Manipulating Libor to Cost UBS $1.5 Billion

MANHATTAN (CN) - UBS will pay $1.5 billion in fines and penalties after its Japan division pleaded guilty to manipulating the London interbank offered rate, or Libor.

The criminal information against UBS Securities Japan was filed Wednesday in U.S. District Court in the District of Connecticut. It charges the bank with one count of engaging in a scheme to defraud traders of interest-rate derivatives by secretly manipulating Libor benchmark interest rates.

By pleading guilty, UBS Japan has admitted its criminal conduct and agreed to pay a $100 million fine.

Its Zurich-based parent meanwhile must pay a $400 million penalty as part of its nonprosecution agreement.

Compounded with regulatory penalties and disgorgement, total resolution comes at a cost of $1.5 billion to UBS, the Justice Department said.

This includes $700 million for the Commodity Futures Trading Commission action, $259.2 million for the U.K. Financial Services Authority action and $64.3 million for the Swiss Financial Markets Authority action.

Its nonprosecution agreement requires UBS AG to admit and accept responsibility for its misconduct, and to continue cooperating with the ongoing federal investigation.

Federal charges against the two former senior UBS traders were simultaneously unsealed in the Southern District of New York.

Tom Alexander William Hayes, 33, of England, was charged with conspiracy, wire fraud and a price-fixing violation arising from what prosecutors called his collusive activity with another bank to manipulate Libor benchmark rates.

Roger Darin, 41, of Switzerland, was charged with conspiracy.

Prosecutors say Hayes worked as a senior trader in the UBS Tokyo office between July 2006 and September 2009. Darin allegedly made and supervised Libor submissions on behalf of UBS to the London-based British Bankers' Association, which publishes the Libor.

In a statement of facts filed by the government, Hayes is referred to as "Trader-1" and Darin is referred to as "Submitter-1."

Prosecutors say that Hayes helped UBS Japan try to move yen Libor in a direction favorable to Hayes' trading positions. This allegedly occurred on a near daily basis between November 2006 and August 2009.

Hayes once estimated that a 0.01 percent movement in the final yen Libor fixing on a specific date could result in a $2 million profit for UBS, the Justice Department says.

To execute this scheme, Hayes allegedly conspired with Darin and other UBS employees to make false and misleading yen LIBOR submissions on behalf of UBS.

Prosecutors say Hayes also caused cash brokerage firms to disseminate false and misleading information about short-term interest rates for yen, and that he communicated with interest rate derivatives traders employed at three other yen Libor panel banks in an effort to cause them to make false and misleading yen Libor submissions to the British Bankers' Association.

Libor is an average interest rate, calculated based on submissions from leading banks around the world. It reflects the rates those banks believe they would be charged if borrowing from other banks.

As the primary benchmark for short-term interest rates globally, Libor is used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer-lending products.

The Bank of International Settlements estimated that, as of the second half of 2009, outstanding interest rate contracts were estimated at approximately $450 trillion.

The British Bankers' Association calculates the Libor for 10 currencies at 15 borrowing periods, known as maturities, ranging from overnight to one year. The Libor for a given currency at a specific maturity is the result of a calculation based upon submissions from a panel of banks.

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