The Serious Fraud Office, a British government fraud agency that investigates and prosecutes complex frauds, has announced that it is dropping the FX fix manipulation investigation. While several government agencies around the world investigated and settled with banks for over $10 billion in fines (with many banks pleading guilty to felony charges), the SFO announced that it is dropping its investigation (while continuing to liase with the US Justice dept in its investigation of FX fix manipulation). It said that there was insufficient evidence to realistically gain a conviction.
The lion share of FX trading occurs in the UK. We will have to wait and see the effect of this matter on the law suits that reportedly are being considered for filing in the UK, as well as on further regulatory investigations in the US and elsewhere.
Promotion of Ethics, Simplicity and Transparency in Finance
Showing posts with label fraud. Show all posts
Showing posts with label fraud. Show all posts
Wednesday, March 16, 2016
Wednesday, July 23, 2014
FSB Proposes FX Benchmark Changes; UK Opens Criminal FX Benchmark Investigation
The Financial Stability Board (coordinates national regulators and international standard setting bodies) published suggested changes to FX benchmark calculations in the following areas:
- The calculation methodology of the WM/Reuters (WMR) benchmark rates;
- The publication of reference rates by central banks;
- Market infrastructure in relation to the execution of fix trades;
- The behaviour of market participants around the time of the major FX benchmarks (primarily the WMR 4pm London fix);
- Recommendations from a forthcoming IOSCO review of the WMR fixes.
These are open to comments and should entail great diversity as there is much disagreement on how to reduce the possibility of rate rigging in FX markets.
In the UK, the Serious Fraud Office (SFO) has opened a criminal investigation into possible fraud occurring in benchmark rate setting. The US DOJ has been looking into criminal angles for quite some time,and last week we reported their offer of immunity to junior FX traders in exchange for information. The SFO has an ongoing investigation into LIBOR rigging as well.
Thursday, June 19, 2014
Report that DOJ is Investigating FX for being ... an OTC Market
Bloomberg reports today that people with knowledge of the matter say that the Department of Justice is looking into the practice by banks of charging different size markups to different clients, based upon how closely they watch market rates. The DOJ is looking into whether not disclosing this practice represents fraudulent behavior.
FX, as an OTC market, does not charge commissions but instead banks earn profits by charging a markup on the rate to clients. References in the article are to bankers executing trades that are sent to them via email, and then waiting some time to see if the later currency rate allows them to charge a worse rate to the client (this is similar to the fact pattern in the standing instructions lawsuits ongoing against several custodial banks). In fact, all FX OTC trades, however initiated, include varying markups, based upon client relationship and client credit among other factors, including how closely the client watches market rates.
Buyer beware, whether buying FX or going to the store to buy milk, should be the underlying principle that protects buyers from unscrupulous sellers (and sellers from an overreaching government). If the longstanding implications of the OTC market (unequal pricing) are no longer acceptable, what are the alternatives? The least intrusive might include a warning notice about the OTC FX market, provided when opening an FX account (this account may be hazardous to your financial health). The most would be to change the regulatory regime and create an exchange traded spot and derivative FX market, potentially to the detriment of the majority of market participants who benefit from a low cost, highly liquid market.
Regardless, the FX custodial lawsuits were followed by FX benchmark suits, and this leads me to suspect that there will be another wave coming.
FX, as an OTC market, does not charge commissions but instead banks earn profits by charging a markup on the rate to clients. References in the article are to bankers executing trades that are sent to them via email, and then waiting some time to see if the later currency rate allows them to charge a worse rate to the client (this is similar to the fact pattern in the standing instructions lawsuits ongoing against several custodial banks). In fact, all FX OTC trades, however initiated, include varying markups, based upon client relationship and client credit among other factors, including how closely the client watches market rates.
Buyer beware, whether buying FX or going to the store to buy milk, should be the underlying principle that protects buyers from unscrupulous sellers (and sellers from an overreaching government). If the longstanding implications of the OTC market (unequal pricing) are no longer acceptable, what are the alternatives? The least intrusive might include a warning notice about the OTC FX market, provided when opening an FX account (this account may be hazardous to your financial health). The most would be to change the regulatory regime and create an exchange traded spot and derivative FX market, potentially to the detriment of the majority of market participants who benefit from a low cost, highly liquid market.
Regardless, the FX custodial lawsuits were followed by FX benchmark suits, and this leads me to suspect that there will be another wave coming.
Thursday, May 8, 2014
Legal Theories in LIBOR and FX Lawsuits
While this article in CapLaw discusses the history of the allegations, investigations and lawsuits in the FX and LIBOR scandals, we thought it most interesting to focus on the legal theories and their current status.
In LIBOR, the US consolidated case held that there was no antitrust damage as the LIBOR rate setting process was not competitive in nature and thus there could not be anti-competitive behavior. However, "second-generation" lawsuits filed by plaintiffs claiming direct trading losses from derivatives with banks that provided benchmark LIBOR rates, are moving through the legal system. Two large plaintiffs are the FDIC, on behalf of 38 failed banks, claiming fraud and collusion were used by the LIBOR setting banks to suppress rates, and Freddie Mac and Fannie Mae, claiming that LIBOR manipulations caused them to suffer losses on mortgages and financial derivatives.
LIBOR cases in the UK have been limited, with only two cases filed, one of which was settled and the other remains with the courts.
In the FX benchmarks, the US has consolidated numerous class action suits into one. Differences between the rate setting process in FX vs. LIBOR make it unclear whether antitrust charges will hold up in the FX case. Fraud and collusion charges remain in FX as well, but the later start of FX allegations, the complexity of the cases and the continuing regulatory and internal bank investigations, means that further clarity will not be forthcoming until at least late 2014.
In LIBOR, the US consolidated case held that there was no antitrust damage as the LIBOR rate setting process was not competitive in nature and thus there could not be anti-competitive behavior. However, "second-generation" lawsuits filed by plaintiffs claiming direct trading losses from derivatives with banks that provided benchmark LIBOR rates, are moving through the legal system. Two large plaintiffs are the FDIC, on behalf of 38 failed banks, claiming fraud and collusion were used by the LIBOR setting banks to suppress rates, and Freddie Mac and Fannie Mae, claiming that LIBOR manipulations caused them to suffer losses on mortgages and financial derivatives.
LIBOR cases in the UK have been limited, with only two cases filed, one of which was settled and the other remains with the courts.
In the FX benchmarks, the US has consolidated numerous class action suits into one. Differences between the rate setting process in FX vs. LIBOR make it unclear whether antitrust charges will hold up in the FX case. Fraud and collusion charges remain in FX as well, but the later start of FX allegations, the complexity of the cases and the continuing regulatory and internal bank investigations, means that further clarity will not be forthcoming until at least late 2014.
Wednesday, April 2, 2014
Quick Test of your Fraud Detection Skills
Which one of these interest rate histories does NOT look real?!
HINT: One of the curves represents secondary market trading of the 4-week Treasury bill. The other curve is 1-month LIBOR set by a panel of banks now accused of providing false and managed "LIBOR settings."
Thursday, February 27, 2014
Advisors Beware: Investors Can Sue Third Parties for Aiding Fraud
WSJ reports on a recent 7-2 Supreme Court decision allows investors of R. Allen Stanford's Ponzi Scheme to sue advisors for allegedly aiding and abetting the fraudulent scheme. This is an important decision that will give investors additional pockets for recovering their losses.
Wednesday, February 12, 2014
Bad Test for Phony Data ?
Just over a year ago came the news that researchers applied "Benford's Law" to show that GDP data from China is likely fraudulent. That's a huge finding!
BUT WE FIND THIS TEST TO BE UNRELIABLE
See above a graph that demonstrates BOTH the USA and China fail "Benford's Law" for GDP data from 1961 through 2012. A conventional "Chi Square" test shows that both the USA and China data fail to obey Benford's Law at a confidence level higher than 95%.
What we call Benford's Law states that the first digits of a collection of numerical data will follow a known and non-intuitive pattern UNDER THE RIGHT CIRCUMSTANCES. (See this link for a good discussion.)
But GDP % Change over time is not a data collection that typically satisfies criteria for Benford's Law to be relevant. In fact, Benford's Law is often mis-used.
LINK TO WORLD BANK DATA SOURCE
BUT WE FIND THIS TEST TO BE UNRELIABLE
See above a graph that demonstrates BOTH the USA and China fail "Benford's Law" for GDP data from 1961 through 2012. A conventional "Chi Square" test shows that both the USA and China data fail to obey Benford's Law at a confidence level higher than 95%.
What we call Benford's Law states that the first digits of a collection of numerical data will follow a known and non-intuitive pattern UNDER THE RIGHT CIRCUMSTANCES. (See this link for a good discussion.)
But GDP % Change over time is not a data collection that typically satisfies criteria for Benford's Law to be relevant. In fact, Benford's Law is often mis-used.
LINK TO WORLD BANK DATA SOURCE
Wednesday, February 5, 2014
Tuesday, January 28, 2014
You say marijuana, I say Bitcoin?
According to Bloomberg, the SEB AB Bank has refused to set up Bitcoin accounts due to concerns about money laundering. The news about Silk Road getting shut down and prominent Bitcoin speculators being arrested for money laundering comes at the same time that legal marijuana businesses appear to have no access to banks due to the same money laundering concerns. Except of course that legal marijuana business can transact in cash whereas Bitcoin only has value if it can be converted into another currency. Unless one were to shop at Overstock.com where apparently they still take Bitcoins, money laundering concerns be damned! Does anyone know if Overstock's Vice Chairman, Jonathan Johnson, is as worried about Bitcoin and money laundering as he is about gay marriage?
Monday, January 27, 2014
Bitcoin miner beware!
NY Times's Dealbook has reported that 2 executives of Bitcoin business have been arrested, accused of facilitating drug transaction on the now defunct website Silk Road. Investors looking to profit from Bitcoin should tread carefully lest they be accused of being a part of a money laundering scheme.
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