The Final Chapter

TOM HAYES AND CARLO PALOMBO: THE LIBOR/EURIBOR SAGA - THE FINAL CHAPTER

  1. Mr Hayes was the first person to be prosecuted by the SFO in connection with attempts to influence key benchmark rates of interest used in financial markets; in his case the London Inter-bank Offered Rate - LIBOR.
  1. The allegations he faced concerned his conduct between 2006 and 2010 in relation to setting LIBOR for the Japanese yen. In June 2013 he was charged with eight counts of conspiracy to defraud. On 3 August 2015 after a trial lasting 47 days he was convicted of all eight counts. He was given 14 years.
  1. Mr Palombo was charged in respect of his conduct between January 2005 and December 2009 with conspiracy to defraud in relation to the Euro Inter-bank Offered Rate - EURIBOR.
  1. He was alleged to have dishonestly agreed with others to submit false, misleading and dishonest interest rate figures used in setting the rate. He was tried twice because the first jury could not reach verdicts. At his re-trial he was convicted by a 10-2 majority. He was given four years.
  1. Both Mr Hayes and Mr Palombo were engaged in making decisions involving subjective assessments. As Lord Leggatt pointed out in Mr Palombos’s case the degree of imprecision and subjectivity was arguably greater “...as there was no definition of “prime bank” and the submitter was asked to consider not just the borrowing rates available to his or her own bank but the rates offered by any prime bank to another prime bank - which might encompass a variety of different quotations or transactions between different parties involving deposits of different sizes.” (25).
  1. It was the SFO’s case that Mr Hayes had submitted false or misleading and thus dishonest figures because they were not genuine assessments of the interest rate at which the bank submitting the rate could borrow funds and were intended to influence LIBOR to the benefit of Mr Hayes trading in derivatives.
  1. Mr Hayes admitted that when there was a range of potential borrowing rates, he had tried to influence submitters to put forward numbers within that range which would advantage his trading but he denied that he had attempted or conspired to induce submitters to put forward rates which did not represent their genuine opinion.
  1. His case was that he had not been dishonest nor had he agreed to procure submissions of rates which were false or misleading. As to the latter there existed a range of numbers that he said could properly and legitimately be submitted in answer to the LIBOR question. Provided the rate submitted was within the range the submission was not false or misleading.
  1. In 2017 when Mr Palombo was indicted with conspiracy to defraud “…the notion that the truth or falsity of a rate submission depended upon the proper construction of the LIBOR document as decided by the court had taken a firm root. The same approach was applied to EURIBOR.” (163).
  1. Mr Palombo’s indictment was drafted in similar terms to that of Mr Hayes.
  1. Mr Palombo did not deny that he had attempted to influence the prime bank’s EURIBOR submissions. His defence was that he had not sought or conspired with others to procure or make submissions that were false or misleading and had not acted dishonestly. His case was that it was common to have a range of equally valid and justifiable numbers that could be submitted for a particular maturity; and that where the submitter formed that view, it was and was believed to be legitimate to submit any figure within that range and in choosing which figure to submit, to have regard to the bank’s commercial interests. (172).
  1. Of the three core submissions made on Mr Palombo’s behalf the court found that it was the third that gave rise to the real issue in his appeal. It was similar to the core submission made in Mr Hayes’ appeal, namely, that as a result of a misdirection in law he was denied the right for his jury to decide whether or not he had been dishonest.
  1. In allowing their appeals against conviction Lord Leggatt began with these somewhat chilling words: “The history of these two cases raises concerns about the effectiveness of the criminal appeal system in England and Wales in confronting legal error.”
  1. No attempt is made here to address each area considered by the court in these appeals. There were many. Lord Leggatt’s judgment runs to 235 paragraphs, is spread over 73 pages and deals with a number of important points.
  1. Those points are trumped by the central submission made on behalf of both appellants. In short it was submitted that the jury function was usurped by flawed directions of law that resulted in the appellants being robbed of one of the jury’s most crucial fact-finding roles, namely, was a defendant dishonest?
  1. The core submission in each appeal was that it was for the jury to decide whether a defendant was dishonest. A jury could have regard to what the LIBOR and EURIBOR documents meant and whether the meanings enabled relevant inferences to be drawn about the defendant’s conduct but that of itself could not answer the crucial question - was the defendant dishonest.
  1. The appeals demonstrate how wrong turns can be made from the initial formulation of an indictment through to errors of law at trial which conflated the meaning of a document with the intention of the defendant who acted pursuant to it and how errors of law can be wrongly exonerated by the Court of Appeal on multiple occasions thus compromising the effectiveness of the criminal appeal process and its protections.
  1. The most important ground of appeal in the Hayes case was that the trial judge had wrongly directed the jury that as a matter of law a submission of an interest rate figure by the bank to set LIBOR could not be genuine or honest if the person making it had taken any account of his or the bank’s or anyone else’s commercial interests. In his case he would gain in trading in derivatives by the alleged use by him of a false or misleading benchmark rate.
  1. Not only did Mr Hayes fail to persuade the trial judge that the issue was indeed one of fact for the jury and not one of law for him but also when this ground of appeal fell for consideration by the Court of Appeal it “summarily rejected” it.
  1. Thus it was that the directions given in Mr Hayes trial were followed in material respects in later cases including the case of Mr Palombo. His attempt to further challenge the direction before the Court of Appeal also failed for the same reason as Mr Hayes appeal; it was held that the central question of what amounts to dishonesty in the context of the case was a matter of law for the trial judge and not one of fact for the jury. It was said to turn on the meaning of the LIBOR and EURIBOR definitions and it was for the court to decide the meaning of the definitions as a matter of law.
  1. The LIBOR and EURIBOR definitions required a bank on the contributor panel of banks to submit the rate at which that bank (in the case of LIBOR) or a prime bank (in the case of EURIBOR) could borrow money at the time of submitting the rate. It was the detail of the respective definitions that the courts had interpreted.
  1. Several similar prosecutions were brought in the USA. They included two individuals against whom it was alleged that they had induced fellow employees to submit false statements intended to influence US dollar LIBOR. They were convicted at trial in 2018 but in January 2022 their convictions were reversed on appeal.
  1. Influenced by this appellate decision, which adopted a different legal analysis from the English courts, the Criminal Cases Review Commission (“the Commission”) referred the Hayes and Palombo convictions back to the Court of Appeal to hear fresh appeals against the convictions.
  1. As above, Lord Leggatt found that their central submission was “summarily rejected” by the Court of Appeal. The court decided “...that this ground of appeal should not be entertained at all as it did not relate to the reasons given by the Commission for making the reference. They also said that they saw no arguable merit in the point and that, even if they had, they would have rejected it anyway.” (4).
  1. The Court of Appeal marked its own homework thus - “...there have been five decisions of this court, not just one, treating the point as a bad one”. So the important issue that had attracted a completely different approach by a US appeal court was not even entertained.
  1. The Court of Appeal of course appreciated what the appeal point was (as we will see below it even certified it as a general point of law of public importance) but did not entertain the submission that it had and might continue to get this part of the law wrong.
  1. As noted, the Court of Appeal certified that a general point of law (posed in two parts) was of general public importance involving as it did the proper construction of the LIBOR and EURIBOR definitions.
  1. However, it did not grant permission to appeal saying that it “...should be for the Supreme Court to decide whether the point of law is one which it ought to consider in the light of the consistent series of decisions of the Court of Appeal.”
  1. The “force in numbers” point (five times decided already - not just once) did not find favour with the Supreme Court which having considered the certified point of law decided it was one which it ought to consider and granted permission to appeal in both cases.
  1. Lord Leggatt in the Hayes appeal in answering “no” to each of the certified points, regarded the first as mattering “...more to the safety of the appellants’ convictions”.
  1. The first part of the certified point was in these terms “ (a) If a LIBOR or EURIBOR submission is influenced by trading advantage it is for that reason (my emphasis) not a genuine or honest answer to the question posed by the definition”.
  1. Lord Leggatt ruled that the identification of the submitted rate “...required a qualitative assessment of various data sources and was a matter of subjective opinion rather than empirical fact. Whether a submission was genuine or not did not turn on how a court construes the LIBOR and EURIBOR definitions. It turned on the state of mind of the submitter and whether the stated opinion of the borrowing rate was one which that person actually held. That is a question of fact which, in a criminal trial, is the province of the jury and not the judge.” (7).
  1. He went on to say that “It was wrong for the judge to direct the jury that, if the submitter took any account of the commercial interests of the bank or a trader, the rate submitted was for that reason not a genuine or honest answer to the question posed by the definitions as a matter of law” (my emphasis).
  1. The law could not dictate whether or not the answer given represented the submitter’s genuine opinion. The jury might well have regarded the fact that a submission was influenced by trading advantage as supporting an inference that the figure submitted was not in truth a rate at which, in the submitter’s opinion, the bank or a prime bank, could borrow money at the relevant time. Indeed the Supreme Court acknowledged that there was evidence upon which a jury properly directed might convict. However, it was for the jury to decide whether to draw that inference and not for the judge to tell them that they must do so because the law required it (8).
  1. Lord Leggatt ruled that Mr Hayes’ case amounted to a defence but that the trial judge’s direction was to remove consideration of that defence from the jury by instructing them that if any consideration had been given to trading advantage the rate submitted could not as a matter of law be a genuine or honest assessment of the bank’s borrowing rate. He held that this crucial misdirection undermined the fairness of the trial (8).
  1. In Mr Palombo’s case the directions were not open to the same degree of criticism but they still involved the same essential error of treating this question of fact as if it was a matter of law rendering his conviction also unsafe.
  1. The Supreme Court decided that at trial the court was misconceived in thinking that it was important to direct the jury as to the legal effect of the definitions. In Mr Hayes’ case not only had the trial judge done so but in doing so “he conflated the question whether the submission of a rate complied with the LIBOR definition with the question whether it represented the genuine opinion of the submitter. The conflation of these two matters pervades his legal directions. The judge treated them as interchangeable...” (124).
  1. Significant prejudice was caused by a ruling that on its proper construction the LIBOR document did not permit any consideration of trading advantage to be taken into account in making a LIBOR submission.
  1. “When the proposition was combined with the fallacy that whether a submission was a genuine or honest assessment of the bank’s borrowing rate turned on whether it accorded with the LIBOR definition, it produced the following flawed conclusion: if trading advantage was taken into account, the submission could not as a matter of law, be a genuine or honest answer to the LIBOR question.” (125).
  1. The effect of the trial judge’s direction was to remove the defence from the jury’s consideration. “The jury was told in substance that the fact that Mr Hayes had intended trading advantage to be taken into account necessarily meant, as a matter of law, that he intended figures which were not genuine assessments of the bank’s borrowing rate to be submitted…This usurped the function of the jury.” (130).
  1. As Lord Leggatt said in Mr Palombo’s appeal he was entitled to be acquitted unless the jury found him guilty of the offence charged. In his case that required proof of an agreement to procure or make false representations of the submitter’s opinion and which the submitter knew misrepresented his or her opinion of the relevant borrowing rate. The crucial question for the jury was whether Mr Palombo was in fact a party to such an agreement (218).
  1. Further misdirections in his case as to what the proper basis for the submission of EURIBOR rates involved, had the effect of exaggerating the gravity of his alleged actions in trying to advance his and the bank’s commercial interests in his communications with the individuals responsible for putting forward the bank’s EURIBOR submissions.
  1. The jury was given the impression that such conduct of itself involved trying to influence submitters to break the criminal law when in truth all that the Court of Appeal had decided in an earlier appeal in 2018 was that taking into account commercial interests would be a breach of the prime bank’s contractual obligations it had with Belgian entities that administered EURIBOR (233).
  1. The test of dishonesty is a two-stage process.
  1. First, the jury determines the defendant’s actual state of knowledge and belief about the relevant facts. This is a factual enquiry into the defendant’s mental state which may include a belief about a particular situation, the understanding of any relevant rules or the perception of the consequences of the relevant actions or omissions. Second, the jury then objectively assesses whether the alleged or admitted conduct was dishonest by the standards of ordinary decent people. It follows that the defendant’s own understanding of what is honest or dishonest is relevant but not the sole determinant.
  1. In the present appeals repeated errors of law were made. The Court of Appeal displayed a somewhat judicial arrogance at the thought that its previous decisions on the same point might be at fault. Lord Leggatt’s opening remark nailed the concern. How effective is the criminal appeal system in England and Wales at confronting legal error?
  1. The errors were corrected in this case albeit years after they were repeatedly made. We all know how difficult it is to get to the Supreme Court; particularly when the route is blocked by the Court of Appeal. The sobering fact is that if the appeals had not made it “to the top” then given precedent, trials involving the same issues would have been unfair from the off.
  1. In its recent published response to the quashing of the convictions, the SFO announced that it would not be in the public interest to seek the appellants’ retrial. No doubt a decision reached with relative ease.