5 banks guilty of rate-rigging, pay more than $5B

Five major banks Wednesday agreed to plead guilty to criminal charges and pay more than $5.5 billion in collective penalties to settle charges their traders routinely manipulated the world's foreign-exchange market for their own profit.

The Department of Justice, the Federal Reserve and other U.S. and European authorities and regulators said corporate units of Citicorp(C), JPMorgan Chase (JPM), London-based Barclays(BCS) and Royal Bank of Scotland(RBS) acknowledged their traders rigged foreign exchange prices of U.S. dollars and euros from Dec. 2007 to Jan. 2013.

Outlining what she termed a "brazen display of collusion," U.S. Attorney General Loretta Lynch said investigators found that traders in the nearly unregulated, $5.3-trillion-a-day foreign-exchange market colluded in you-scratch-my-back-and-I'll-scratch-yours forms of plotting.

The $2.5 billion in criminal fines levied as part of the resolutions represent the largest federal anti-trust penalties ever obtained by U.S. authorities, she said.

"Starting as early as Dec 2007, currency traders at several multinational banks formed a group dubbed 'The Cartel,' " Lynch said. "It is perhaps fitting that those traders chose that name, as it aptly describes the brazenly illegal behavior they were engaging in on a near-daily basis."

Lynch said prices the market sets for currencies "influence virtually every sector of every economy in the world." The traders actions "inflated the banks' profits while harming countless consumers, investors and institutions around the globe — from pension funds to major corporations, and including the banks' own customers," she said.

Euro-U.S dollar traders at Citicorp, JPMorgan, Barclays and RBS — self-described members of the cartel — used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates of the two currencies in ways that benefited their own trading positions, prosecutors said.

"By agreeing not to buy or sell at certain times the traders protected each other's trading positions by withholding supply of or demand for currency and suppressing competition in the FX market," the Department of Justice said.

One chat room exchange showed that a Barclays foreign exchange trader appeared to be desperate to join The Cartel and reap the benefit of its trading advantages in 2011.

After extensive discussion of whether or not this trader "would add value" to the group, the group's trading members invited him to join for a "1 month trial," but warned: "mess this up and sleep with one eye open at night."

Transcripts of other exchanges cited a Barclays employee who said "if you aint cheating, you aint trying," as well as a Barclays foreign-exchange trader who reportedly said, "[Y]es, the less competition the better."

UBS (UBS) also acknowledged involvement in the rate-rigging. However, the Swiss banking giant received conditional immunity from criminal prosecution because it was the first to report foreign-exchange misconduct to DOJ investigators. The bank said it provided "full cooperation" to federal prosecutors and other authorities in Europe and around the world.

That leniency came with a high price. Making good on threats to deal harshly with banks accused as repeat offenders, federal investigators said the bank violated terms of the 2012 non-prosecution agreement that had settled UBS' involvement in rigging the London Interbank Offered Rate (Libor). The financial benchmark is used to set rates on trillions of dollars in mortgages, loans and credit cards.

As a result, UBS agreed to plead guilty to one count of wire fraud, pay a $203 million fine and accept a three-year term of probation for Libor rate manipulation by its traders. UBS also agreed to pay $342 million to the Federal Reserve and make remedial changes to its foreign-exchange business practices.

No individual bank employees were hit with criminal charges as part of the settlements, though several authorities said investigations into foreign-exchange issues are continuing.

The criminal settlements mark the latest result from a global crackdown on systematic manipulation of financial benchmarks by bank traders.

In all, the five banks have now paid nearly $9 billion in total criminal and civil fines and penalties for rigging the foreign-exchange spot market, Department of Justice officials said.

Bank officials took responsibility for the illegal activity, terminating dozens of traders as investigators around the world probed foreign exchange practices.

"The behavior that resulted in the settlements we announced today is an embarrassment to our firm, and stands in stark contrast to Citi's values," said Citigroup CEO Michael Corbat.

Citi also announced that it has agreed to a separate $394 million settlement of a private class-action lawsuit related to the foreign-exchange activity. The settlement is subject to court approval.

JPMorgan CEO Jamie Dimon called the investigation findings "a great disappointment to us," and said "we demand and expect better of our people."

"The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us, and have significant ramifications for the entire firm," said Dimon.

In Zurich, UBS Chairman Axel Weber and CEO Sergio Ermotti said the Swiss bank has taken "appropriate disciplinary actions" against a small number of employees involved in "unacceptable" behavior.

Barclays CEO Antony Jenkins said he shared the frustration of shareholders and colleagues "that some individuals have once more brought our company and industry into disrepute."

"Dealing with these issues, including taking the appropriate disciplinary action against the individuals involved, is a necessary and important part of our plan to transform Barclays and remains a key priority," said Jenkins.

Eight additional Barclays employees who participated in the wrongdoing are being terminated, said Benjamin Lawsky, the superintendent of New York's Department of Financial Services, the regulator that oversees the bank's U.S. operations.

Lawsky called the trading activity a "heads I win, tails you lose" scheme. He said his office is continuing to investigate whether electronic systems used in Barclays' foreign-exchange trading and foreign-exchange-related products was responsible for additional manipulation of the foreign-exchange market.

RBS Chief Executive Ross McEwan said the serious misconduct found by investigators "has no place in the bank I am building," and represents "another stark reminder of how badly this bank lost its way and how important it is for us to regain trust."

Bank officials nonetheless predicted the settlements were not expected to have a material impact on their financial operations. Lynch said the banks are "working with their regulators" to obtain any waivers might be required to continue normal operations.

Investors appeared to deliver a mixed appraisal of the resolutions.

Shares of Barclays, UBS and Royal Bank of Scotland all rose at least 1.9% Wednesday. But Citigroup and JPMorgan shares each fell 0.8%.

Jimmy Gurulé a former assistant attorney general and Treasury official, questioned whether the criminal pleas and massive fines would produce meaningful change in banks' activities.

"Once again the actual perpetrators and criminal architects of the fraud scheme will avoid criminal liability," said Gurulé, now a University of Notre Dame law professor. "While the payment of these large fines may help to reduce the federal deficit, such penalties will do little to change the pervasive culture of corruption that currently exists in the banking sector. Real change will only occur when corrupt bank officials are indicted, convicted and sent to prison for their crimes."

Contributing: Jane Onyanga-Omara