Case raises questions about bank’s ‘top management’ as well as trading floor – judge
By Mark Watts and Mike Yuille | 23 May 2016
Documents forced out of the Royal Bank of Scotland led to an extraordinary accusation against it by a former business client.
Not only did RBS mis-sell interest-rate swaps in relation to loans of around £71 million, alleged Property Alliance Group (PAG), and not only were these financial products benchmarked to the Libor inter-bank interest rate, but the bank had committed fraud on its customer. The fraud, according to PAG, was linking the swaps to a benchmark rate that the bank was manipulating.
And PAG wanted to add that accusation to its particulars of claims against RBS. It is suing its former bank for a total of £29 million after, as it alleges, RBS mis-sold to it interest-rate swaps, supposedly to hedge interest payments due on loans. The swaps were benchmarked against £ Libor.
“The bank needs to account for the activities of its senior staff as well as the actions on the trading floor” – Sir Colin Birss, High Court judge
RBS denies the allegations and is “vigorously” defending the claim.
PAG also wanted to add the allegation that RBS and other banks submitted Libor rates in the wake of the credit crunch in 2007 when they were unable to borrow funds on the inter-bank market at all. And, it claimed, knowledge of serious problems with Libor from August 2007 until well into 2008 was known by RBS staff “at the highest level”.
The allegations relied on internal bank documents that RBS had to disclose to PAG in the “discovery” process in the case. But the bank objected to PAG’s proposed amendments to its claim, saying that the allegations were too wide and unsupported by the evidence.
At a preliminary hearing last November, the judge, Sir Colin Birss, considered whether the documentary evidence was sufficient to allow PAG to make the claim of fraudulent misrepresentation, as detailed in a schedule submitted by PAG. He decided that it did:
i) There are a number of documents starting from one dated 9th August 2007 which provide arguable support for the allegations of misconduct in relation to USD Libor. An example is a document dated 16th August 2007, whereby the submitter at RBS (Paul Walker [then head of RBS Money Markets in London]) seems to have been asked to make a submission that took into account the pricing of a floating rate transaction that would impact the relevant book on the following day. The schedule also refers to documents from June and October 2008 which provide arguable support for an inference that derivatives traders sought to influence the bank’s USD submitter on those occasions. These two are notable given the admissions of attempted manipulation on those dates which are now sought to be made by RBS in its Amended Defence, served after this schedule.
ii) There are a number of documents (fewer than for USD) which arguably support the allegations of misconduct relating to GBP Libor. For example there is a calendar reminder set on 11 September 2009 whose purpose, PAG submits, should be inferred as having been to remind Mark Thomasson [senior trader at RBS Short-Term Markets and a director of Sterling Money Markets at RBS] to submit a low 6 month GBP Libor rate on 16th September 2009 at the request of RBS derivatives traders who had transactions set by reference to 6 month Libor that were due to fix on that date. On that date Mr Thomasson made a submission that was 5 basis points lower than the submission made on the previous day.
iii) There is an email dated 16th August 2007 from John Ewan (the [then] managing director of the BBA [British Bankers’ Association]) to Graham Niblock [then global head of Money Markets and co-head of Short-Term Markets] and Mark Thomasson, both of RBS and other members of the BBA FX and Money Markets committee. The email relates to “ongoing problems with the inter-bank market”. Mr Ewan requests a meeting to discuss issues. One issue is the BBA definition of Libor as being a rate at which a bank could borrow funds by accepting inter-bank offers. He points out that “currently there is no London inter-bank market”. Another issue to be discussed is “how best to defend ourselves against potential accusations that the current rates are not a genuine reflection of the market”.
iv) There is a record of a teleconference on 20th August 2007 involving Paul Walker of RBS with a representative of a hedge fund in which Paul Walker states that liquidity has completely dried up “so no one has really got a cash market anymore to base Libors on”. He also says “so people are just setting their Libors, you know, to suit what they’ve got on their book.”
v) There is an email dated 29th August 2007 from Ian Bedford of RBS Global Banking and Markets divisions to recipients including Graham Niblock, Scott Nygaard [then co-head of Short-Term Markets] and Kevin Liddy [then global head of Short-Term Interest Rates] which refers to illiquidity of the inter-bank cash markets and appears to state that, as regards GBP and USD Libor “the ‘mechanism’ is definitely broken”.
vi) There is an email on 15th November 2007 from Graham Niblock to a group including John Cummins [RBS Group treasurer], which refers to Libors in GBP and USD still fixing higher than where cash is actually trading in the inter-bank market. It states “we have stopped lending cash internally at Libor as it does not reflect our cost of funds any longer”.
vii) There are references in documents in November 2007 to “a meaningless benchmark”, “almost an irrelevant indicator”, and “Libor is kind of false at the moment”.
viii) On 29th November Paul Walker responded to an email from Mark Thomasson relating to a communication from John Ewan at the BBA in which Mr Walker wrote “Citibank, UBS and Deutsche put in regular Libors way below the market … UBS don’t really trade cash anyway, they set their Libors as many banks do to suit the Derivative Fixes. With no underlying cash market what do the BBA expect??????”
ix) On 30th April 2008 Johnny Cameron [then chairman of Global Banking and Markets] circulated a note of a meeting he had attended described as the BBA’s CEO’s meeting. It took place at the Bank of England on 25th April. The note was sent to a number of people including Mary McCallum (executive assistant to Fred Goodwin, then CEO of the RBS Group), Guy Whittaker [then group finance director], John Cummins, Peter Nielsen [then global head of Markets, Corporate and Institutional Banking] and Graham Niblock. It includes the following: “They wanted Banks to play $ libor very ‘straight’. I said FED needed to understand and be involved.” The word “they” seems to refer to the Bank of England. PAG submits this was a reference to the Bank of England directing banks to make accurate or honest submissions for USD Libor as opposed to inaccurate or dishonest submissions. PAG submits that it can be inferred that representatives of the Bank of England and each of the individuals to whom Mr Cameron sent the note were aware that, prior to it, Libor panel banks had not been submitting accurate or honest Libor rates at least for USD Libor. This material on its own does not support a plea of dishonest manipulation as opposed to knowledge that the rates were inaccurate, but it provides a properly arguable foundation for PAG’s allegation that those at the highest level in the bank were aware of serious problems with Libor.
x) There is an email dated 28th May 2008 from Johnny Cameron to John Cummins and Graham Niblock in which he states that he has received a call from Paul Tucker, the then Deputy Governor of the Bank of England. The email refers to concerns that the BBA may appear too complacent about the problem of Libor fixing. Mr Cummins replies referring to a primary area of concern as being USD Libor setting in London and the view that these rates do not reflect reality.
xi) There is a transcript of a conversation between John Cummins and Paul Walker on 2nd October 2008 which refers to the bank being in “gold medal spot” in the context of Libor submissions. Mr Cummins appears not to want RBS to be in that position. “Gold medal spot” seems to refer to having the highest submitted rate amongst the panel banks. PAG submits one can infer that following this call Mr Cummins passed on that instruction to Peter Nielsen and/or Scott Nygaard.
xii) It appears that on 25th November 2008 John Cummins sent a briefing note to Stephen Hester (then CEO of RBS) for a forthcoming meeting at the Bank of England in which it was noted that, amongst other things, “the inter-bank market is not functioning properly”.
The judge pointed out that this was not the trial, and he had not heard what RBS has to say in response. But he added:
There is evidence from which a properly arguable inference can be drawn that knowledge of serious problems with Libor existed at a senior level inside the bank. The issues raised in this action do not only concern the RBS trading floor, they concern top management with overall responsibility for Libor and for swaps. Based on the material relied on by PAG, the bank needs to account for the activities of its senior staff as well as the actions on the trading floor.
Asked for a response to the judge’s ruling, an RBS spokeswoman would only say: “RBS rejects the allegations made by Property Alliance Group Limited and will continue vigorously to defend this claim.”
Meanwhile, the judge also ordered RBS to disclose relevant board minutes and papers as well as communications with the Bank of England.
In January, RBS successfully applied to the chancellor of the High Court, Sir Terence Etherton, for the case to be heard by a judge on the “financial list”. Introduced last October, the list is made up of specialist judges who are deemed to have the expertise to handle claims related to the financial markets.
Birss, who oversaw most of the pre-trial hearings in the case, is not on the financial list, and so the trial will be heard by another judge.
Beyond Libor, RBS’s Global Restructuring Group (GRG) is also due to come under scrutiny in the trial that will be closely watched by regulators and yet more potential litigants – of RBS as well as other banks. It is expected to last six-to-eight weeks.
Exaro revealed last month that RBS faces pressure to set up a compensation scheme for GRG victims following the submission of a long-awaited report on the bank’s restructuring unit to the Financial Conduct Authority (FCA), which replaced the FSA.