By Anne Sherry, J.D.
Rabobank employees were wrongly convicted of LIBOR manipulation, argues an amicus brief filed in the Second Circuit by the New York Council of Defense Lawyers (NYCDL). By ruling on a defense motion that the relevant issue was the defendants' intent rather than the accuracy or inaccuracy of the LIBOR submissions, the district court "improperly dispensed with an essential element of fraud liability." Adopting such an expansive theory of wire fraud would erode fair notice and due process, amicus argues (U.S. v. Allen, July 13, 2016).
Conviction based on intent. Rabobank derivatives traders were convicted of wire fraud, conspiracy, and bank fraud in the Southern District of New York for allegedly manipulating U.S. dollar and yen LIBOR rates. The amicus brief highlights that the court instructed the jury it could convict if the defendants submitted rate estimates "reflecting, at least in part, an intent to benefit Rabobank's trading positions and thereby obtain profits that Rabobank might not otherwise realize." Denying the defendants' motion for acquittal, the district court explained that "the relevant issue was not the accuracy or inaccuracy of defendants' LIBOR submissions, but the intent with which these submissions were made."
The court reasoned that the defendants effectively represented that they acted in good faith in submitting LIBOR estimates. The NYCDL argues that this rationale depends on intent substituting for an actual misrepresentation. Furthermore, the Council argues, it rests on a flawed assertion that lack of good faith "could consist merely of Defendants' seeking to promote the financial interests of their employer in transactions with parties to whom no fiduciary duty was owed." Such a rule would subject executives and employees to criminal liability for their opinions and estimates simply because they were in part influenced by their employers' financial interest—even if the opinions and estimates were reasonable, accurate, and honestly believed.
Fraud liability requires misrepresentation. The sole statement made in the LIBOR submissions was an answer to the question: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?" NYCDL asserts that the rates provided in answer were estimates or opinions, not statements of historical fact. As such, they stand on a different footing in a falsity analysis. To be actionable as fraud, the Council continues, a statement of opinion must lack a reasonable basis, and the speaker must subjectively disbelieved it. Neither of these facts was proven at trial, allowing defendants to be convicted of fraud without proof of the most basic element: a misrepresentation.
The brief quotes the Second Circuit's recent Countrywide decision, in which it rejected the Government's argument that fraudulent intent was sufficient to show fraud. "Freestanding 'bad faith' or intent to defraud … is not actionable under the federal fraud statutes," the court wrote; "the statutes apply to 'everything designed to defraud by representations as to the past or present, or suggestions and promises as to the future.'" NYCDL argues the government's theory of fraud in the LIBOR case invalidly relied on evidence of intent alone, without connecting that intent to a misrepresentation. Even worse than in Countrywide, the district court's theory of fraud equated an intent to benefit Rabobank with an intent to defraud. "Employees are supposed to promote their employer's financial interests, and indeed have a fiduciary obligation to do so," the brief asserts.
Expanding criminal liability. In NYCDL's view, the district court's interpretation of the wire fraud statute is antithetical to the principle that criminal statutes must be written and interpreted in such a way that ordinary people can understand what conduct is prohibited. Furthermore, the "creative interpretation" runs afoul of the principle that because of the seriousness of criminal liability and penalties, legislatures, not courts, should define criminal activity.
The case is No. 16-898(L).