, they did the same with respect to sterling Libor. Making submissions that were, as some Rabobank employees said at the time, “ridiculous,” “obscenely high” and “silly low,” more than two dozen traders, including several desk managers and at least one senior manager located in Rabobank’s New York, London, Utrecht, Tokyo, Hong Kong, and Singapore offices engaged in this wrongful conduct or knew it was ongoing at the time but did nothing to stop it.

 · At times, Rabobank was successful in its attempts to manipulate yen LIBOR.  In fact, the misconduct with respect to yen LIBOR was so entrenched that as traders assumed the role of submitter, their predecessors would train them on the unlawful practices.

 · Rabobank also, at times, aided and abetted other banks’ attempts to manipulate yen Libor and Euribor, including coordinating with an interdealer broker on yen Libor submissions to aid the manipulations of the senior yen trader at UBS AG. As one senior Rabobank employee put it: “You know, scratch my back, yeah, and all,” to which the broker observed, “Yeah oh definitely, yeah, play the rules.”

 The CFTC order further finds that Rabobank ignored the obvious conflict of interest it created by assigning traders with trading positions tied to LIBOR and Euribor to serve as Rabobank’s Libor and Euribor submitters. Submitters were improperly left to choose between their responsibility to make an honest assessment of borrowing costs and their desire to maximize the profitability of their trading positions. Here, Rabobank’s submitters often resolved the conflict in favor of profit.  This conflict was exacerbated by traders and submitters sitting together so that traders could simply shout requests for unlawful submissions across the trading desk. Rabobank thus provided these employees with unfettered opportunities to attempt to manipulate LIBOR and Euribor for profit, and the traders took advantage of those opportunities. The order also finds that Rabobank otherwise lacked sufficient controls around the LIBOR and Euribor submission process and failed to adequately supervise its traders and submitters.

 According to the order, this manipulative conduct occurred even after the Commission had commenced its investigation of Rabobank’s U.S. dollar LIBOR practices in April 2010, when Rabobank received the Commission’s request that the Bank internally investigate its U.S. dollar Libor practices.  In late 2010, after Rabobank submitters refused, as instructed by a manager, to consider a trader’s requests for particular Yen Libor submissions, the Rabobank trader promptly obtained the assistance of an interdealer broker to continue attempting to manipulate yen LIBOR to benefit his trading positions through early 2011.

 The CFTC requires Rabobank to pay a civil monetary penalty of $475 million, cease and desist from its violations of the CEA, and adhere to specific undertakings to ensure the integrity of its Libor and other benchmark interest rate submissions in the future. The Order also recognizes the significant cooperation of Rabobank with the Division of Enforcement in its investigation.

 In related actions, the U.S. Department of Justice entered into a deferred prosecution agreement with Rabobank, deferring criminal wire fraud charges in exchange for Rabobank continuing to cooperate and agreeing to a penalty of $325 million; the United Kingdom Financial Conduct Authority issued a Final Notice regarding its enforcement action against Rabobank and imposed a penalty of £105 million (approximately $170 million); the Japanese Financial Services Agency issued an administrative action against Rabobank for failure of its internal controls within its Tokyo office; De Nederlandsche Bank (or the Dutch National Bank took action by imposing remedial measures on Rabobank; and the Dutch Public Prosecutor’s Office  agreed to a payment of €70 million (approximately $96.5 million) by Rabobank  for the bank to avoid a criminal prosecution. 


The CFTC has now imposed penalties of $1.765 billion on entities for manipulative conduct with respect to LIBOR and other benchmark interest rates. ICAP Europe Limited, ($65 Million penalty), The Royal Bank of Scotland plc and RBS Securities Japan Limited, ($325 Million penalty), UBS AG and UBS Securities Japan Co., Ltd., ($700 Million penalty),  Barclays PLCBarclays Bank PLC, and Barclays Capital Inc., ($200 million penalty).  


NFA issues MRA against AlphaMetrix LLC

The National Futures Association (NFA) ordered AlphaMetrix LLC to satisfy its obligations to certain pool participants by Nov. 1. The firm had deducted advisory fees for certain participants in commodity pools operated by the firm. Those fees were to be reinvested in the pools but were not. The total amount owed to participants is approximately $600,000. AlphaMetrix has approximately $700 million under management. According to NFA's action, if AlphaMetrix fails to satisfy its obligations by Nov. 1, the firm would be prohibited from placing trades for any of its pools except for trades liquidating open positions. Further, any disbursement of pool funds could only be made with NFA's approval.


Jeffrey Gustaveson ordered to pay over $1.6 million for commodity pool scheme 

The CFTC obtained a federal court order awarding restitution for defrauded commodity customers and a civil monetary penalty against defendant Jeffrey Gustaveson of Morgan Hill, Cal., in connection with a commodity pool investment scheme.  Gustaveson is to pay a civil monetary penalty of $1,230,000 and $410,000 in restitution.It also imposes permanent trading and registration bans against Gustaveson and prohibits him from violating the Commodity Exchange Act (CEA), as charged. 

The order finds that Gustaveson received $2,495,000 from customers to trade commodity futures in a pool. But, rather than trade the pool participants’ funds as promised, Gustaveson used only approximately $400,000 of the funds to trade commodity futures, and he kept at least $400,000 of the remaining funds to pay his personal expenses. To conceal his misappropriation, Gustaveson distributed false trading account statements to the pool participants that misrepresented the value of the pool, reported false profits, and failed to disclose his misappropriation of pool participants’ funds. When his fraud was exposed, Gustaveson returned a significant portion of the pool participants’ funds, leaving $410,000 of the customers’ funds unpaid, the order finds.  As to the amount still owed, Gustaveson admitted that he spent the money on personal expenses, past-due taxes, and repaying a previous investor.


Louis J. Giddens, Jr., Anthony W. Dutton, and Michael Gomez to pay $400,000 for foreign exchange scheme

The CFTC obtained a consent order from the U.S. District Court for the Northern District of Georgia against Defendants Louis J. Giddens, Jr. of Fayetteville, Ga., Anthony W. Dutton of Peachtree City, Ga., and Michael Gomez of Valrico, Fla., requiring them to pay restitution to investors, respectively, of $29,759.49, $56,604.35, and $68,000 and to pay a civil monetary penalty of  $100,000, $100,000, and $75,000, respectively. The court’s order also imposes permanent trading and registration bans against them, and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.   

The order finds that, from at least January to October 2010, Giddens and Dutton operated Currency Management Group, LLC and Pinnacle Capital Partners, LLC, respectively, and solicited and accepted funds to trade off-exchange foreign currency from friends and co-workers. Giddens and Dutton transferred the solicited funds to another entity they owned and operated named Pinnacle Trade Group, LLC to trade forex. Funds transferred to Pinnacle Trade were either sent to forex trading accounts or to a bank account controlled by Gomez to trade investor funds.  However, the order finds that not all of investor money was traded in forex, but rather, some funds were retained by Gomez and Dutton.  

The order also finds that Giddens and Dutton made statements on websites guaranteeing monthly returns of either 5% or 10% from trading forex and that the websites did not disclose any risks associated with trading forex or that past performance does not guarantee future results. In addition to promising to pay investors fixed returns, the order finds that Giddens and Dutton executed promissory notes that promised to repay investors their principal sum, plus monthly interest of either five or ten percent and prepared online account statements that showed the current net balance of the promissory notes. The notes did not disclose any risk associated with forex trading, the order finds.

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About the Author

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors. Ginger received a master's degree in journalism at Northwestern University's Medill School of Journalism and a bachelor’s in communication arts from the University of Wisconsin – Madison