Dismissed Citi FX Trader Wins with "everyone else was doing it"

The former trader brought a lawsuit in front of a UK employment tribunal saying that he was unfairly terminated by Citi. He said that his conduct (sharing information in chat rooms with other FX traders, including sharing private info regarding client trades) was quite common at the time and that his managers were aware that he was on the chat rooms. In 2009 during an employment review he was told by his manager to join chat rooms to gather market information, but was not provided any guidelines on what he could post.

The tribunal found in his favor, although saying that he contributed to his dismissal. A hearing next year will determine the compensation that Citi is required to pay him.

This argument is not one that usually wins in a court ("officer, why did you stop me? Everyone else was speeding also). Although this verdict may help other former bank FX traders who are bringing suits, it does not impact anything else regarding the fixing scandals, such as guilt or fines and settlements with regulators.

FX Scandal Not Blowing Away

First of all, the rest of the world is looking at the US class action suit in which over $2 billion in settlements have already been made by 9 large banks, and lawyers and investors are planning additional suits in several countries. A $1 billion suit has just been filed in Canada relating to benchmark currency fixes.

Secondly, a Citi FX trader who had been dismissed in the UK relating to his sharing of client information with FX traders from other banks on chat rooms, is fighting his dismissal. He is claiming that it was a market practice at the time to share such information, especially regarding the trading of central banks. He mentions one M&A deal in which Citi front run the client's trade and made a profit of $35 million. He states that the very top Citi FX management actually had a hand in this deal.

There are other FX traders who were dismissed relating to similar charges who are also planning on disputing their firings.

Citi says FX Fines 2,500 Times the Illicit Profits

Bloomberg reports that "Jamie Forese, head of the Citigroup Inc. unit that houses trading and investment banking, said fines the firm paid for rigging foreign-exchange markets dwarfed the amount generated by the illegal conduct. Revenue from the trades amounted to about $1 million, while Citigroup paid out $2.5 billion in fines and penalties, Forese estimated Wednesday at an investor conference in New York."

Among commentators, and regulators as well, there has been a question regarding whether the size of fines in recent settlements have been painful enough to cause banks to prevent further occurrences of misconduct. Some suggest yes, many no, but without knowing the profits generated by misconduct, it is a difficult question to answer.

If this represents Citi's answer to the discussion, we suggest that it is incomplete. While the article does not mention how the 1 million dollar gain was calculated, perhaps it was strictly based upon the specific trades uncovered in the investigations, such as the trades highlighted in the CFTC - Citi settlement. However, the settlement states that "From 2009 through 2012 (“Relevant Period”), Citibank, by and through certain of its
foreign exchange (“FX”) traders, at times sought to benefit its own trading positions or those of certain FX traders at other banks by attempting to manipulate and aiding and abetting certain traders at other banks in their attempts to manipulate certain FX benchmark rates." So the plea is to misconduct at the fixes for 4 years.

In the DOJ settlement Citi pleads to having "entered into and engaged in a conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, the EUR/USD currency pair exchanged in the FX Spot Market by agreeing to eliminate competition in the purchase and sale of the EUR/USD currency pair in the United States and elsewhere. The defendant, through one of its EUR/USD traders, participated in the conspiracy from at least as early as December 2007 and continuing until at least January 2013." Here the plea is to manipulating the EUR/USD pair for a period of 5 years, but not limited to only the fixing of benchmark rates.

If 5 years of misconduct in EUR/USD (DOJ) or 4 years in various currencies at benchmark fixes (CFTC) only lead to a 1 million dollar gain, it would lead one to question how Citi made about $2 billion in revenue per year in FX during this period. Thus we question not only if the fine was truly 2,500 times the size of the misbehavior, but whether such misbehavior was limited to about one-hundredth of one percent of FX revenues ($1 million / $10 billion).

Estimate of Regulator Fines on Banks for FX Fix Misconduct - $41 Billion

Bloomberg reported that Citibank analysts' estimate of fines relating to the FX fix could total over $40 billion between US, UK and European regulators, spread among money center banks.  The analysis excludes fine reductions or waivers for those banks cooperating with investigations.  As many banks are cooperating (some required to do so by their agreements with regulators in the LIBOR scandal) this might substantially reduce the actual fines.

As most banks have been reserving for these investigations, which started in the middle of last year, there may not be a big hit to the earnings of the banks as a whole from the eventual fines.  As to reputational hits, the fact that so many banks will be included may, in effect,  protect all of them.

Another Shoe Drops: Pension Sues Banks Alleging Manipulation of ISDAfix

Hot off the presses, Bloomberg reports that the Alaska Electrical Pension Fund yesterday filed suit against the banks responsible for contributing to the ISDAfix rates. Those of you who want more about this brewing controversy can read my report here.  This comes on the heels of lawsuits alleging manipulation in gold, FX rates and LIBOR.  I'm sure there will be more to come as additional information comes to light. 

Swiss Name 8 Banks in Forex Manipulation Probe

Some expected names, but a couple of surprises when the the Swiss Competition Commission named the 8 banks under scrutiny relating to potential forex manipulation.  This comes, of course, on top of industry nervousness and concern over the scope of investigations, potential manipulation and, most of all, potential penalties and damages to be paid to regulators and law suit settlements.  

Given the global scope of the investigations, with even jurisdictions like New Zealand getting involved, the smart money should be betting that this will need more time to play out before we can start putting estimates of dollars and cents on the fix.

NYT Dealbook: Senior FX Execs from Goldman and Citi to Step Down

Dealbook reports that senior FX officials from Goldman and Citi are stepping down in part due to fallout from the continuing investigations over alleged FX manipulation. I don't recall so many executives losing their jobs from the LIBOR investigations. Is anyone keeping count? 

Could more regulation be on the way for the FX market?

With banks either firing or placing traders on leave, one has to wonder whether a result of the investigations into the alleged FX manipulation will result in more regulation.  http://dealbook.nytimes.com/2014/01/17/hsbc-and-citigroup-suspend-currency-traders/?_php=true&_type=blogs&nl=business&emc=edit_dlbkam_20140121&_r=0

WSJ: HSBC, Citi Suspend Currency Traders

According to WSJ, 2 more banks have suspended FX traders.  Wonder what the banks and regulators found?  http://on.wsj.com/LpXgcC

WSJ: Deutsche, Citi Face Forex Pressure

WSJ reports US regulators are in Citi's London offices as part of FX investigation. For our take on the matter check see our post earlier today.

http://on.wsj.com/1m6JhTM