Five years after starting an interest rate-rigging probe, Australia’s financial regulator is poised for a court showdown with three of the nation’s biggest banks.
Barring any last-minute settlement, the Australian Securities & Investments Commission (Asic)will proceed with its cases against Australia and New Zealand Banking Group Ltd., Westpac Banking Corp. and National Australia Bank Ltd. on Monday morning. Asic alleges the banks’ traders sought to manipulate the benchmark bank bill swap rate—used to price more than A$10 trillion ($7.8 trillion) in derivatives —to benefit their institutions’ trading positions.
The cases are coming to court after banks worldwide paid $9 billion in fines for rigging Libor, a practice that scarred the industry’s already-tainted reputation in the wake of the global financial crisis. On top of the latest litigation, Australian banks are facing an image problem of their own after a series of scandals criticized by politicians and the public.
Unlike the Libor and Euribor cases, the immediate financial hit to the Australian banks if they lose the civil case would be small: as much as A$231 million in fines compared to their combined annual profits of A$20 billion, according to calculations based on the regulator’s claim. The bigger concern, if they are found responsible, is harm to their reputations and the threat of follow-on litigation overseas.
“The legal damages would likely be manageable,” said Frank Mirenzi, a banking analyst at Moody’s Investors Service. But the reputation damage and potential for class-action suits could be “large and significant.”
‘Unconscionable conduct’
The regulator claims that in trades between 2010 and 2012, the banks abused their role as BBSW (bank bill swap) panel members and created an artificial market. It accuses the lenders of “unconscionable conduct,” taking advantage of counterparties and breaching their financial-service license duties.
Lawyers for both sides are scheduled to meet in the Melbourne Federal Court at 10:15 a.m. for the first day of the hearings, which are slated to run until at least Christmas. Suits have been filed against each of the banks separately over different trading incidents, although the thrust of the claims is the same in each case. The banks deny the allegations.
Underscoring the risk of claims abroad, last year United States investment funds FrontPoint Asian Event Driven Fund Ltd. and Sonterra Capital Master Fund Ltd. filed a rate-rigging suit in New York against 16 banks—including Westpac, National Australia Bank and ANZ—which drew heavily on material presented in legal filings by the Asic. The banks are defending the case.
E-mails, calls
ASIC’S case is built around instant messages, e-mails and telephone calls from the banks’ own communication systems as part of its investigation dating back to 2012. The process for setting BBSW rates has since been overhauled to rely on market data rather than submissions.
Extracts of these often-profane conversations about rate-setting tactics were filed in court documents by the regulator as part of the claims process.
“We are trying to push the rate set lower today…and then push it higher tomorrow,” Asic alleges one ANZ trader said, court filings show. In another it quotes a Westpac trader as saying their role is to “manage and monitor where BBSW gets set” and there may be cases where it’s “in the bank’s interest to try and decrease that rate or something.”
The lenders argue that individual traders didn’t have the ability to move the benchmark, considering the large number of participants. They also suggest that some of their quoted conversations don’t reflect the full exchanges, and say the regulator presented an overly simplistic view of how the rate was set.
Capitalizing on popular resentment against the nation’s banks, Prime Minister Malcolm Turnbull’s government imposed an A$6.2-billion annual levy on the sector in May. The opposition Labor Party, which has promised a wide-ranging inquiry into the sector, is riding high in the polls.
‘Snowball Building’
This latest court case “just adds to the pressure,’’ said Andrew Hughes, a lecturer in branding and marketing at Australian National University in Canberra. “You can see the snowball building.”
It’s also a high-stakes case for the regulator. Asic has focused much of its enforcement budget on seeing these three case through to court, and a defeat would raise questions about its ability to take on future large prosecutions. Asic Chairman Greg Medcraft said last year that the regulator has an A$80-million “war chest” to use in any litigation.
Proving the allegations won’t be straightforward, legal experts said, with the law around the two most serious allegations—of unconscionable conduct and market manipulation—rarely having been tested in court.
The cases are a swansong for Medcraft, whose term ends on November 12. The former investment banker has repeatedly stressed the need to ensure a “credible outcome” in the case and has publicly complained about a perceived lack of cooperation from the banks.
“This is a critically important case for the regulator,’’ said Michael Adams, dean of the School of Law at Western Sydney University. “The complexity of proving market manipulation and the quantity of evidence means it will be an uphill battle for Asic.”
Image credits: Bloomberg
