Four years ago, a New York jury convicted Deutsche Bank employees Matthew Connolly and Gavin Black of wire fraud for manipulating Libor, a benchmark interest rate. Last month, both bankers were vindicated by a federal appeals court. One of the men’s attorneys called the charges “contrived.” Other observers suggested a political motive. Indicting Connolly and Black, they said, was meant to placate a public frustrated that no bankers were jailed over the 2008-9 financial meltdown.
New York super lawyer Kevin J. O’Brien calls the reversal a big deal, both within his circles and the financial world in general. O’Brien’s firm is well known for winning the 2019 acquittal of former Platinum Chief Executive Officer Joseph SanFilippo after a nine-week trial. Mr. SanFilippo had faced five felony counts for alleged securities fraud, investment adviser fraud, and conspiracy.
O’Brien calls the Connolly and Black decision “striking,” because it suggests that prosecutors should never have brought the case to trial. In citing insufficient evidence “as a matter of law to permit a finding of falsity,” O’Brien says that the appeals court “stood the government’s proof on its head.”
The three appellate judges determined that prosecutors had not proved that the bankers had made false statements, a prerequisite to proving fraud. More important, perhaps, while acknowledging that Connolly and Black had “nudged” Libor to the benefit of their employer, Deutsche Bank, the behavior was explicitly allowed by authorities in the UK. Moreover, the judges wrote that prosecutors had not proven that the bank could not have borrowed money at any of the rates that were ultimately published.
According to the ruling, “While defendants’ efforts to take advantage of DB’s position as a Libor panel contributor in order to affect the outcome of contracts to which DB had already agreed may have violated any reasonable notion of fairness, the government’s failure to prove that the Libor submissions did not comply with the BBA Libor Instruction and were false or misleading means it failed to prove conduct that was within the scope of the statute prohibiting wire fraud schemes.”
The BBA is the British Banking Association. The judges found that their rules only forbade collusion between banks, not collusion within the same bank.
“Where the government claimed there was only ‘one true interest rate’ if Deutsche Bank followed the rules, the Second Circuit found there were many possible rates, all equally valid, that the bank ‘could’ have submitted,” O’Brien observes. “It was as if the Court had the transcript of a different trial than the one the jury saw and heard.”
In the end, the appeals court panel determined that while the bankers’ conduct was “unseemly,” it was not criminal. The judges wrote that “the government failed to show that any of the trader-influenced submissions were false, fraudulent or misleading” and concluded, “The Libor submissions were not false.”
The ruling is not expected to have much of an effect on Wall Street. As of last month, banks in the United States are not allowed to use Libor. Instead, debt must be issued based on a benchmark of actual rates, not theoretical rates submitted by bankers, as is the case with Libor.
O’Brien hints that the changed landscape backed up the appellate court’s contention that the bankers were simply bit players in a flawed system. “Where the government painted Connolly and Black as interlopers who skewed automatic rate-setting for Deutsche Bank’s financial gain, the court saw them as two of many participants in a process marked by discretion and mutual adjustment,” he says.