UBS, the Swiss banking giant, is close to reaching settlements with American and British authorities over the manipulation of interest rates, the latest case in a multiyear investigation that has rattled the financial industry and spurred a public outcry for broad reform.
UBS is expected to pay more than $450 million to settle claims that some employees reported false rates to increase the bank’s profit, according to officials briefed on the matter who spoke on the condition of anonymity because the talks were private.
If the bank agrees to the deals with various authorities, the collective penalties would yield the largest total fines to date related to the rate-rigging inquiry and would increase the likelihood that other financial institutions would face stiff penalties. Authorities dealt their first blow in the rate-rigging case in June when the British bank Barclays agreed to a $450 million settlement.
A spokeswoman for UBS declined to comment. The agencies leading the UBS investigation, the Commodity Futures Trading Commission, the Justice Department and Britain’s Financial Services Authority, also declined to comment.
The UBS case will provide a window into systemic problems in the rate-setting process, which affects how consumers and companies borrow money around the world. After reviewing thousands of internal bank e-mails and interviewing dozens of employees, the authorities have uncovered patterns of abuse at the major banks that help set benchmark interest rates.
Libor Explained
The sprawling investigation is focused on benchmarks like the London interbank offered rate, or Libor. The rate, a measure of how much banks charge each other for loans, is used to determine the costs of trillions of dollars of mortgages, credit card charges and student loans.
The authorities claim that UBS traders colluded with rival banks to influence rates in an effort to bolster their profits, according to officials briefed on the matter. Some traders at UBS were suspended this year over the matter.
Given the scope of the case, the UBS settlement is expected to heighten calls for a reform of the Libor system. Lawmakers are pushing to change the way banks report rates, providing more transparency to consumers, companies and investors that rely on the benchmark.
The reform movement gained momentum after global authorities secured the settlement with Barclays. Regulators had accused Barclays of reporting false rates, a scandal that prompted the resignation of the chief executive and other top officials at the bank.
Global authorities are now moving forward with civil and criminal cases, setting up the potential for major fines and regulatory sanctions. Some banks are in advanced settlement talks, including UBS and the Royal Bank of Scotland. The Royal Bank said it expected to disclose penalties before the firm’s next earnings release in February. Deutsche Bank said last month that it had set aside money to cover potential fines, although it was too early to predict the size.
American authorities are hoping to complete a deal with UBS by the middle of the month, according to officials briefed on the matter. The officials noted that the discussions could spill into next year. The talks could also break down, in which case the authorities would file a lawsuit against the bank.
It is unclear whether global authorities will act in tandem on the UBS case. The bank and the regulators would prefer to strike a deal together, but the agencies are proceeding at different speeds.
Investigators say the broader Libor case could go on for years.
Canadian, Swiss and Asian authorities as well as the Justice Department, the Commodity Futures Trading Commission and Britain’s Financial Services Authority are investigating the actions of more than a dozen banks. Along with UBS, the futures commission is focused on potential wrongdoing at two American banks, Citigroup and JPMorgan Chase, the officials said. HSBC is also under scrutiny.
In addition to the regulatory cases, the Justice Department has identified potential criminal wrongdoing by traders at Barclays and other banks. The banks also face private lawsuits from large investors like local governments, which claim to have suffered losses as a result of interest rate manipulation. The New York attorney general has subpoenaed 16 banks over their role in the scandal, an action that could foreshadow civil lawsuits. Analysts predict the financial industry could face penalties of up to $20 billion.
“The evidence that comes out of any future settlement is likely to be enormously helpful for our claims,” said David E. Kovel, a partner at the law firm Kirby McInerney who is representing clients in a potential class-action suit related to Libor.
For UBS, the Libor case comes at a difficult time.
It has faced a series of legal problems since the financial crisis. In 2009, the bank agreed to pay $780 million to settle accusations by American authorities that it helped wealthy clients avoid taxes.
In 2011, it announced a $2.3 billion loss prompted by a rogue trader, Kweku M. Adoboli, who received a seven-year jail sentence for fraud last month. The firm agreed to pay a $47.5 million penalty to the British authorities in connection with the trading loss.
In the Libor case, UBS has been eager to cooperate. It has already reached a conditional immunity deal with the antitrust arm of the Justice Department, which could protect the bank from criminal prosecution under certain conditions. It is also cooperating with Canadian antitrust authorities by handing over e-mails and other documents implicating other banks.
But it did acknowledge publicly that such deals would not shield the bank from potential penalties from other regulators. The Justice Department’s criminal unit, for instance, could still take action against the bank.
UBS disclosed last year that it was the subject of investigations related to Libor, saying it had received subpoenas from American and Japanese authorities. Swiss and British regulators have joined the UBS investigation, which involves a number of currencies in the Libor system.
The timing of the Libor cases against UBS depends in large part on cooperation among regulators.
The Financial Services Authority in Britain has worked closely with its American counterparts. In total, the British regulator has about 160 people working on its various cases against banks, which are at different stages of development.
As the top watchdog of London’s financial services industry, the British regulator has positioned itself as a conduit for document requests from international regulators regarding Libor, which is set daily by banks in London. The agency also organizes interviews for its American counterparts with London-based bankers involved in the inquiries, according to an official with direct knowledge of the matter.
British regulators had been ready to move against UBS a month after officials announced a settlement with Barclays, the person added. The settlement has been delayed, however, as global authorities have tried to pursue a joint agreement with the bank.
“We’ve been going at the pace of the slowest regulator,” the official said.
