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Brandon L. Garrett Headshot

How About 'Mr. Victim?'

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Who are the victims of the latest financial scandal? We have learned how major banks manipulated key interest rates used in hundreds of trillions of dollars of transactions each year. I am reminded of the Monty Python sketch where John Cleese as the "Merchant Banker," cheerfully answers his phone, saying "Ah, Mr. Victim..." and then offers Mr. Victim a deal, but noting: "We will need ... deposited in our vaults your three children as hostages, and a full legal indemnity against any acts of embezzlement carried out against you by any members of our staff in the normal course of their duties."

Traders at Barclays were not much more subtle, according to smoking-gun evidence detailed in the non-prosecution agreement signed recently with federal prosecutors. The traders asked each other to report lower or higher London InterBank Offered Rates (Libor) and Euro Interbank Offered Rates (Euribor) as favors to help their own trades or to help friends at other banks. They said things in email like: "Really appreciate ur help mate," and "very important that the setting comes as high as possible.... thanks," and "I know a big clearer will be ag[a]inst us... and dont [sic] want to loose money [sic] on that one," and "seriously, thanks a million dude."

Apart from using poor grammar and spelling, they were not careful like John Cleese's character to keep their misconduct on the phone. According to the prosecution agreement, there was gaming of rates, high and low, to make profits on trades, and then, after the worldwide financial crisis hit, efforts to push rates lower, so as not to admit higher borrowing costs than the other banks.

Everyone is waiting to see who will get prosecuted next, including other banks (and for other banking scandals as well -- witness the HSBC hearings earlier this week). However, we should not lose sight of the potentially vast numbers of victims of the scheme -- and so far the victims have been left out. Barclays received a deal rewarding it for its "extraordinary" and "extensive" cooperation. In addition to committing to future cooperation with authorities in the U.S. and the U.K., Barclays also paid a $160 million penalty to the U.S. Treasury, $200 million to regulators, and a fine to U.K. regulators.

Hundreds of trillions of dollars in trades rely on those rates -- so do student loans, mortgages and credit cards. Who is following the money? While the U.S. Department of Justice announced "Barclays is paying a significant price," the non-prosecution deal did not provide anything to the victims. Prosecutors often create vast restitution funds to compensate victims -- they sometimes dwarf the fines paid to the government. The billions of dollars in restitution paid by companies entering federal deferred prosecution agreements since 2001 is almost as large as the total fines. Prosecution agreements with Adelphia, AOL, Beazer Homes U.S.A., Bristol-Myers Squibb, Computer Associates and many other firms farther down the alphabet created restitution funds in the tens and hundreds of millions of dollars.

Perhaps prosecutors are for now focusing on holding employees and other banks accountable. Victims have a right to intervene and be heard if a case is filed in a court -- but the Barclays deal was not filed in a court. It can be hard to obtain restitution from the likes of Bernie Madoff. If the company collapses into bankruptcy, much of the money may be gone, leaving assets like sports cars, jewelry, and country club memberships to be auctioned off. Yet Barclays is in no such dire straits.

Maybe it will be hard to calculate harm to so many victims of different kinds. However, securities and antitrust and other financial cases typically require complex economic analysis. If bankers had not been manipulating them, what would these rates have been? The agreement notes "even very small movements in those rates could have a significant impact on the profitability of a trader's trading portfolio." There are vast numbers of potential victims.

Having been left out of government settlements entered so far at least, potential victims are rushing to file massive lawsuits on their own. In the past few days, a growing pile of class action lawsuits have been filed, including multiple antitrust class actions, and other claims including civil RICO racketeering claims and securities class actions. They of course rely on the smoking-gun evidence that Barclays provided to prosecutors.

The City of Baltimore leads one class action suit against the banks that set the Libor. Nassau County, New York says the rate-setting could have cost them as much as $13 million. Small community banks have also filed suit. Still others may come forward once they decide if they were harmed and triggered by Barclays own confessions. After all, Barclays formally admitted its responsibility for its conduct in the non-prosecution agreement -- although it did not plead guilty to a crime. Time will tell how these civil suits fare.

The criminal prosecutions of the other big fish aren't the only legal dramas that will be worth watching. These civil suits may be a sight to see. If the suits succeed, the fines may make the hundreds of millions already paid look like small potatoes. Let's watch as Mr. Victim comes back calling on the Merchant Banker.