As the trial against a former foreign exchange (FX) trader charged with price fixing kicked off in a Manhattan court last month, it is important to understand that criminal antitrust exposure has increased for traders at global banks dramatically over the past 10 years due to the expanding reach of U.S. antitrust law. Recently, the Department of Justice (DOJ) has scrutinized bankers dealing in major markets when their efforts to gather market color from other bankers seemingly spilled over into collusion. Their actions have not only embroiled them in Kafkaesque investigations, but even if a jury finds a trader not guilty or the DOJ investigation is closed with no action, regulators and private plaintiffs’ actions will persist for years and may result in billions of dollars in fines and civil settlements, debarment and suspension as asset managers, and reputational risk.
There are primarily two ways investigators have learned about potential collusion among traders: leniency applications and required self-reporting.
The DOJ Antitrust Division’s corporate leniency policy allows the first company to self-report a criminal antitrust violation and cooperate to secure a nonprosecution agreement, and potentially even have its key executives covered under that nonprosecution agreement. An executive may come forward and get the same protection if he or she is first in the door and beats the company in. Those who come in second, third or not at all risk prosecution and higher penalties the longer they wait. For some bankers, that has meant jail sentences. According to public statements by DOJ officials, applications for leniency under the Antitrust Division’s leniency policy are the reason for easily more than half of the hundreds of prosecutions secured by the Antitrust Division across numerous industries over the past decade.
Recent plea agreements and deferred prosecution agreements with global banks have required those banks to self-report to the DOJ potential antitrust and fraud violations by their traders. This does not bode well for traders at global banks because, in the DOJ’s view, these banks are now recidivists, resulting in the DOJ increasing resources for uncovering the full story even when traders are in a different market employed by a different subsidiary with different managers.
What constitutes a violation?
A criminal violation of the antitrust laws requires only that two or more competitors agree to influence a price. That is price fixing. Significantly, there is no requirement that a person intends to violate the law or that the result of the combined effort actually had an adverse effect on any potential victim. It’s a violation simply to make a joint effort to push a price in one or direction or another, the penalty for which can be up to 10 years in jail.
Implications for traders
The Antitrust Division has made it clear that due to the importance of the financial services industry to our nation’s economy and the global economy, it will continue to pursue even the toughest cases. That means we can expect more charges against bankers even where there is only a little better than a 50% chance that the government will win at trial.
An example of the Antitrust Division’s commitment to these prosecutions was the trial against three former FX traders charged with price fixing in 2018. The DOJ’s case was based on the testimony of a witness who participated in the alleged conspiracy and received a nonprosecution agreement in exchange for cooperation and testimony. The indictment alleged that the cooperator and three other traders at competing global banks agreed to influence the price of the euro-U.S. dollar currency pair through an agreement to help each other and refrain from trading against each other. Although the defendants were acquitted, each one lost their job and faced multiple regulatory actions.
Courts have ample experience assessing price fixing, and prior to the trial, the court stated, “[w]hatever may be its peculiar problems and characteristics, the Sherman Act, so far as price-fixing agreements are concerned, establishes one uniform rule applicable to all industries alike.” The court went on to state unequivocally that price-fixing allegations against competitors occupying the same level of the FX market structure is a criminal violation.
In late October, before Judge John G. Koeltl in a Manhattan federal court, the DOJ began the trial of Akshay Aiyer, a former JPMorgan trader, based on similar allegations of FX market collusion. Unlike in the first FX trial, Aiyer must face two of his alleged co-conspirators, who have already pleaded guilty to participating in the conspiracy with Aiyer and agreed to testify if needed.
These two FX cases follow the significant Antitrust Division prosecutions of brokers and traders of the London Interbank Offered Rate (LIBOR). Beginning as far back as 2003, numerous brokers and traders conspired to manipulate LIBOR by submitting intentionally erroneous borrowing costs instead of submitting the rates the bank would actually pay to borrow money. The traders also colluded with members of other global banks to do the same, with the effect of influencing LIBOR in a way that would benefit the traders. Sixteen individuals were criminally charged. As with the FX defendants, many of the LIBOR defendants were not U.S. citizens, did not work for banks in the U.S. and did not trade in the U.S. Six banks, including their non-U.S. affiliates, were also convicted and had to pay more than $1.3 billion in criminal fines.
The risk for traders will persist. The case law to pursue traders in these markets has been refined, giving courts more experience and comfort to let these cases on the criminal side proceed in conjunction with the cross-border regulatory actions and growing civil class actions.
While the DOJ has faced scrutiny for not prosecuting bank CEOs, it has added a tool in pursuing market manipulation against market makers. The antitrust law in the U.S. covers various modes of conduct and those who manage traders must be aware of the risks. Measures can be taken to ensure communications between traders are monitored and trading is analyzed. Managing this risk is vital for bankers.