Last month Tom Hayes, a former city trader, was convicted of 8 counts of conspiracy to defraud relating to his role in manipulating the LIBOR rate.
On 3rd August 2015, Mr Hayes was sentenced to 14 years in prison.
This was a very lengthy trial and getting the full facts is pretty difficult. There’s a pretty good summary of it here.
It is to the shame of the English (and Welsh) judicial system, and to the credit of the American, that there is more information publicly available from the US Government that the English Courts. See here and here for some of the Justice department documents and evidence in the case.
But, in essence, LIBOR is the ‘London Inter Bank Offered Rate’ – the interest rate that banks would expect to be charged at the time if they were borrowing money from another bank.
This was calculated daily in different currencies, and over different periods over which a loan would be made.
It is such a significant number as it is the number that many banks and other financial institutions use to set their own interest rates (for example, the interest rate of a tracker mortgage that they offered).
If you expect that this number was calculated by a state of the art supercomputer using technology and mathematics that you don’t understand, then you’d be surprised.
What happened was that at just before 11am (on a working day at least) someone from each of the major 18 financial institutions would email or ring in with a number – their estimate of the rates. The lowest 4 and highest 4 would be discarded and the mean of the rest calculated. And that was the LIBOR (the same procedure would be done for each currency and each loan period).
The reason for discarding the top and bottom guesses were to stop anyone artificially raising or lowering the rate. This is important because if you are a trader then you will be betting for or against a rise or fall in interest rates. If you can control, even by a tiny amount, the interest rates, then there is a lot of money to be made.
Just as one example, the market in interest rate swaps depends on the LIBOR rate. And this is a market that is over a trillion pounds. If you change the rate by a fraction of a per cent, this is still an enormous amount of money.
What Mr Hayes was accused of doing was manipulating the LIBOR with other people across ten other financial institutions. He accepted doing this, but denied being dishonest, saying that this was well known and common practice across the industry.
That was always going to be a tough defence to run. Added to that is that when he was first arrested he made a full confession and offered to help the authorities. He told the jury that this was due to his fear of being extradited to the USA.
It is perhaps not surprising that he was then convicted.
Mr Hayes was always going to get whacked for this offence. Fortunately, we have the Sentencing Remarks which are invaluable reading.
As the Judge said, the Sentencing Guidelines for Fraud are probably not applicable given the extremely high value of the fraud.
The Judge sets out the aggravating and mitigating features, before concluding :
“The maximum sentence is 10 years for a count of conspiracy, which is generally recognised as too low. The starting point for a Category A case of high culpability based on a loss figure of £1m is 7 years. The figures here exceed that by a distance and the number of counts must drive the sentence up. The right approach here, in my judgment is to look at the 4 counts when you were at UBS as distinct from the 4 counts relating to the time when you were at Citi and to bear in mind the principle of totality.”
Was the Judge entitled to make the sentences consecutive to increase the overall sentence? Yes, in the sense that if there is genuinely different offending, then a Judge is entitled to pass consecutive sentences. However, a Judge isn’t allowed to pass consecutive sentences in order to get round the fact that the maximum sentence is too low – that’s for Parliament not the Judge.
The line between the two is a fine one. Did the Judge overstep the mark? Probably not as he has identified two separate conspiracies, although the start of the paragraph quoted above could have been perhaps phrased slightly differently.
Will there be an appeal? Probably. The sentence is a huge one, even given the general increases in sentences in recent years, and the even larger increase in fraud sentencing (see here and here for some examples).
But this was a ‘keynote’ prosecution, and involved offending in a different league even to a high value fraud, so we doubt that he will get very far. Tonight, Mr Hayes may be regretting having a trial on this, rather than following his initial plan and confessing and co-operating …