Stalled Fraud Prosecutions Could Force DOJ Prosecutors to Reassess Strategy | Eversheds Sutherland (USA) LLP

On January 27, 2022, the United States Court of Appeals for the Second Circuit issued a decision in United States vs. Connollyoverturning the 2018 fraud convictions of two former traders at a major financial institution.1 A three-judge panel overturned the sentencing judgments, citing insufficient evidence at trial to prove that the defendants, Matthew Connolly and Gavin Campbell Black, had incited colleagues to submit false statements to the British Bankers’ Association (BBA) that could influence the London Interbank Offered Rate (LIBOR) – a benchmark used to set the market rate on interest rate derivatives – to the benefit of their positions. In 2015, the financial institution where the defendants worked agreed to pay the US Department of Justice (DOJ) $2.5 billion in fines for the same rate manipulations at issue in this appeal.

the Connolly The decision underscores the high threshold that prosecutors must meet to show that a defendant’s actions were false, fraudulent or deceptive within the meaning of federal wire fraud and bank fraud laws. The decision is the latest blow in a series of opinions limiting prosecutors’ attempts to broadly define fraudulent conduct in financial crime, even as the DOJ publicly commits to aggressive enforcement.

The decision of the Second Circuit in Connolly

As the second circuit found in Connolly, LIBOR is regulated by the BBA and is a widely used benchmark for trading interest rate derivatives. During the relevant period, sixteen banks, including defendants’ financial institution, sat on the LIBOR panel with respect to United States currency, submitting daily rates reflecting hypothetical interest rates at which a bank might borrow money to another. The BBA compiled the numbers to generate a LIBOR number. LIBOR changes can affect not only which party owes the other money, but also the amount of that payment. The value of swaps and futures traded using the LIBOR benchmark is over $300 trillion.

In this case, the employees responsible for submitting the financial institution’s LIBOR rates each had an “evaluator,” a model that compiled real-time market data to automatically generate LIBOR figures. However, employees often manually changed the number based on various factors, such as actual cash transactions, liquidity levels at other banks, and other interest rate changes. In addition, defendants sometimes asked their colleagues for higher or lower LIBOR bids to benefit from their trading positions. Their colleagues then modified the LIBOR submissions based on the defendants’ requests.

Based largely on trial testimony confirming that the practice took place, the defendants were convicted of wire fraud, in violation of 18 USC § 1343, and conspiracy to commit wire fraud and bank fraud. , in violation of 18 USC § 1349. The government relied on the theory, which was adopted by the district court, that the number automatically generated by the pricer was the only “true” number for each day, and would not have been altered without the conduct of the defendant. Following the jury’s verdict, the district court dismissed the defendant’s motion under Rule 29, stating, among other things, that the government was not required to prove that the financial institution could not have borrow funds at the submitted rate to establish the falsity of LIBOR submissions.

The Second Circuit disagreed, taking a narrower view of what practices qualify as false, fraudulent, or deceptive. The panel ruled that to demonstrate falsity, given the wording of the BBA guidelines, the government had to prove that the institution could not have borrowed at the rates submitted to the BBA. If the rate submitted was one that the bank could hypothetically ask for, be offered and accept, the bid would not be false. As no evidence suggested otherwise, the statements were not false or misleading. The Second Circuit also disagreed with the assertion that there was only one true LIBOR rate, generated by the pricer. The panel cited employee testimony that multiple factors were used every day to manually edit the pricer’s rate, and the rate was often changed despite the lack of input from derivatives traders.

The Second Circuit concluded that while the defendants’ efforts to manipulate rates to extract financial benefits may have “violated any reasonable notion of fairness”, the government’s failure to prove that the conduct failed to comply with the BBA guidelines – and therefore was false or misleading – left the conduct outside the scope of the statutes.

Other recent decisions

The DOJ has long used a broad interpretation of wire fraud law and other similar fraud laws. However, this decision is the latest in a series of decisions that set back the government’s efforts to interpret these laws broadly. For example, in March 2019, a federal judge in the Northern District of California granted a Rule 29 motion in favor of Robert Bogucki, the former head of Barclays’ currency trading desk, immediately after the indictment chief at trial. . The government accused Bogucki of making false and materially misleading statements in connection with Hewlett-Packard’s attempt to resell or “unwind” options purchased from Barclays in 2011. In its ruling against the government, the court of district felt that there was no expectation of full disclosure between the parties, given their sophistication, the agreement underlying the transaction, and the well-known industry tendency to take sides and overdo it. He also pointed to the unregulated nature of the behavior that the government called fraud. In making the ruling, the judge went so far as to criticize the DOJ for “assuming[ing] the role of nanny. The district court ruling echoed the Second Circuit’s ruling in its 2018 acquittal of Jesse Litvak for allegedly lying to clients about mortgage-backed securities, where he said the counterparty to the conviction of the transaction that Litvak was a fiduciary was not relevant to materiality: materiality is based on the view of the reasonable investor, who would not have believed that Litvak was a fiduciary despite his misrepresentations . The opinions show that when the parties to the transaction are warned, it is difficult to prove the materiality of false or misleading statements.

As another example, in May 2020 the Supreme Court overturned the convictions in the “Bridgegate” case, in which the defendants were accused of conspiring to reduce the number of lanes on the George Washington Bridge in order to increase congestion, as political retribution for the local. mayor refusing to support Governor Chris Christie’s re-election campaign. The Court held that the Wire Fraud Act, used to convict the defendants, was designed to criminalize fraudulent schemes undertaken to obtain money or property: these must be the motivation, not simply the underlying product, misconduct. While the behavior of the defendants was corrupt, it was politically motivated and therefore they could not be convicted under the law.

Key points to remember

The decisions rendered in these cases and in Connolly are a wake-up call to the DOJ that it should review cases in the context of party sophistication and common industry practice, look closely at the motives for the misconduct in question, and think twice before proceeding. unregulated business practices. Notwithstanding Assistant Attorney General Lisa Monaco‘s recent urging to prosecutors “to be bold” and not be deterred by “the fear of losing,2 these rulings suggest that the government may need to reevaluate its ability to use fraud laws as broadly as it has used them in the past.

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1 United States vs. Connolly, No. 19-3806, 2022 WL 244669 (2d Cir. January 27, 2022).

2 Assistant Attorney General Lisa O. Monaco delivers a keynote address at the ABA’s 36th National Institute on White Collar Crime, Washington, DC (October 28, 2021).

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