The smoke-filled chat room - Nicole Kar, Partner April 2014
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The smoke-filled [chat] room Nicole Kar, Partner April 2014
Overview
1. The Legal Framework
2. Trends in antitrust enforcement
3. Trends in financial regulation enforcement
4. Enforcement using chat room evidence:
a) the LIBOR case
b) Ongoing cases
5. Practical tips
1The Legal Framework
Antitrust Market Abuse
Behaviour will infringe competition law Behaviour will constitute market abuse if it:
where there is: 1. occurs in relation to a qualifying investment
1. an agreement, decision or admitted to trading on a prescribed market (or in
concerted practice; and respect of which a request for admission has been
2. it has the object or effect of the made) or a related investment; and
prevention, restriction or distortion 2. constitutes:
of competition. (i) insider dealing;
(ii) improper disclosure;
(iii) misuse of information;
Conspiracy to defraud (iv) manipulating transactions;
Conduct will be conspiracy to defraud when: (v) manipulating devices;
1. two or more persons agree; (vi) dissemination of false or misleading information
2. by dishonesty; (vii) distortion and misleading behaviour.
3. to deprive a person of something
which is his/hers, or to which he/she Principle 5 of the Principles for Businesses – A firm must
might be entitled or to injure some observe proper standards of market conduct – broader
proprietary right of his/hers. than the market abuse regime. Equivalent APER
principle for approved persons
2Burden of proof and evidential standard - antitrust
> The European Commission must show “sufficiently precise and
coherent proof” to support the existence of infringement, while the
CMA must persuade on the basis of “strong and compelling”
evidence.
> Given these infringements are of their nature secretive, inferences
can be drawn in the absence of other plausible explanation.
> Evidence is not analysed on a stand-alone basis – it is sufficient that
the body of evidence viewed as a whole meets the standard.
> Mere receipt of information concerning a competitor, or participation
in a meeting where strategic information is exchanged between
competitors can be enough to inculpate a firm.
3Burden of proof and evidential standard – market abuse
> Burden of proof is on the FCA.
> Standard of proof is the balance of probabilities.
> Because allegations of market abuse are serious, the FCA must
adduce cogent and clear evidence to establish them, but it is not
required to do any more than be satisfied / satisfy the RDC / Upper
Tribunal that the market abuse alleged more probably occurred than
not – Swift Trade v FSA [2013].
4Burden of proof and evidential standard – conspiracy to
defraud
> Burden of proof is on the SFO/prosecuting authority.
> Criminal standard of “beyond reasonable doubt” applies.
> Proof of dishonesty requires:
> that according to the ordinary standards of honest and reasonable
people, what was done was dishonest; and
> that the defendant realised that the conduct was – by the
standards of reasonable and honest people – dishonest.
> It is sufficient that the agreement is entered into: it need not be
executed.
5Enforcement trends
> Recent investigations have seen authorities push the limits of
antitrust.
> Antitrust has been used to “fill the void” in novel infringements.
> Focus is now beyond the classical “smoke filled room” and looks to
pure information exchange, “hub and spoke” breaches, signalling
and at the potential for infringement in complex multifaceted
relationships between players at different levels of the market.
6Information exchange and antitrust law
• Systematic info to a competitor
Stop! • Price/strategic current future information
• Intent to restrict competition/no legitimate
explanation
• Private exchange
Ask
Compliance • Historic data
• Aggregated data (no reverse engineering)
• Public information/data
Go ahead • Diligence in context of bona fide transaction
7A single exchange of competitively sensitive information? T-Mobile > Representatives of five Dutch mobile telecoms operators held a meeting. > Meeting discussed planned reductions of fees each would pay dealers who sold mobile subscriptions – confidential information was discussed, but not prices for subscribers. > One-time exchange led to a permanent change in the market in relation to handset subsidies. The number of contacts is irrelevant, the question is whether the contact afforded the opportunity to “knowingly substitute practical cooperation between them for the risks of competition.”; parameters of competition go beyond price. 8
What about a one-way disclosure?
RBS/Barclays
> An RBS trader disclosed information regarding the pricing of
loans to RBS customers to traders at Barclays.
> Information was shared over the phone, at social functions and
at industry events.
> Barclays blew the whistle to the OFT – no penalty.
> RBS was fined £28.9 million.
OFT considered it was entitled to presume the receiving bank
had relied upon the information when making its own
decisions about loan pricing.
9What about an indirect disclosure?
U-Haul
> U-Haul’s CEO used quarterly earnings calls to indirectly communicate
with its main competitor – Budget – who was known to be monitoring
calls.
> CEO spoke of U-Haul’s “price leadership” and the fact that Budget’s
refusal follow the price increase “hurt the industry”. Said U-Haul would
wait “a little longer” for Budget to respond to their price increase and that
even if Budget’s prices remained slightly below U-Haul’s, they should
ensure the differential is not significant.
> Aim was to increase prices of one-way rentals and strategy also included
directly contacting Budget’s regional managers and encouraging them to
follow U-Haul’s price increases.
FTC concluded that U-Haul had no legitimate justification for these
disclosures and therefore the intent was clearly to facilitate collusion
with Budget.
10Enforcement trends: Financial Regulation
> The FCA has been aware of the importance of chat rooms for some
years and will request IMs as a matter of course in investigations into
flows of information or irregular trading or pricing.
> Key concerns:
> Confidentiality (in relation to clients’ and the bank’s own positions).
> Conflicts of interest between clients or between clients and banks.
> Potential to encourage or enable the commission of market abuse
through exchange of information (front-running / pre-hedging / etc.)
or facilitating manipulative or collusive behaviour.
> FCA Business Plan 2014/15 announces the FCA will do a further
thematic review of the way in which banks control access to information
through Chinese walls to ensure confidential information received by
one part of a bank is not used by another in an abusive way.
> FCA has pushed boundaries of conduct regulation, using Principles to
take disciplinary action. 11Use of chat room evidence in enforcement: LIBOR
> Manipulation of input rate with a view to benefiting own trading position, to
detriment of counterparty to derivative trade.
> Enforcement by financial and competition regulators - total of fines and private
enforcement estimated to be as much as US$22 billion.
> Record European Commission fine of €1.71 billion (EIRD cartel – €1.042 billion;
YIRD cartels – €690 million).
> 12 traders so far charged by the SFO with the criminal offence of “conspiracy to
defraud”.
> In US first time a financial services firm held criminal liable under antitrust laws
for trader based market manipulation scheme.
“What was shocking about the LIBOR and EURIBOR scandals is not only the
manipulation of benchmarks … but also the collusion between banks who are
supposed to be competing with each other.”
12
Vice-President Almunia, 4 December 2013LIBOR - continued Smoking gun Bloomberg chat-room conversations internally (between traders and rate submitters) and externally (between traders in different banks). “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.” “If it comes in unchanged I’m a dead man.” “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.” “The jpy libor is a cartel now. [I]ts [sic] just amazing how libor fixing can make you that much money” Used to show incentives to manipulate (e.g. bonuses) as well as the agreement itself. “Life is tough enough over here without having to double guess the libors every morning and get zipper-de-do-da. How about some form of performance bonus per quarter from your b bonus pool to me for the libor service?” 13
LIBOR case – lessons learned > Competition enforcement focus was on core group of “manipulators” – those with ability to move the market. Anticompetitive “object” was easily established by IM evidence and incentives to profit and no effects analysis was required. > Commission appears to have recognised that strict application of standard information exchange guidelines is not always appropriate in traded markets. > Information exchange was important insofar as it facilitated a broader collusive objective. > Financial regulators’ enforcement has focused not only on manipulation itself but absence of adequate systems and controls. 14
Ongoing cases
> Forex
> Oil benchmarks
> Relates to suspected manipulation or collusion in relation to benchmark prices
for crude oil and refined products.
> Investigations underway by numerous authorities globally, and a number of
damages claims already filed in the US.
> Authorities are likely to closely review IMs between traders making
submissions to price reporting agencies (e.g. Platts).
> Gold
> London Spot rate is set through conference calls between three competitor
banks and clients.
> The US CFTC and the German financial regulator have both begun
investigating the gold-fixing process. Litigation has been launched against the
fixing banks in the US.
> Deutsche Bank has withdrawn from Gold/Silver price setting.
15Key messages
> In a sense there’s nothing special about chatrooms – they are just
another forum for the airport/pub/smoke filled room discussions familiar
to antitrust authorities :
“if the chat rooms contribute to the collusion, then.. that can
be worked around. I don’t know if banning that avenue would
be sufficient”.
> The IM/chatroom evidence from LIBOR and emerging from other
investigations demonstrates the informality around chat room
discussions and its durability as evidence:
“Ian … This is a great initiative that you and Neil have
instigated!!!!!!!!! However, a word to the wise, never ever put
anything in writing, its highly illegal and it could bite you right
in the arse!!!! suggest you phone Lesley and tell her to trash?
Talk to Dave. Mike”
16Key messages cont.
> The same conduct can give rise to issues under financial markets regulation,
antitrust law and criminal law.
> Antitrust law is filling the “void” in many recent cases given its wide scope.
> Financial services regulators’ expectation is that companies will have clear
policies and procedures, controls, monitoring and governance/oversight in
relation to employees’ use of chat rooms.
> Adequate policies will however not be a defence to antitrust breach.
> Authorities can raid to obtain IMs and chat room records which are relevant to an
investigation.
> Records of those IMs are likely to be held by numerous parties (participants in
chatrooms and third party service providers).
> Given multi-faceted relationships and informality around use of chatrooms,
careful communication is crucial.
17Practical tips
1. Trading-specific anti-trust training should be given to all traders and
refreshed on a regular basis. Key messages must be:
a) Do not coordinate in relation to prices offered/paid;
b) Do not exchange information which may be commercially
sensitive (e.g. current/future trades, trading strategy).
2. A framework for ongoing oversight and ad hoc investigations is
crucial to an effective compliance culture. This could include:
a) Red flag words which trigger automatic reports to compliance;
b) Random audits of traders’ IMs/chatroom discussions.
3. Be alert to complexities in trading relationships: counterparties are
often competitors, brokers can act as a hub for exchange.
18“Banks – especially those with trading desks – would be
wise to bolster their antitrust training and oversight systems
to ensure that traders don’t even appear to share
information on pricing or bidding on securities”
John Terzaken, former director of Criminal Enforcement, Department of Justice Antitrust
Division
19Contact
Nicole Kar
Competition/Antitrust Partner, London
Tel: +44 20 7456 4382
Mobile: +44 7795 234 559
Email: nicole.kar@linklaters.com
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