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Second Circuit Reverses Conviction Of Two Traders Accused Of LIBOR Rigging Scheme, Finding Insufficient Evidence Of False Or Fraudulent Statements
02/01/2022On January 27, 2022, the United States Court of Appeals for the Second Circuit reversed the convictions of two former traders convicted of wire fraud and conspiracy to commit wire and bank fraud, part of the widely-publicized series of prosecutions for allegedly manipulating the London Interbank Offered Rate (“LIBOR”). US v. Connolly, No. 19-3806, 2022 WL 244669 (2d Cir. Jan. 27, 2022). The Court held that although the government had offered evidence that the former traders had sought to impact LIBOR through their submissions, the government had failed to offer sufficient evidence that they did so through fraud. Because the LIBOR instructions with which the submitters were required to comply called for a hypothetical rate at which the submitting bank could borrow funds, the Court held that if the rate submitted was one a bank could request, be offered, and accept, the submission, irrespective of its motivation, would not be false. And, in this case, the Court found that there was no evidence that the submitted rates were false under that standard. Thus, even if the conduct could be perceived as dishonorable, the Court held that the convictions had to be reversed.
Defendants Matthew Connolly and Gavin Campbell Black had been convicted in October 2018. During their employment, Connolly and Black worked at one of sixteen banks (the “Bank”) that submitted daily borrowing rates to the British Bankers Association (“BBA”) pursuant to instructions issued by the BBA. The BBA took the rates submitted by the banks and applied a formula to arrive at an adjusted mean rate for various tenors—LIBOR. During the trial, the jury saw numerous emails and chats, and heard testimony from several cooperating and expert witnesses, purporting to demonstrate that Connolly and Black induced their colleagues on the Bank’s derivative desk to alter their daily submission to the BBA in hopes of influencing LIBOR in order to increase the profitability of the Bank’s holdings, primarily in interest rate derivatives tied to LIBOR.
The government argued—and the District Court agreed when denying defendants’ Rule 29 motion for a judgment of acquittal—that the Bank used a specific method (a “pricer”) for arriving at one particular rate for which it could accept interbank offers, and that Black and Connolly caused the rates submitted to the BBA to be altered so that they were inaccurate and differed from the pricer output to the Bank’s advantage. Black and Connolly were sentenced to time served and periods of home confinement.
On appeal, defendants argued that the government failed to provide any evidence that Black and Connolly’s statements and requests of the Bank’s derivatives desk led to any false or material statements, or that any such statements were made with fraudulent intent. In particular, defendants contested the notion that any one rate existed (such that submitting a different rate in response to the BBA instructions would be false or misleading), that traders like Black and Connolly could not share their holdings with the derivatives desk, and that Black and Connolly’s conduct was unique in the market. The government also cross-appealed defendants’ sentences of home confinement, especially given that Black was a foreign resident serving his sentence abroad.
In overturning the convictions, the Second Circuit agreed with defendants that the government failed to put forward any evidence showing Connolly and Black, or in turn the Bank, had made false or misleading statements in submitting their daily rates to the BBA. The Court emphasized that federal fraud statutes “are not catch-all laws designed to punish all acts of wrongdoing or dishonorable practices.” Instead, the Court emphasized that: “In order to determine whether LIBOR submissions … that were affected by requests of Connolly or Black—undisputedly requests in aid of derivatives contracts held by them or by traders they supervised—constituted statements that were false, half-truths, or fraudulent omissions, we must begin by examining the BBA LIBOR Instruction with which the LIBOR submitters were to comply.” And the BBA LIBOR Instruction directed each panel bank to state, as to each tenor of the currency at issue, “the rate at which it could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size just prior to 1100.” (emphasis added). Thus, as the Court recognized, it asked for a hypothetical rate.
In reviewing the evidence relied on by the government, the Court noted two fundamental issues: first, the government purported there was “one true interest rate” at which the Bank could borrow money, and second that this rate was automatically generated through a standard set of inputs to the pricer. The Court held that the evidence showed the opposite was true—even if it generally did not, the Bank could borrow money at varying interest rates, and the rates the Bank submitted were the result of many factors including, but not limited to, automatically collected data. The Court noted that the testimony contained several instances where Bank employees indicated varying factors that could influence daily estimates by the derivatives desk and impact the ultimate rates submitted. And, ultimately, the Court found that the government did not offer any evidence negating the fact that the submissions by the Bank to the BBA reflected rates at which the Bank could have borrowed or loaned money. Instead, the Court found that the government relied only on evidence that Connolly and Black had induced their colleagues to move rates lower or higher on some occasions, but without showing that the statements were false within the meaning of the BBA instruction. Without such evidence, the Court reversed the convictions of Black and Connolly and remanded to the District Court for a judgment of acquittal. The Court also denied the government’s cross-appeal regarding defendants’ sentence as moot in light of the judgment of acquittal.
While the ruling addressed a particular set of facts, it is nonetheless a significant one that may have a disciplining effect on charging decisions in white collar cases. In particular, by focusing with precision on whether the statements at issue were, in fact, false, rather than simply designed to achieve an improper purpose, the Court issued a reminder on the limits of federal fraud statutes. Moreover, a number of individuals have previously pleaded guilty in connection with the same case and may now seek to withdraw their pleas.
