The great banking swindle

“When money is the measure of all worth, constraints on the temptation to fix Libor or knowingly sell shoddy products are greatly reduced,” FSA chairman Adair Turner said in a speech last week.

He was not far off.

The Libor fixing and interest rate product mis-selling banking scandals broke on consecutive days.

Legal commentators immediately speculated that every single noteworthy firm would find a role, such was the depth and breadth of the fallout. As the repercussions now incorporate internal and external probes, High Court claims, Treasury committees, international competition investigations and possibly cross-border criminal prosecutions, that prediction is proving to be true.

Across the UK, continental Europe and the US, hundreds of lawyers are meeting thousands of clients to discuss the ramifications of further investigations.

Sources suggest the government is keen to avoid a Leveson-style public jamboree, but a parliamentary commission on banking standards has already been established to consider and report on the professional standards and culture of the UK banking sector.

The commission has been ordered to make recommendations on regulation and policy for legislative action by 18 December this year – before the Banking Reform Bill is published.

In an unprecedented step for a parliamentary commission, members are expected to select external counsel to act as special advisers and grill witnesses in a Robert Jay QC-style manner.

A number of silks with financial expertise will be throwing their hats into the ring for the next name-making gig.

The story so far

To date, only Barclays has been collared for deliberately suppressing Libor – which is the interest rate at which banks borrow from each other. The bank has accepted charges of manipulating interest rates and making false reports to benefit its derivatives trading positions.

Internally, Barclays has established an independent review of its business practices, to be led by former Freshfields Bruckhaus Deringer senior partner Anthony Salz.

For holding its hands up and cooperating with the FSA, the US Commodity Futures Trading Commission (CFTC) and the Department of Justice (DoJ) Barclays got a record £290m fine and a non-prosecution agreement with the US.

For that process, the bank turned to Sullivan & Cromwell’s US-based team of criminal defence and investigations partner Steven Peikin, litigation managing partner David Braff, litigation partner Jeffrey Scott and special counsel Matthew Fitzwater.

One source said the strategy of instructing a major US firm with a strong white-collar crime team and a London presence is one other major banks have followed. One reason for this is that the US authorities are way ahead of the UK in investigating Libor.

It is believed that Gibson Dunn & Crutcher is acting for UBS, Paul Weiss Rifkind Wharton & Harrison for Deutsche Bank, Davis Polk & Wardwell for Bank of America Merrill Lynch, Shearman & Sterling for Credit Suisse and Hogan Lovells for Lloyds.

The FSA documents made clear that Barclays had negotiated the Libor “misrepresentation” with other banks – so far unnamed, but likely to include Lloyds, HSBC and RBS if US lawsuits and evidence before the Treasury Committee are any indication.

Whether the evidence will be enough for a criminal price-fixing cartel finding by EU competition commissioner Joaquin Almunia is debatable. This week he has thrown more resources at the investigation to make it a top priority.

Barclays has also instructed Clifford Chance and the firm advised on the record £59m FSA fine. It has been reported that Clifford Chance is also acting for RBS and has set up a ‘Chinese wall’ to avoid conflict.

One gig Clifford Chance has lost out on in the fallout is advising the British Banking Association (BBA) on an internal investigation into Libor, which has gone to a Lawrence Graham (LG) team led by partners Helga Breen, Eoin O’Shea and Richard Everett.

Back in 2008 Clifford Chance banking and finance partner Habib Motani advised on BBA’s review of the governance of Libor, coming up with proposed changes in definition and application.

The magic circle firm helped establish Libor, but LG will take on the role of scrutinising exactly what went on.

Litigation boutique Hausfeld’s Washington office – led by Michael Hausfeld – was the first to file a class action lawsuit in the US on behalf of purchasers of Libor-indexed financial products affected by Barclays’ interest-rate fixing. The firm’s London office is also speaking to clients in UK and Europe who have suffered losses.

National US shareholder litigation firm Ryan & Maniskas has since followed suit with its own class action claim, lodged in New York.

Freshfields is also heavily involved, with dispute resolution partner Ian Taylor leading a team acting for the Bank of England, whose governor Sir Mervyn King and deputy governor Paul Tucker appeared before the committee.

Former Barclays chief operating officers Jerry del Missier gave evidence, shadowed by Morrison Foerster New York litigation partners Carl Loewenson and James Hough, as well as London-based regulatory partner Kevin Roberts.

And Dechert white-collar and securities litigation partner Andrew Levander is advising former Barclays chief executive Bob Diamond, who stepped down in the wake of huge criticism of his bank. Dechert has advised Diamond since the start of the Libor investigation in 2010 and Levander is being assisted by Philadelphia litigation partner Cheryl Krause and counsel from Norton Rose in London.

The Treasury Committee is in the process of compiling its report, due to be published in a matter of weeks. The parliamentary committee has turned to Devereux Chambers silk Jonathan Fisher QC to advise it on the legal framework.

The aftermath

Fisher believes there will be a tightening of the law, with a Government paper already out on creating new offences for bankers who mismanage their financial institutions.

“In general terms, I think the Libor case may be the high-water mark as we move into an era of tougher enforcement. The committee’s investigation is part of that process,” Fisher says. “My role is to advise the committee on issues such as how the penalty imposed by the FSA was calculated, whether the FSA sufficiently explored the route of criminal prosecution and whether it had the powers to do so.”

Fisher believes that “in the right cases” in the aftermath of the banking scandal, there will be criminal prosecutions as part of a “recalibration” of corporate culture.

“There’s a general recognition that the ‘light touch’ regime has failed and been consigned to the burial ground,” he adds, “and it’s quite clear the public will not accept this sort of conduct. It’s not just Libor and mis-selling, but other practices too.”

FSA chairman Turner says “robust after-the-event enforcement action and sanction” will remain a “key regulatory tool”, but accepts that his authority “made big mistakes” before the banking crisis when Libor was being manipulated either for reputational reasons or to benefit derivatives positions.

“The past few weeks have been bad for the reputation of British banking – rebuilding trust will be a huge challenge,” Turner says. “But it’s a challenge that must be met.”

Morgan Stanley has recently estimated the cost of the Libor scandal to almost a dozen global banks may be as high as £9bn in regulatory, legal settlement and market share costs up to the end of 2014.

The FSA has passed on the issue of criminal charges to the Serious Fraud Office (SFO), which has instructed 9-12 Bell Yard’s Mukul Chawla QC to advise on whether there are grounds for prosecution. A decision on whether it has enough evidence to proceed will be made at the end of this month.

The Lawyer also understands that Kingsley Napley partner Louise Hodges is advising several of the individual Barclays traders whose brash correspondence was detailed in the original FSA documents.

Last week there were reports that prosecutors in the US have contacted lawyers for some UK Libor traders, to advise them that arrests and charges could come in the next few weeks. It is common practice in the States to give suspects a chance to cut a deal and give evidence on other culprits.

It was Clifford Chance who led the BBA through the Libor review in 2008, but now it is the turn of much of the City legal profession to clear up the mess.