Whistle Stop: CFTC Hands Record $200 Million Reward Under its Whistleblower Program

The Story

Last week, the US Commodity Futures Trading Commission (CFTC) handed a record reward of $200 million under its Whistleblower Program. The sum recognised the “specific, credible, and timely original information” provided by a former Deutsche Bank employee.

Between 2003 and 2011, Deutsche Bank employees were found to have manipulated the London Interbank Offered Rate or 'LIBOR'.

In 2015, the bank, and its wholly-owned subsidiary DB Group Services (UK) Limited, agreed to pay “$775 million in criminal penalties to the Department of Justice, bringing the total amount of penalties against the bank to $2.5 billion” (Compliance Week).

The Background

Introduced in the 1980s, the London Interbank Offered Rate, or LIBOR, has been called “the world’s most important number” (BBC), affecting interest on products such as mortgages and commercial loans, on both sides of the Atlantic, and estimated to affect the cost of $350 trillion of deals - or five times the value of everything produced in the world.

Each day at 11am, the ‘LIBOR submitter’ from each of the major banks would submit an estimate of the interest rate they thought they would be offered if they wanted to borrow money from another bank. The average of the middle 50% of bank estimates submitted would be taken and published.

However, the banks had a conflict of interest that arose as they had also staked money on LIBOR going up or down. In 2012, Barclays CEO Bob Diamond was forced to resign as Barclays was fined £290 million, after regulators on both sides of the pond found Barclays’ submitters had accepted improper requests from traders and instructions from managers to shift the rates they submitted. It was manipulation of the economy, skewing the average just slightly and making millions for the banks.

Barclays was one of sixteen financial institutions (WSJ) that came under scrutiny by regulatory authorities from countries including the US, Canada, Japan, Switzerland, and the UK. LIBOR trader Tom Hayes, a UBS and Citigroup trader jailed for manipulating LIBOR, argued that Bank of England and UK bank chiefs were complicit in practices known as ‘lowballing’ and ‘highballing’ (Business Insider). Released in January 2021 after five and half years, he told Global Capital that “People were battling for higher or lower rates, either from their own treasury department or their own derivatives positions”.

The UK’s Serious Fraud Office (SFO) brought charges against 13 individuals over the course of a “sprawling probe into the rigging” - a seven-year investigation which resulted in only four convictions, one guilty plea, and eight acquittals (Financial Times). Cases were brought against Japanese Yen and US Dollar traders, with the criminal standard of beyond reasonable doubt. The limited success rate may reflect not only how difficult juries can find financial cases to understand (one juror apparently fell asleep), but also the difficulty of obtaining a conviction in white collar crime if the practices are apparently systemic.

In the aftermath of the 2008 financial crisis, American lawmakers called for increased regulation within the financial industry. Created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFTC’s Whistleblower Program was introduced under Section 748 (CFTC.gov). It also hoped to avert further massive fraud such as Bernie Madoff’s Ponzi scheme.

What It Means For Businesses And Law Firms

The whistleblower recipient of the $200 million remains anonymous, but was represented by New York’s Kirby McInerny LLP.

Of the award, Kirby McInerny partner David Kovel said “The whistleblower laws recognize the fundamental truth that incentivizing persons with knowledge to come forward to report on frauds benefits the public as a whole by disclosing violations that likely would never have been caught” (KMLLP.com).

In October 2019, the SFO announced the closure of its investigation into LIBOR manipulation. The total expenditure over the seven years was over £36 million (SFO.gov.uk).

Striking a balance between anonymity and accountability raises difficult questions in the internet age (Clean Up the Internet). Tom Hayes, now released after serving his sentence, is on record as saying that he feels the LIBOR submitters should have been separated from the banks.

But he continues, “I don’t think you’re ever going to change the culture really, especially when your performance metric is entirely a function of how much money you bring in…” (Global Capital).