Swap Transactions

Benchmark Rigging: Deutsche Bank to Pay $170M Over Euribor Fixing Allegations, UK Court Agrees to Hear Libor Swaps Case Against RBS, and Ex-Barclays, Citigroup, and JPMorgan Traders to Face Currency Manipulation Charges in the US

Published on: June 16, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Settle Investor Lawsuit Over Euribor Rigging
Deutsche Bank AG (DB) has agreed to pay $170M to resolve an investor fraud lawsuit accusing the German lender of conspiring with other banks to rig Euribor and other derivatives. Euribor is the European Interbank Offered Rate benchmark and the euro-denomination equivalent of Libor, which is the London Interbank Offered Rate.

FrontPoint Australian Opportunities Trust and the California State Teachers Retirement System (CalSTRS) are two of the plaintiffs in the Euribor rigging case against Deutsche Bank. However, the bank, despite settling, is not denying or admitting to wrongdoing. It claims to have decided to resolve the case to avoid more lawsuits and further costs.

A preliminary settlement has been submitted in the U.S. District Court in Manhattan. Now, a judge must approve the deal.

Swaps Interest Rate Cases: FHLBNY Settles With Lehman Brothers for $70M & Banco Santander and Portugal Come to An Agreement

Published on: April 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Home Loan Bank of New York will pay Lehman Brothers and its Special Financing unit a $70M settlement in an interest-rate swaps case. The plaintiffs sued FHLBNY two years ago seeking over $150M that they claim they were owed related to their position on more than 350 swaps and options transactions.

Lehman filed for Chapter 11 bankruptcy protection in 2008. The move froze the markets while spurring the end of millions of derivative transactions in which it was involved. A few days later, when FHlBNY ended its swaps with Lehman, it did so with a $16.5B notional amount.

According to Lehman, due to interest rate fluctuations after its bankruptcy filing, FHLBNY returned and “cherry picked” other end dates. As a result, claims the plaintiff, the latter “massively understate” how much it owed Lehman.

SEC Cases: IT Specialist Settles Insider Trading Charges For Over $375K, San Francisco Firm Pays $80K for Unregistered Swaps Sales Involving Pre-IPO Companies, and EB-5 Fraud Cases Lead to Settlement for Florida Businessman and Civil Charges For California Lawyer

Published on: December 31, 2016 | by Shepherd Smith Edwards & Kantas, LLP

IT Specialist Accused of Hacking Expedia Executives and Insider Trading

The U.S. Securities and Exchange Commission has filed civil insider trading charges against Jonathan Ly, who worked as a technology specialist for online travel company Expedia. According to the regulator, Ly hacked senior company executives and traded on company secrets ahead of nine announcements between 2013 and 2016.

As a result of his alleged insider trading, Lyn made almost $350K in profits. To settle the SEC case against him, Ly will pay over $348K of disgorgement and more than $27K in interest. This is a deal that still has to be subject to court approval.

Meantime, the U.S. Attorney’s Office for the Western District of Washington has filed parallel criminal charges against Ly.

Institutional Fraud Cases: Shareholders Sue PJT Partners Over Andrew Caspersen’s $95M Fraud, Sabal Limited Sues Deutsche Bank, and Dallas Pension Fund Sues Firm

Published on: April 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Securities Case Brought Over Caspersen Fraud
Shareholders of PJT Partners Inc. have brought a class action lawsuit against the publicly traded investment bank. The complaint comes in the awake of the arrest of Andrew Caspersen, who previously was one of the top officials at the bank’s Park Hill Group unit. Caspersen is accused of running a $95M fraud in secret. He is also a defendant in this lawsuit.

According to authorities, Caspersen falsely told investors that he was raising funds for supposed private equity investments when actually he was placing their money in high-risk options bets. He lost millions of dollars through options trading in his own accounts. Among his investors were the charitable foundation of a hedge fund and other institutional clients.

Caspersen was arrested and charged last month, as well as fired from PJT Partners. Investor Gregory Barrett claims that the investment bank misled shareholders by not disclosing that it had inadequate fraud prevention and compliance controls. The shareholder lawsuit points to purported evidence of alleged control failures, including an anonymous quote in the New York Times stating that Caspersen had availed of Park Hill Group’s payment system to give investors invoices and keep his scam going.

Sabal Sues Deutsche Bank Over Swap Transaction
Sabal Limited LP is suing Deutsche Bank AG (DB). Sabal claims that the German bank falsified documents after coming to the realization that the outcome of a swap transaction wasn’t going to be in its favor. Deutsche Bank is accused of improperly holding nearly $1M from the Texas asset management firm.

According to Sabal, in 2011, Deutsche Bank proposed a way of “cheapening” the firm’s capital costs through a swap tied to the DB Pulse USD Index. Deutsche Bank purportedly said that if the swap was based on this index it would generate a lot of funds. The transaction was finalized a few months later.

Securities News: Deutsche Bank to Pay $2.5M For Swaps Violations, Fifth Street Finance Sued in Class Action Lawsuit, and Countrywide’s $8.5B MBS Settlement Gets IRS Approval

Published on: October 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Reaches Swaps Violation Settlement with CFTC
The Commodity Futures Trading Commission and Deutsche Bank AG (DB) have reached a settlement over the regulator’s order accusing the firm of not properly reporting its swaps transactions from 1/13 through 7/15. The regulator also said there were supervisory failures and that the bank failed to modify the reporting errors at issue until after it found out that the CFTC was conducting a probe.

According to the regulator, Deutche Bank did not properly report swap transaction cancellations in all asset classes, resulting in somewhere between tens of thousands and hundreds of thousands of reporting errors, violations, and oppositions in its reporting of swaps. CFTC believes that the bank knew about the problem but did not notify its Swap Data Repository in a timely manner, nor did it properly probe, deal with, and modify the information deficiencies until last year when it became aware of the investigation. As a result of the reporting failures, the wrong information was put out to the public.

The CFTC believes that the bank’s reporting failures were partly because of deficiencies in its swaps supervisory system. A more adequate system could have better supervised Deutsche Bank’s activities involving compliance with reporting requirements.

Because the bank is a provisionally registered Swap Dealer, it has to abide by certain recordkeeping, disclosure, and reporting duties related to swap transactions. These requirements are supposed to improve transparency, encourage standardization, and lower systemic risk in swaps trading.

Investors File Class Action Securities Case Against Fifth Street Finance
An investor has filed a class action securities fraud case against Fifth Street Finance Corp. on behalf of shareholders. According to the plaintiff, and for those who bought Fifth Street Finance common shares between 7/7/14 and 2/6/15, the company, Fifth Street Asset Management, Inc., and specific directors and officers violated federal securities laws by allegedly taking part in a fraudulent scam to artificially inflate Fifth Street Finance assets and investment income to raise revenue of Fifth Street Management.

FDIC Approves New Swaps Rules for Banks

Published on: October 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Deposit Insurance Corp. has adopted new rules mandating that banks collect more collateral, also known as margin, for swaps transactions. This would serve as a type of insurance in the event that trades were to fail.

Swaps involve two parties swapping price swing risks in interest rates, currencies, commodities, and other matters. Manufacturers, financial firms, energy firms, and farmers use swaps to hedge and bet against these swings. Swap dealers and significant swap participants should be registered with the Securities and Exchange Commission and the Commodity Futures Trading Commission. They typically take part in over $8 billion in swaps yearly.

Swaps are part of a multi-trillion-dollar global market of contracts. They let counterparties trade a benchmark or fixed price for one that fluctuates. This allows companies to hedge exposure to the changes in the market in terms of its values and process. The new rules come in the wake of the 2010 Dodd-Frank Act, which required such regulations to lower the risks involved in derivatives.

According to The Wall Street Journal, the FDIC’s new rules seek to prevent the kind of risk-taking that led to the government having to bail out certain firms, such as American International Group Inc. Prior to the financial crisis AIG establish a huge derivatives book. When the trades failed, counterparties demanded that collateral be increased. Because the insurer couldn’t pay, the government had to get involved. If the new rules were in place back then, AIG would have been required to put aside more collateral before getting involved in the contracts. This would have placed a limit on its portfolio’s growth.

SEC Adopts Rules Improving Transparency in the Security-Based Swap Market

Published on: January 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has adopted rules mandating that security-based swap data repositories register with the regulator. They also prescribe public dissemination and reporting requirements for security-based swap transaction information.

The rules were mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII and they are supposed to increase transparency in the security-based swap market, while establishing a regulatory framework for “swap data repositories.”

The new rules require that data warehouses not only register with the Commission but also that they set up governance standards, appoint a chief compliance officer, and require the reporting of certain information to the public. For now, all swaps will have to be reported within 24 hours. This requirement could change as regulators examine the way this impacts the cost and ability of financial firms to execute large trades. The big banks that currently dominate the swaps market in the United States are Goldman Sachs Group Inc. (GS), JP Morgan Chase & Co. (JPM), Citigroup (C), Bank of America Corp. (BAC), and Morgan Stanley (MS).

Credit Suisse, Goldman Sachs, JPMorgan, and 16 Other Banks Agree to Swaps Contract Modifications to Assist Failed Firms

Published on: October 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM), HSBC Holdings Plc (HSBA), Goldman Sachs Group Inc. (GS), Credit Suisse (CS), and fourteen other big banks have agreed to changes that will be made to swaps contracts. The modifications are designed to assist in the unwinding of firms that have failed.

Under the plan, which was announced by the International Swaps and Derivatives Association, banks’ counterparties that are in resolution proceedings will postpone contract termination rights and collateral demands. According to ISDA CEO Scott O’Malia, the industry initiative seeks to deal with the too-big-to-fail issue while lowing systemic risks.

Regulators have pressed for a pause in swaps collateral collection. They believe this could allow banks the time they need to recapitalize and prevent the panic that ensued after Lehman Brothers Holdings Inc. failed in 2008. Regulators can then move the assets of a failing firm, as well as its other obligations, into a “bridge” company so that derivatives contracts won’t need to be unwound and asset sales won’t have to be conducted when the company is in trouble. Delaying when firms can terminate swaps after a company gets into trouble prevents assets from disappearing and payments from being sent out in disorderly, too swift fashion as a bank is dismantled.

US Banks May Need $644B in Collateral Under Revised Swaps Rules

Published on: September 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The revised rules for non-cleared swaps could require banks to have $644 billion in collateral to offset risks involved in swaps trading among themselves. The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve adopted a proposal for collateral requirements for swaps traded between firms, manufacturers, banks, and others this week. However, the Securities and Exchange Commission and the Commodity Futures Trading Commission still have to vote on the regulations.

The proposal seeks to lower risk and improve transparency by mandating that swaps be guaranteed at central clearinghouses and are traded on platforms. It also looks to limit the effect on global liquidity and smaller companies, as well as free end-users from requirements.

Ever since the 2008 economic crisis, when unregulated trades played a part in the financial meltdown, regulators have wanted to enhance oversight of the global swaps market. Under the proposed rules, banks would need to finance collateral and hold custody accounts that might not be as profitable as other uses they could engage in instead.

Barclays Settles Two Libor-Related Securities Cases

Published on: April 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Barclays (BARC) has just settled two Libor-related securities cases alleging mis-selling related to Libor. In the first lawsuit, filed by Guardian Care Homes over interest swaps worth £70M that were linked to the benchmark interest rate, Barclays has agreed to restructure a loan for the home care operator.

The bank had tried to claim the case lacked merit and that it was the home care operator that owed money. Barclays argued that the swaps, purchased in 2007 and 2008, cost the bank millions of pounds when interest rates plunged in the wake of the economic crisis. In 2012, Barclays was fined $450 million for Libor rigging.

The London interbank offered rate is relied on for measuring how much banks are willing to lend each other money. Among the allegations against the firm was that it tried to manipulate and make false reports about benchmark interest rates to benefit its derivatives trading positions. Barclays settled with regulators in the US and the UK.

In the other Libor mis-selling case, the bank has arrived at a “formal” compromise in the securities case involving property firm Domingos Da Silva Teixeira over more rigging claims and Portuguese construction. The company had filed a 11.1 million euro securities case against the bank.

Also, this week, three ex-ICAP (IAP) brokers appeared in court in London to face charges accusing them of running a securities scam to manipulate the Libor benchmark interest rates. ICAP is the biggest interbroker dealer in the world.

The men allegedly engaged in conspiracy to defraud. Their scam allegedly involved Tom Hayes, an ex-yen derivatves trader. He is charged with multiple counts of conspiracy to commit fraud while he worked for UBS (UBS) in Japan.

To date, 10 banks and ICAP have been ordered to pay$6 billion in fines. The Libor rigging scandal spans multiple continents and led to numerous criminal charges. Traders are accused of fixing Libor for profit.

Barclays settles with Guardian Care Homes in Libor-linked court case, The Guardian, April 7, 2014

Three former ICAP brokers in UK court on Libor fixing charges, Reuters, April 15, 2014

Barclays settles second Libor case in week, Yahoo, April 11, 2014

More Blog Posts:
Deutsche Bank, Royal Bank of Scotland Settle & Others for More than $2.3B with European Union Over Interbank Offered Rates, Institutional Investor Securities Blog, December 24, 2013

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012