02-05-2013, 05:11 PM
Quote:Clubby London Trading Scene Fostered Libor Rate-Fixing Scandal
WSJ's David Enrich looks at how the London brokerage industry went to great lengths to curry favor with top traders. The brokerage industry's efforts to woo traders escalated from taking them to fancy dinners to sometimes providing them with cocaine and prostitutes to allegedly helping them manipulate a key global interest rate.
LONDONNeil Danziger's trades for Royal Bank of Scotland Group RBS.LN +0.16% PLC generated rich commissions for the brokers who handled them.
In return, brokers at London's Tullett Prebon TLPR.LN -0.45% PLC took Mr. Danziger to London strip clubs and spent long weekends with him in Las Vegas, according to people familiar with the relationship. Brokers at R.P. Martin Holdings Ltd., another London firm, gave him early access to lucrative trades, these people say.
Regulators now suspect the favor-trading went much further. U.S. authorities believe Mr. Danziger and brokers participated in an alleged scheme to rig a crucial benchmark that affects trillions of dollars of mortgages and other loans world-wide. People familiar with the investigation say the authorities believe Mr. Danziger asked brokers to help him manipulate the London interbank offered rate, or Libor, and that the brokers enlisted him in a rate-rigging scheme involving a different trader.
Traders and brokers have always enjoyed chummy, symbiotic relationships. But investigations into attempts to manipulate Libor highlight how efforts to curry favor escalated from expense-account meals and nighttime carousing to more legally questionable activities.
In London, the center of the Libor scandal, rules about such favor-trading are looser than on Wall Street. Brokers and traders interviewed by The Wall Street Journal said brokers routinely reward valued traders by returning a percentage of their commissions in the form of entertainment. Brokers have paid for traders to spend weekends in the Alps and Saint-Tropez, and on occasion, have even bought them cocaine or prostitutes, according to people who witnessed such activity.
A few years ago, U.S. and British regulators allege, some brokers were so eager to please bank traders that they helped with an illegal Libor-rigging scheme.
Mr. Danziger's former employer, RBS, admitted in a February settlement with U.S. and British authorities that its traders tried to manipulate Libor. The settlement didn't name Mr. Danziger, Tullett or R.P. Martin. It used letters and numbers to refer anonymously to several traders and brokers. People familiar with the probe say investigators believe Mr. Danziger was involved in the manipulation efforts, and that he rewarded brokers at Tullett and R.P. Martin with transactions designed solely to generate fees.
Mr. Danziger, a 38-year-old born in South Africa, hasn't been charged with any wrongdoing. A Tullett spokesman said the firm hasn't been informed by regulators that it is under investigation. An R.P. Martin spokesman declined to comment.
U.S. and British authorities say the alleged involvement of brokers allowed attempted rate-rigging to mushroom from a small cluster of bank traders into a broader effort that successfully influenced Libor.
Investigators believe brokers at R.P. Martin and ICAP IAP.LN -0.17% PLC, acting at the behest of bank traders who stood to profit from movements in Libor, encouraged other banks to provide inaccurate Libor data and spread false market information intended to move Libor, according to the people familiar with the probes. Investigators think traders at UBS AG UBSN.VX +1.08% and RBS, possibly among others, sent extra commission-generating trades and other payments to compensate the brokers.
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British fraud prosecutors in December arrested two R.P. Martin employees and a former UBS trader, Tom Hayes. Authorities allege he played a central role trying to rig Libor. None of them has been charged in the U.K.
As part of a $1.5 billion settlement in December with the U.K.'s Financial Services Authority, the U.S. Justice Department and the Commodity Futures Trading Commission, UBS admitted its employees tried to manipulate Libor. Mr. Hayes, who has been charged in the U.S. with fraud, told the Journal via text message earlier this year that "this goes much much higher than me." An ICAP spokeswoman said the firm is cooperating with various regulators.
Interdealer brokers such as Tullett, R.P. Martin and ICAP serve as middlemen for banks buying or selling financial products, taking a tiny cut as a commission. A busy bank trader can pay as much as $1 million a year in commissions to a single broker.
That provides brokers with a powerful incentive to persuade bank traders to route transactions through them. The London brokers and traders interviewed by the Journal estimated that roughly 5% of the brokerage commissions a trader generates often come back to the trader in the form of various perks. It isn't uncommon for a brokerage to spend $50,000 a year entertaining a single trader, they say.
While plenty of client entertainment takes place on Wall Street, traders and brokers say such activity is even more prevalent in London.
In the U.S., the Financial Industry Regulatory Authority, a Wall Street self-regulatory organization, imposes a limit of $100 per person per year on gifts or other spending by brokers designed to score more business or better terms. Finra says dinners and other business entertainment don't count toward this limit, provided they are "neither so frequent nor so extensive as to raise any question of propriety."
No such limit exists in the U.K.
British lawyers say there isn't anything wrong with a broker entertaining a trader to cultivate a relationship. But providing extravagant perks in explicit exchange for extra trading business might violate antibribery laws, they say.
Brokerage officials say entertaining traders is a legitimate form of relationship-building, not a form of payback. They say they have strict policies against improper or excessive entertainment.
As recently as last summer, BGC Partners Inc., BGCP +2.67% a New York-based brokerage, dispatched limousines to the homes of top traders at London banks. The limos ferried the traders' wives and girlfriends to a helicopter, which flew them to the Royal Ascota marquee event on London's social calendarfor a day of horse races, according to people familiar with the event.
"From time to time, BGC participates in distinctive corporate events for staff and clients," a BGC spokeswoman said. "We have strict policies and procedures in place to monitor entertainment."
ICAP has treated traders to ski weekends in Chamonix, France, according to a former bank trader who attended.
The ICAP spokeswoman said the firm "has maintained a strict policy on corporate entertainment for more than a decade covering the type and extent of any such activity. Any infringements are dealt with as a disciplinary matter."
Several former brokers and bank traders said they witnessed brokers providing clients with cocaine or prostitutes.
Compliance departments at some brokerage firms cross-check brokers' entertainment expenses against a "banned list" that includes a database of major strip clubs.
Brokers take traders to strip clubs anyway, according to former traders and brokers. When taking traders to strip clubs, Tullett brokers sometimes paid cash out of their own pockets, according to one trader who participated. The trader said the brokers told him they expected to be reimbursed after submitting inflated expenses for taxis.
Some brokers appear to see entertainment as part of explicit favors-for-business exchanges. An electronic-chat transcript unearthed during the Libor investigation showed a broker dangling lunch for an entire trading desk as an incentive for a trader to participate in transactions. In a separate incident, after one broker took a trader to Las Vegas, the trader sent a batch of orders to a rival brokerage, prompting the broker to send an angry missive to the trader demanding to know why, according to a person who read the note.
One former ICAP derivatives broker says the morning after treating a trader to a night out, "there would be a line of trades for me. I didn't even have to ask."
The difficulty of proving a quid pro quo helps explain why British authorities seldom go after brokers for lavish entertaining, according to industry participants and lawyers.
In one of the few cases brought, the Financial Services Authority in 2010 banned from the industry a broker at Tradition Financial Services, Fabio De Biase, for showering a hedge-fund trader with approximately £131,000 ($200,000) worth of cash, gift vouchers and gold bullion in exchange for higher commissions. The agency said Mr. De Biase violated an FSA guideline that requires finance-industry professionals to "act with integrity."
A broader probe into the entertainment of trading clients by other brokers at Tradition, majority-owned by French financial-services company Viel & Cie, VIL.FR -1.26% found evidence that some Tradition brokers hired prostitutes for traders, and took the traders to an outfit called Lady Marmalade Adult Parties, say people familiar with the investigation. The website of Lady Marmalade says it operates from a four-bedroom apartment in central London, equipped with an "erotic love swing," promising customers "an orgasmic time."
While the FSA didn't take any enforcement action, police in London are now investigating whether brokers provided illegal kickbacks, these people say. "There aren't specific rules about whether you can send your clients to go see prostitutes," an FSA spokesman said. "You have to pick what sort of things you look at as a regulator." (Prostitution itself isn't illegal in the U.K., but soliciting a prostitute in public is.)
A Tradition spokesman said "a small number of former employees" are suspected of having submitted "fraudulent expense claims," most of it for personal entertainment but some that "was not in accordance with the firm's policies." He said Tradition itself isn't under investigation.
U.S. and British authorities believe that brokers' eagerness to please trading clients played a key role in the Libor scandal. Some traders stood to profit if Libor moved up or down slightly. But calculating Libor involves more than a dozen banks submitting data about their borrowing costs, so an effective manipulation effort would need to involve multiple banks.
Mr. Hayes, the former UBS trader, was a coveted client because of his massive trading volumes. Brokers bombarded him with marketing materials and dinner invitations, which he routinely rebuffed.
He instead sought another kind of favor, enlisting brokers in efforts to nudge Libor, according to U.S. and British authorities. Mr. Hayes repeatedly asked brokers to tweak certain data that they provided to other banks, which those banks used to determine their Libor submissions, the regulators say.
The transcript of electronic messages released by the Justice Department shows that in February 2009 Mr. Hayes asked a broker to try to move a yen version of Libor as "high as a drug addict." The broker replied "hahahha like it" and promised to "do my best."
Later that morning, the broker passed on Mr. Hayes's request to a Libor-submitting employee at another bank. Mr. Hayes agreed to route a big trade through the broker, helping him meet his monthly revenue target, according to the transcript. "love yu mate," the broker messaged back.
People familiar with the case say the broker is R.P. Martin's Terry Farr. Mr. Farr's lawyer said his client is cooperating with authorities.
Regulators say traders rewarded some brokers for their help with Libor with "wash trades"transactions that cancel each other out but generate commissions for the broker. People with knowledge of the transactions say UBS's Mr. Hayes and R.P. Martin's Mr. Farr constructed wash trades to generate extra commissions for R.P. Martin. Mr. Hayes's boss signed off, according to the Justice Department.
Several times a year, R.P. Martin brokers enlisted RBS's Mr. Danziger to take the opposite side of the wash trades, these people say.
In September 2008, for example, Mr. Farr messaged Mr. Danziger: "Take it from UBS, give it back to UBS. He wants to pay some bro," industry parlance for commissions, according to a CFTC transcript and people familiar with the matter. In exchange, Mr. Farr said, "we'll send you lunch around for the whole desk."
Mr. Danziger was willing to do favors for R.P. Martin in order to score future trading opportunities, according to one person familiar with the transactions. But he also sought at least once, in June 2009, to get R.P. Martin to try to influence other banks' Libor submissions, according to people familiar with CFTC settlement documents, which described the episode but didn't identify who was involved. In exchange, Mr. Danziger executed a wash tradewith Mr. Hayes on the other sidegenerating about $20,000 in commissions for R.P. Martin, according to the documents and these people.
A separate series of wash trades enabled Mr. Danziger to generate commissions for the Tullett brokers, including one named Mark Jones, with whom Mr. Danziger went to strip clubs and Las Vegas, according to people with knowledge of the transactions. Mr. Hayes agreed to be on the opposite side of those trades because Mr. Danziger participated in the R.P. Martin trades, one person said. Those trades are now under U.K. regulatory scrutiny, this person said.
Mr. Hayes jumped from UBS to Citigroup Inc. C +0.52% in 2009. He was fired less than a year later.
Mr. Farr remains an R.P. Martin employee but has been suspended with pay. He was arrested in the U.K. in December but hasn't been charged. RBS fired Mr. Danziger in 2011. Mr. Jones left Tullett in 2011 and now is a broker at BGC Partners.
This brings back memories.
I worked in the office immediately beneath a major money-brokers trading room and used to go up to their trading room regularly. I heard all these stories. It was commonplace. In a prior job working for a US investment bank, I remember my boss, Max, a very British type (lovely guy) spluttering in fury after receiving a call from the head of sales in NYC, telling Max he was coming to visit London and wanting Max to book him a high class whore for the night - at London's expense. A few crisply rendered expletives saw the guy off.
But it's disingenuous for the WSJ to simply point fingers at London, to be perfectly honest. I can tell some horror stories of times I spent in NYC and otherwise working for a number of Wall Street firms. It's standard fare both sides of the Atlantic - and throughout Europe and the rest of the financial world.
The shadow is a moral problem that challenges the whole ego-personality, for no one can become conscious of the shadow without considerable moral effort. To become conscious of it involves recognizing the dark aspects of the personality as present and real. This act is the essential condition for any kind of self-knowledge.
Carl Jung - Aion (1951). CW 9, Part II: P.14