Investigations and decisions

France: The latest judgment in the Kerviel case, a landmark decision

On 19 March 2014, the Criminal Court of the Cour de Cassation, France’s supreme court, handed down the latest judgment in the case brought against Jérôme Kerviel, the rogue trader whose trading activities resulted in a loss of €4.9 billion for the bank, Société Générale. The Court confirmed the criminal sanctions ordered against the defendant (five years’ imprisonment) but, contrary to expectations, it overturned the lower court’s judgment with respect to the civil fine imposed on Kerviel, departing from long-established case law.

Until now, the principle was that, where criminal courts are required to rule on civil interests in cases of offences against property (as opposed to offences against the person), the perpetrator of the offence must be ordered to compensate the victim for the entire loss suffered, regardless of any contributory negligence on the victim’s part. The lower court had applied this principle strictly, resulting in a civil fine of €4.9 billion imposed on Kerviel. However, and overturning precedent, the Court ruled that the fine imposed on the ex-trader had to take in account the bank’s contributory negligence in the fraud.

This application of a proportional liability regime constitutes an alignment with the regime applied by criminal courts in cases of offences against the person and with that applied by civil courts. The specific circumstances of the case may, however, have played an important part in this endorsement of proportional liability, and in particular the fact that the defendant did not derive any profit from the offence, an element underlined by the Court in its judgment. 

As regards the criminal law aspects of the judgment, the Court confirmed the application of the offence of “forgery” to emails sent by the trader to the bank to mask his operations. The defence had argued that those emails could not be characterised as “forgeries” as they were meant to be verified and controlled internally before any transactions were effected on the bank’s account as a result. The Court dismissed the argument, ruling that emails which were supposed to have come from third parties and “had legal consequences and were of such nature as to cause a harm to the bank” could and did amount to a forgery.

Hong Kong: Investigations into benchmark rate manipulation find weaknesses in UBS’s internal controls

Amid a flurry of investigations and enforcement actions by regulators around the world in relation to alleged manipulation of benchmarks rates, the Hong Kong Monetary Authority (“HKMA”) announced in March that it had found UBS liable for misconduct in its submissions for the Hong Kong Interbank Offered Rate (“HIBOR”), following its investigation of nine designated HIBOR reference banks. However, in a stark contrast with the actions taken by regulators in other jurisdictions, no financial penalty was imposed on UBS and so far no criminal charges have been laid against any of the individuals involved.

The HKMA commenced its investigation in December 2012, after receiving information from overseas authorities about possible misconduct by UBS in relation to the fixing of HIBOR. The investigation was later extended to eight other banks, namely Bank of Tokyo-Mitsubishi UFJ, Citibank, Crédit Agricole Corporate and Investment Bank, Deutsche Bank, HSBC, JPMorgan Chase Bank, Royal Bank of Scotland and Société Générale. After extensive reviews of the banks’ communication records and interviews with bank staff had been completed, none of the banks other than UBS was found to have been involved in HIBOR manipulation. The HKMA also found no evidence of collusion between these banks to rig the fixing of HIBOR.

Regarding UBS, the HKMA found that between 2006 and 2009, change requests were made by six traders to the UBS HIBOR submitter in internal chat messages, with a view to rigging the bank’s submissions. There was evidence that about one-third of these change requests affected the rates submitted by UBS, although their impact on the actual outcome of the HIBOR fixing was negligible.

UBS was found to have failed to report to the HKMA when it became aware of the change requests. The HKMA also found material weaknesses in the bank’s internal controls and governance, and as a result the HKMA has ordered UBS to:

  • take disciplinary actions against the employees responsible for the HIBOR manipulation, and for the failure to self-report to the HKMA;
  • implement a remedial plan for the control and governance weaknesses; and
  • submit to the HKMA a report by an independent external auditing firm assessing the effectiveness of the remedial plan.

The HKMA will consider whether to take further actions in light of UBS’s compliance with the above requirements. Meanwhile, it has required another bank to conduct a review of its communication records, which is still in progress. It has also been reported recently that the HKMA has started enquiring into several banks’ foreign exchange trading operations over concerns about potential manipulation.

UK: More charges brought in connection with Libor

The Serious Fraud Office has commenced criminal proceedings against six further individuals in connection with its investigation into the manipulation of Libor.

On 28 April 2013 the agency announced that it had issued proceedings for conspiracy to defraud against three former employees at Barclays Bank Plc, Jay Vijay Merchant, Alex Julian Pabon and Ryan Michael Reich. These charges followed the commencement of criminal proceedings by the SFO against three former employees at interdealer broker ICAP Plc. The three men, Daniel Wilkinson, Darrell Read and Colin Goodman, appeared in court on 15 April 2014 charged with conspiring with former UBS and Citigroup trader Tom Hayes to procure or make submissions of yen Libor rates that were false or misleading, between August 2006 and September 2010. Tom Hayes has already been charged with eight counts of conspiracy to defraud.

The three ICAP workers have also been charged with conspiracy by US prosecutors. However, it is unlikely they will face trial there now that the SFO has commenced its prosecution. They will appear at Southwark Crown Court on 30 April 2014 for a case management hearing, with Tom Hayes and two other former brokers, Terry Farr and James Gilmour, who were charged alongside Hayes. Hayes is due to stand trial in January 2015 while Farr and Gilmour's trial is planned for September 2015. All three have pleaded not guilty to conspiracy.

The SFO’s press release on the charging of the ICAP defendants is available here.

The SFO’s press release in relation to the three former Barclays Bank plc employees is available here.

Further allegations of corruption at GSK

Following internal reports by employees, GlaxoSmithKline (GSK) is investigating allegations of bribery by its staff in Iraq and Poland, in addition to an on-going investigation in China. The allegations centre around payments and benefits given to doctors and pharmacists in those countries to promote the use of GSK products. If proven, the allegations would breach both the UK’s Bribery Act 2010 and the US Foreign Corrupt Practices Act.

The US Department of Justice and Securities and Exchange Commission, and the UK’s Serious Fraud Office are reported to be looking into the allegations but no formal announcements have so far been made by either authority. GSK has said it is investigating the claims and has a zero-tolerance approach to corruption

UK: Trial takes place of former Innospec executives charged with conspiracy

The trial of two senior executives at British chemicals company Innospec, is proceeding in the Southwark Crown Court. Dennis Kerrison, the former chief executive of Innospec and Miltiades Papachristos, a former sales director, are accused by the Serious Fraud Office of conspiring to make corrupt payments to public officials in Indonesia and Iraq to secure contracts for the supply of Tetraethyl Lead, an octane booster, (TEL - the "lead" in leaded petrol) by Innospec between February 2002 and December 2008.

TEL, which has been banned in many countries due to its adverse effects on health, was manufactured and supplied by Innospec at considerable profit. The Indonesian Government decided to phase out TEL and leaded fuel in 1999. However, it is alleged that Innospec executives bribed Indonesian state officials to continue to purchase TEL from Innospec and delay the banning of TEL until 2006.

Innospec itself admitted bribery offences in Indonesia and was fined £8 million in a corporate prosecution in 2010. Two former employees have already admitted their part in bribing Iraqi and Indonesian officials to secure TEL contracts on Innospec’s behalf - Paul Jennings, a former chief executive of Innospec and David Turner, a former TEL sales director. Dr Turner is giving evidence for the prosecution in the current trial. He and Mr Jennings will be sentenced at the end of the trial.

US: Circuit Court Finds Conflict Minerals Disclosure Rule Unconstitutional

On 14 April 2014, the U.S. Court of Appeals for the District of Columbia Circuit held that a new rule promulgated by the U.S. Securities and Exchange Commission (“SEC”) requiring companies to disclose whether their products contain “conflict materials” from the Democratic Republic of the Congo and nearby countries violates the First Amendment of the U.S. Constitution and thus is unenforceable.  The rule, which became effective on 13 November 2012 and whose first filing deadline is scheduled to be 2 June 2014, was issued by the SEC in response to Congress’s directive in Section 1502 of the Dodd-Frank Act.       

In National Association of Manufacturers v. SEC, the D.C. Circuit Court held that the implementing statute and rule violate the First Amendment to the extent that they impose a requirement that a company state that any of its products have “not been found to be ‘DRC conflict free.’” The court ruled that such a requirement would unconstitutionally compel speech in violation of the First Amendment. However, the decision left the rest of the rule intact, including its due diligence requirement that companies conduct internal inquiries into the origins of minerals used.

The court’s decision creates the prospect that companies may be required to make unconstitutional disclosures when meeting the 2 June deadline. As of 28 April 2014, the SEC had neither commented on how it plans to proceed with enforcing the rule, nor whether it would delay the deadline.  Given this uncertainty, companies are advised to continue their due diligence processes as well as the preparation of any conflict minerals disclosures pending further guidance from the SEC or a court order staying enforcement of the reporting requirement.  Indeed, on 24 April, Taiwan-based Siliconware Precision Industries Co., Ltd. filed the first Form SD conflict minerals report with the SEC.

The D.C. Circuit Court opinion is available here.

The Form SD conflict minerals report of Siliconware Precision Industries is available here.