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.

Now a Crime In Venezuela - Publishing FX Rates

It would be funny if not true - similar to Argentina's fining consultants who tried to calculate the true rate of inflation a few years ago, the Venezuelan central bank is now suing a web site for publishing black market fx rates. To state the obvious, the problems in Venezuela are not related to people knowing the current black market rates but instead, the economic policies of the government. Of course, a lawsuit provides the illusion that it is otherwise.

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.

FX Manipulation Lawsuit Tsunami at Banks' Doorstep

First, about three weeks ago, JPMorgan settled an FX manipulation lawsuit for a reported $100 million. Now, Reuters reports that a judge allowed the investor plaintiffs' case to go forward to trial over the banks' objections. These included that there was a lack of evidence and that a prior LIBOR case alleging antitrust abuses was thrown out of court.

These two events alone should bring forth a barrage of suits as success seems more probable. In addition, now that this trial can go forward, the banks' position looks to be hurt by two factors.

First, depositions can now be taken, which may provide additional evidence of wrongdoing (several of the banks have already been fined by regulators following employee interviews). Second, a problem in suing to date has been attempting to prove wrongdoing and antitrust behavior. There is a lack of data on trades executed by banks on specific dates in specific currencies. Trade data released by banks during the discovery process may make the plaintiffs' calculation of any damages much easier, rather than relying upon models of what may have been manipulation based solely upon price movements.

While lawsuits from investors (money managers, pensions funds, etc.)and corporations are to be expected, many other groups impacted by currency rates can be expected as well. As an example,a few weeks ago we reported on British farmers that may have been affected by the conversion of subsidies from euro to British pounds.

Will the Banks be Hit by a Wave of FX Manipulation Lawsuits?

An article in yesterday's Telegraph reports that UK farmers were hurt by the FX benchmark rigging scandal, as there is a 2.6 billion pound EU subsidy that first has to be converted from euros before paid to British farmers. An unclear reference in the article cites one day's manipulation that cost the farmers 16 million pounds in one year.

Regardless of the details here, what struck us at FinancialPests, was the wide range of potential suits with which the banks could be hit. Beyond all of the financial players, who we would expect to be more likely to file suits now that JPMorgan has settled one US suit, there may be many others as well. UK farmers would not have been on our radar screen as potential litigants(although no suit was mentioned in the article). Europe is, of course, less litigious than the US, and slower to file suits, but this reinforced to us that potentially, there may be a landslide of suits filed around the world during 2015.

From SCOTUS Blog: LIBOR Litigation

For those of you following the LIBOR litigation appeal in front of SCOTUS, here's an excellent write-up from the good folks at SCOTUS blog.   

Not Edgar Too! Do High Frequency Traders Have an Advantage?

Bloomberg reports that a study highlights another way that high frequency traders appear to be taking advantage of slower market players.  The SEC's EDGAR system receives companies' required  filings electronically.  There are some participants that pay to receive this service directly while most can access it for free online.

The study indicates that the documents are received between 0 seconds and up to one minute earlier by those who pay compared to when the documents are made available online to all others, 10 seconds earlier on average. The study also shows that in cases where the filing availability was made earlier to paying market participants, abnormal volume and price moves began on average 30 seconds before availability to the general public.  The study does not tie the early availability to these moves, stating that the cause is unknown.

While there are many reasons that some are concerned about high frequency traders making money at the expense of slower moving investors, this has not been heard of before by us.  While the article states that this is most likely unintentional, as high frequency traders did not exist when the system was initiated in the 1990s, it does seem to highlight another way that certain market players keep ahead of the regulators and the rest of the market.  Ironically the system replaced a much longer availability time discrepancy when reports were not available electronically at all.  The SEC has been reviewing the situation at least since June.

We will need to await the SEC's review to assess market impacts and the potential for a new set of "market rigging" lawsuits.

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.

Goldman and Bain settle antitrust suit against private equity

NYT Dealbook reports that Bain Capital and Goldman's private equity division have settled an antitrust suit, breaking ranks with the other private equity defendants. The allegations involve PE firms essentially colluding on the price they were willing to pay for target companies, thereby denying shareholders of potentially higher takeover bids.

I haven't heard much about this suit before the settlement. Have any incriminating documents come to light to trigger the settlement?  Where is the DOJ?  

International Financial Law Review on ISDAfix

For those who can't get enough of ISDAfix, he IFLR just published The ISDAfix Scandal: Injured Investors. There is still surprisingly little information about the ISDAfix scandal. I haven't seen any banks enter into a settlement with regulatory authorities where they reveal how ISDAfix was manipulated and, just as importantly, the duration and the degree of any manipulation if it occurred.  Until that data become available, there's not much more to discuss. 

Something Funny Happened on the Way to Court

News about the alleged forex manipulation has sucked most of the media's attention and focus away from the Libor and ISDAfix scandals.  I just saw, however, this recent piece from Global Insurance Intelligence discussing the potential payouts on the ISDAfix scandals. The article suggests that the payouts for ISDAfix could dwarf the costs of Libor and forex but does not share any analysis as to how they got to that conclusion. I don't have a crystal ball telling me whether there will in fact be any payouts on ISDAfix and if so what they will be, but this is a welcome distraction of the steady drumbeat of news about forex traders at big banks being suspended or fired. 

Credit Suisse Estimates US Fines and Other Litigation Costs of $104 Billion

FT Alphaville reports the doubling of Credit Suisse's estimate for US litigation costs from last year to this, from $58B to $104B.  Of this, only $69B has been reserved to date.  US regulators are looking for substantially higher penalties for misconduct on the part of banks than in the past, and many European banks are expected to be severely penalized for many actions. Credit Suisse breaks down its reserves into seven areas, as can be seen in the article.

The WSJ reports that litigation costs have been a part of US bank stress testing but have not been captured in European stress tests.  That is now changing as the European Central Bank and European Banking Authority are both concerned with the potential scope of the costs.  The EBA has asked individual countries to look at "conduct risk" as part of their stress testing.  The ECB takes over the role of European banking supervisor on November 4 from national regulators.  Based upon CS's litigation costs equaling about half of the losses from the financial crisis, the ECB will be kept quite busy in its new role.

Banks Seek Dismissal of FX Fix Rate Manipulation Class Action Lawsuit

Reuters reports that the 12 banks included in the WM Reuters manipulation class action suit are requesting that the case be dismissed.  This would seem to be a standard legal maneuver but we will need to wait to see the judge's ruling.

The banks state that no specific instances of manipulation are mentioned in the suit, nor is there any specific instance of harm brought forth in the suit.  The plaintiffs apparently are waiting for internal bank or regulatory investigations to provide them with some specifics.  The banks are hoping for dismissal before this occurs and to avoid the discovery process if the case is allowed to continue.

Deutsche Reported to Set Aside $2.7 Billion in FX Legal Costs and Fines

Last week Deutsche announced that in total, it is facing 1,000 lawsuits with potential payouts above 100,000 euros. We reported here last week that Bafin, the German regulator, announced that the FX benchmark probe was "much, much bigger" than the LIBOR case.  Now Reuters reports that sources tell it that Deutsche is setting aside $2.7 billion to cover future FX fines and settlements.

Put these together and, while it is not certain what has been found so far in the internal and various regulatory investigations, Deutsche clearly believes that there will be substantial costs going forward of at least that amount.  Of course, this does not necessarily mean that Deutsche believes that they are guilty as they may feel that they are meeting accounting/legal requirements in recognizing these costs at this time.  However, throw in several FX traders that Deutsche has suspended during its internal investigation, and it is difficult not to lean towards the view that where there is smoke there is fire.

London Silver Daily Fixing to End August 14 After 117 Years

Reuters reports that Deutsche Bank has postponed to August 14 its decision to drop out of the London Silver Market Fixing.  In January Deutsche reported that as part of its retreat from much of the commodity business, it was going to sell its' memberships in the gold and silver fixes, run by five and three banks, respectively. They have not been able to sell either so far and announced that they will drop out of the processes on August 14.  The London Silver Market Fixing Ltd. said that the fix will cease at that date.  The possibility of another firm taking over the fix with replacement bank(s)  remains a possibility, although this might be a difficult time to attract anyone to establish benchmark prices.  The CFTC ended an investigation into the silver fix in 2013 without finding any wrongdoing.

Many lawsuits regarding the gold fix are currently in the process of being consolidated by the courts.  There do not appear to be any lawsuits regarding the silver benchmark.

Clients will Need to Pay for Trading at FX Benchmark Rates

We have said in previous posts that trading with a bank for a fix later in the day, without paying the bank for the service (most fix trades are executed at the midpoint, avoiding even the usual bid offer spread paid for an immediate trade), is the source of much of the trouble with fixes.  Clients wanted it and banks accepted it.

This article in FX Week (subscription) describes the problem that the banks have with these trades.  Trading before or during the fix can bring accusations of front running or manipulation, and trading after the fix risks incurring losses, which banks have been particularly unwilling to risk since the financial crisis.  Based upon the allegations in lawsuits and the regulatory and bank investigations underway, many suspect that some bank traders may have found ways to make profits on such trades anyway, including collusion among the banks.

For those who wish to continue fix trading, they may ultimately need to be willing to pay a bank to take on this risk or manage the risk around the fix themselves, either utilizing algorithms or traders with tight risk parameters.  Managing the risk by the firm involves staffing/trading costs as well as the cost of variances between realized rates and the fix.  At the moment there is no indication that banks are considering charging for fix trades, but with continuing compression in bank spreads on non-fix trades, eventually this may be part of the solution.

Class Action FX Benchmark Lawsuit Filed

A dozen individual lawsuits alleging antitrust and anti-competitive behavior on the part of the 12 largest FX trading banks, based upon their behavior at the WM Reuters London Close FX fix, were consolidated and filed as a class action last week.  The plaintiffs and defendants are listed below.

The allegations are similar to those aired in the press over the last nine months or so.  This suit has updated some of the individual suits based upon recent information from the Bank of England and recently fired or suspended bank traders and include some examples of how FX rates were allegedly manipulated.  While for bank customers and those interested in the integrity of markets, the issue is simply whether or not the allegations are true, for the success of the suit, antitrust and anti-competitive behaviors must be shown.  Thus much of the suit contains the plaintiffs' building of such a case.  Similar issues drove the LIBOR case.

Much of the information for the case and press stories, relates to banks' internal investigations and their cooperation with regulators.  As highlighted in the suit, DOJ LIBOR non-prosecution and deferred prosecution agreements require many banks to provide information relating to benchmark manipulation, including manipulation of FX benchmark rates.

The class has been defined as those trading FX at or around the London Close since at least June 1, 2003. Included are those not trading the fix but trading at around that time of day and those trading forwards and swaps as well as spot.

No attempt is made to quantify damages or who are the members of the class.  Reference is made that records should exist, which we can only assume would be held by the banks.

Plaintiffs                                                                        Defendants
Aureus Currency Fund                                                     Bank of America
City of Philadelphia, Board of Pensions and Retirement     Barclays
Employees’ Retirement System of the Government of       BNP Paribas
       the Virgin Islands                                                     Citigroup
Employees’ Retirement System of Puerto Rico Electric      Credit Suisse
       Power Authority                                                       Deutsche Bank
Fresno County Employees’ Retirement Association           Goldman Sachs
Haverhill Retirement System                                           HSBC
Oklahoma Firefighters Pension and Retirement System     JP Morgan
State-Boston Retirement System                                      Morgan Stanley
Syena Global Emerging Markets Fund                               RBS
Tiberius OC Fund                                                            UBS
Value Recovery Fund
United Food and Commercial Workers Union and
       Participating Food Industry Employers Tri-State
       Pension Fund

New Consolidated Lawsuit Filed on Alleged FX Rate Manipulation

The WSJ reports that a new lawsuit was filed by 12 investors, all of whom had previously filed individual suits that have been consolidated by the courts into this one suit, amending and expanding upon a suit filed in November, 2013 by A Haverhill Retirement System (first mover advantage for the fund, as it was the first of these type suits filed). Most of the plaintiffs are public pension funds in the US and Virgin Islands, with 12 major banks charged with colluding to manipulate benchmark currency rates.  Collusion is charged, based upon a " small and close-knit group of traders" using chat rooms and instant messaging, often having worked in previous jobs together, living in the same neighborhoods and socializing together.

Interestingly, the complaint did not quantify losses, calling the impact of the alleged manipulation "presently undetermined".  We have looked at this issue as well, but on an industry-wide rather than an individual firm basis.  The work requires many assumptions, particularly when there is no available data as to what, if anything, actually occurred on particular days. Thus, we assume that the plaintiffs will be seeking data from the banks and looking to what regulators unearth to help their case.

Reuters: 30-some currency traders globally placed on leave, suspended or fired

Reuters reports on the latest casualty from internal investigations at banks relating to the alleged FX manipulation scandal.  While Kai Lew, Deutsche Bank's FX sales director is the first known female to be put on leave, the more interesting number is the tally by Reuters that there are 30-some traders globally who have had administrative action taken against them.  By my count people have been laid off, suspended or terminated on at least 3 if not 4 continents across the major banks.  The reporters over at WSJ have compiled a list for those who want to track.  

Asian Regulators Probing Reports of Oil Benchmark Manipulation

The Wall Street Journal reports that British Petroleum says that Asian regulators are probing potential oil benchmark rate manipulation, in addition to earlier reports of European and US regulators.

There are similarities to the claims in the FX markets where allegations involve major banks manipulating rates set by WM Reuters.  Here it is Platts that sets the benchmarks involved, and last year large oil companies and Platts were subject to unannounced inspections by EU regulators.  Reports are that Japanese and Korean regulators became involved within the last three months.

BP also reported that 15 class-action lawsuits have been filed in the US alleging manipulation and antitrust violations, including a case brought by oil traders.  A similar number of cases have been filed in the FX allegations.

Both the oil and FX stories continue to unfold with few hints of an early conclusion.