In United States v. Connolly, No. 19-3806 (2d Cir. Jan. 27, 2022), the Circuit (Kearse, joined by Cabranes and Pooler) reversed convictions for substantive wire fraud and for conspiracy to commit wire fraud and bank fraud for insufficient evidence.
This is a LIBOR-rigging prosecution. LIBOR (the “London Interbank Offered Rate”) was an interest-rate benchmark, published daily by the British Bankers’ Association (“BBA”), meant to reflect the rates at which one bank could borrow money from other banks. LIBOR also provided a reference interest rate for use in transactions between banks. The daily LIBOR for each currency was computed based on submissions from a panel of selected banks active in the interbank market for that currency. For example, to compute the U.S. currency LIBOR at issue here, the BBA instructed each of the 16 banks on the panel to submit “the rate at which it could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size.” The BBA cut the top four and bottom four submissions and used the average of the middle eight submissions as the LIBOR.
Defendants, derivatives traders at Deutsche Bank, were convicted for having induced the Deutsche employees responsible for making daily LIBOR submissions to the BBA to manipulate those submissions in order to benefit the defendants’ positions in existing derivatives contracts. For example, on one occasion when defendant Connolly’s trading desk held contracts calling for Deutsche to receive payments based on the LIBOR, he emailed the responsible employee that “we would prefer [the daily LIBOR submission] higher,” and the employee accommodated that request, causing the LIBOR to rise and Connolly’s desk to profit.
Defendants moved for judgment of acquittal, arguing that there was no proof that Deutsche’s LIBOR submissions were false, as required for wire fraud. The district court (McMahon, SDNY), denied the motion, concluding that the defendants had induced false LIBOR submissions because their requests caused Deutsche to make submissions different from those that Deutsche would have made had the bank relied only its own internal pricing mechanism (the “pricer”). That is, the defendants induced LIBOR submissions that “reflected something other than honestly held estimates of the rate Deutsche … would have accepted to borrow funds.” Judge McMahon concluded: “Deutsche had a method for determining one particular rate—not a range of rates—at which it could ask for and accept interbank offers for each currency …. Defendants … changed some of those rates to benefit their trades at the expense of their counterparties.”
The Circuit reversed, holding the evidence insufficient to prove that defendants induced the making of false or deceptive LIBOR submissions. The Circuit reasoned that the LIBOR instruction asked about a “hypothetical” rather than an “actual” loan (“the rate at which it could borrow funds, were it to do so”). Accordingly, to prove that Deutsche’s LIBOR submissions were false, the government had to prove that Deutsche could not have borrowed funds at the submitted rates: “If the rate submitted is one that the bank could request, be offered, and accept, the submission, irrespective of its motivation, would not be false.” Because the government adduced no such evidence, it failed to prove falsity: “[T]he government failed to show that trader-induced LIBOR submissions did not reflect rates at which [Deutsche] could have borrowed. If the submissions did reflect rates at which [Deutsche] could have borrowed, they complied with the BBA LIBOR instruction, and the LIBOR submissions were not false.”
The Circuit rejected the government’s argument (accepted by the district court) that the defendant-induced LIBOR submissions were false because they differed from the rates that would have been submitted had Deutsche relied only on the price. The Circuit explained that “there were many factors other than the data automatically received by the pricer that informed [the] final LIBOR submission,” and more importantly, that “there were many loans available to [Deutsche], with varying interest rates; and as [Deutsche] could agree to such rates, there was no one true rate that it was required to submit.” The Circuit also rejected the government’s argument that the defendant-induced submissions were deceptive because Deutsche failed to disclose to the BBA that it had taken into account traders’ input or Deutsche’s financial interests. Nothing in the BBA’s LIBOR instruction prohibited Deutsche from incorporating these considerations in its LIBOR submissions.
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