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Investment Banking | Legal/Regulatory July 14, 2012, 9:00 pm
U.S. Is Building Criminal Cases in Rate-Fixing
By BEN PROTESS and MARK SCOTT
Barclays is at the center of an interest rate-fixing scandal.Carl Court/Agence France-Presse — Getty ImagesBarclays is at the center of an interest rate-fixing scandal.
As regulators ramp up their global investigation into the manipulation of interest rates, the Justice Department has identified potential criminal wrongdoing by big banks and individuals at the center of the scandal.
The department’s criminal division is building cases against several financial institutions and their employees, including traders at Barclays, the British bank, according to government officials close to the case who spoke on the condition of anonymity because the investigation is continuing. The authorities expect to file charges against at least one bank later this year, one of the officials said.
The prospect of criminal cases is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. Collectively, the civil and criminal actions could cost the banking industry tens of billions of dollars.
Authorities around the globe are examining whether financial firms manipulated interest rates before and after the financial crisis to improve their profits and deflect scrutiny about their health. Investigators in Washington and London sent a warning shot to the industry last month, striking a $450 million settlement with Barclays in a rate-rigging case. The deal does not shield Barclays employees from criminal prosecution.
The multiyear investigation has ensnared more than 10 big banks in the United States and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, according to lawyers close to the case. In part, they are trying to avoid the public outcry that stemmed from the Barclays case, which prompted the resignation of top executives.
The criminal and civil investigations have focused on how banks set the London interbank offered rate, known as Libor. The benchmark, a measure of how much banks charge one another for loans, is used to determine the borrowing costs for trillions of dollars of financial products, including mortgages, credit cards and student loans. Cities, states and municipal agencies also are examining whether they suffered losses from the rate manipulation, and some have filed suits.
With civil actions, regulators can impose fines and force banks to overhaul their internal controls. But the Justice Department would wield an even more potent threat by bringing criminal fraud cases against traders and other employees. If found guilty, they could face jail time.
The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan Chase, have only further fueled the anger of consumers and investors.
But the Libor case presents a potential opportunity for prosecutors. Given the scope of the problems and the number of institutions involved, the rate-rigging investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis.
“It’s hard to imagine a bigger case than Libor,” said one of the government officials involved in the case.
The Justice Department has jurisdiction over the London bank rate because the benchmark affects markets in the United States. It could not be learned which institutions the criminal division is chasing next.
According to people briefed on the matter, the Swiss bank UBS is among the next targets for regulatory action. The Commodity Futures Trading Commission is pursuing a potential civil case against the bank. Regulators at the agency have not yet decided to file an action against the bank, nor have settlement talks begun. UBS has already reached an immunity deal with one division of the Justice Department, which could protect the bank from criminal prosecution if certain conditions are met. The bank declined to comment.
The investigation into the global banks is unusually complex and it could continue for years, and ultimately end in settlements rather than indictments, said the officials close to the case. For now, regulators are building investigations piecemeal because the facts of the cases vary widely. That could make it difficult to compile a global settlement, although some banks would prefer an industrywide deal to avoid the harsh glare of the spotlight, said a lawyer involved in the case.
American authorities face another complication as they build cases. Investigators still lack access to certain documents from big banks.
Before gathering some e-mail and bank records from overseas firms, the Justice Department and American regulators need approval from British authorities, according to the people close to the case. But officials in London have been slow to act, the people said. At times, British authorities have hesitated to investigate.
By contrast, the Justice Department and the Commodity Futures Trading Commission have spent two years building cases together. Lanny Breuer, head of the Justice department’s criminal division, has close ties with David Meister, the former federal prosecutor who runs the commission’s enforcement team.
In the Barclays case, the British bank was accused of reporting false rates to squeeze out extra trading profits and fend off concerns about its health. During the crisis, banks feared that reporting high rates would suggest a weak financial position.
Lawmakers in London and Washington are examining whether regulators looked the other way as banks artificially depressed the rates. On Friday, it was disclosed that a Barclays employee notified the Federal Reserve Bank of New York in April 2008 that the firm was underestimating its borrowing costs. Despite the warning signs, the illegal actions continued for another year.
But in April 2008, a senior enforcement official at the Commodity Futures Trading Commission, Vincent McGonagle, opened an investigation. He directed the case along with another longtime official, Gretchen Lowe.
At first the case stalled as the agency waited months to receive millions of pages of documents when Barclays pushed back against the American regulators, according to the officials close to the case. By the fall of 2009, the trading commission received a trove of information, providing a broad view into the wrongdoing.
A series of incriminating e-mail and instant messages, regulators say, laid bare the multiyear scheme. In one document, a Barclays employee said the bank was “being dishonest by definition.”
The case gained further traction in early 2010, when the agency’s enforcement team engaged the Justice Department. The department’s criminal division, led by Mr. Breuer, agreed that regulators had a strong case. The investigation continued until January 2012, when the trading commission notified Barclays lawyers that they were entering the final stages before deciding about an enforcement action.
As part of the deal, regulators pushed the bank to adopt new controls to prevent a repeat of the problems. Among other measures, the bank must now “implement firewalls” to prevent traders from improperly talking with employees who report rates.
The bank says that it provided extensive cooperation during the three inquiries, and has spent around $155 million on its own three-year investigation. Because it agreed to settle with British authorities, Barclays received a 30 percent fine reduction.
In the United States, Barclays offered to pay a fine of $200 million to the C.F.T.C., slightly below the initially proposed range, according to government officials close to the case. Mr. Meister’s team soon accepted the offer, securing the biggest fine in the commission’s history.
On June 27, British and American authorities announced the deal with Barclays, which agreed to pay more than $450 million total. “For this illegal conduct, Barclays is paying a significant price,” Mr. Breuer said then.
Susanne Craig contributed reporting.
July 15, 2012
After Massey mine disaster killed their son, settlement of millions is worth little
The company’s first offer was $3 million, an amount Gary and Patty Quarles called a “slap in the face.” Three million dollars for their only son, Gary Wayne Quarles, 33, one of the 29 workers killed in the worst U.S. coal mining disaster in four decades.
“They couldn’t pay us enough for our son,” said Gary Quarles. “We said, ‘No way, no way. We don’t care how far we go, we don’t care if we go in front of a jury.’ We was going.”
So they got a lawyer. Other families got lawyers. And earlier this year, the last of the wrongful-death claims filed by the families against Massey Energy and inherited by the company that bought them, Alpha Natural Resources, came down to four days of mediation at a green and manicured golf resort about an hour’s drive from the blasted-out hulk of the Upper Big Branch mine in West Virginia.
Offers were made and refused. Then Patty Quarles, her head pounding with a migraine, looked at a number, looked at her distraught husband, thought of her two grandchildren, and finally said, “Do it.”
With that, and with other families agreeing to settlements whose terms remain confidential, millions of dollars have begun raining down on Appalachia, a bitter resolution for families who had hoped other forms of justice would also materialize.
More than two years after an explosion that an independent panel appointed by former West Virginia Gov. Joe Manchin blamed on a corporate culture that put “the drive to produce coal above worker safety,” no former high-ranking Massey executives have been criminally charged. No new federal mine safety legislation has passed, a matter Gary Quarles and other families pressed in Washington recently, carrying posters of their lost sons, brothers and husbands into the red-carpeted offices of senators and representatives.
“This was my son, Gary Wayne,” Quarles said to lawmakers over and over and to reporters on a day that began with three anti-depressants. “I called him my son, but he was a man, a real man.” He paused to compose himself. “We are here for safety . . .”
But he and others left without any new assurances on legislation.
For now there is just the money, money that has poured into local bank accounts and trust funds, more money than most mining families ever had and some say they ever really wanted, bringing a question they did not want either: what to do next.
A few have used it to say good-bye forever to West Virginia. Most, according to lawyers involved, have stayed exactly where they have always been, where their new wealth has settled uneasily.
Gary Quarles sat on the front porch of his trailer in Horse Creek Hollow, a stretch of grass and wild orange lilies in the mountains where he and his wife have lived for more than 30 years.
The trailer had new paint. Two new white trucks were in the gravel driveway. The trailer 40 feet away, where his son lived, had a new roof and new furniture, although no one lives there.
“Money,” said Quarles, a bearded, thick-armed 56-year-old. “Yeah.”
He sat there through the cool morning and into the afternoon, watching one rain shower and then another, not eating, not drinking, not even a glass of water.
Now that they never have to worry about money again, Patty Quarles retired from a part-time health-care job. Gary Quarles retired from more than 20 years of coal mining, work he respected but never loved, especially when he worked for Massey, a company that was frequently cited for federal safety violations, which it often contested, and whose chief executive, West Virginian Don Blankenship, resigned after the disaster with a payout reportedly worth at least $12 million.
“ ‘Production first, safety last, haul the coal or haul your a--,’ ” Quarles said, reciting what he and other miners believed was the true Massey creed. “You were just a number to them. If you were producing, fine. If not, you were just dirt under their feet.”
He and his son had an easy rapport. If Gary Wayne ever swore at him he can’t remember, and his son’s life came to resemble his own in many respects. When Gary Wayne became a coal miner, he moved into the trailer next door. He got a truck, got married, had two kids, got divorced and built a life around the rhythms of fatherhood, hunting seasons and dinnertime, when he would pull up after work, his mom or dad would yell, “Gary, there’s food, come eat,” and they would talk.
These were the pleasures exchanged for a job that left him so covered in coal dust that he could scrape it off his arms, that had become so precarious with safety violations in the weeks before the explosion one miner said he began studying the sky as he went underground in case it was his last look.
Gary Quarles leaned back in his front porch swing. The sun was out.
“I always wondered what it’d be like not having to work,” he said. “I love to hunt. I used to think, ‘When I’m retired, when the seasons come in, I can hunt every day.’ But see, me and Gary Wayne hunted. It ain’t good. It ain’t what I hoped it’ve been. Now when I make the trip I cry going in, I cry in the tree stand, I cry coming home. I never know when I might start crying. I don’t really understand it.”
His wife said she only ever saw him cry one time before this. Now he cried remembering crying, and cried looking out on the green grass and orange lilies and thinking about the night of the explosion, when families gathered in a building and a woman from Massey holding a clipboard opened the door, keeping it ajar with her foot, a detail that still disturbs him.
“‘If I call your name,’” he recalled her saying, “‘you are to report to the fire department to identify bodies.’ What kind of person says that? People was passing out, falling out.”
He cried recalling his hope when Gary Wayne’s name was not called, and the frozen face of Don Blankenship as he stood with another Massey official who announced that, in fact, all 29 miners had died, and people began throwing soda cans at them.
He cried last year when he and Patty finally got their son’s autopsy report and read it in the parking lot of their lawyer’s office. She wanted to know every single detail, to imagine it, to somehow be with her son in his last moment. He was reluctant to see Gary Wayne described so crudely.
“The decedent is identified by recognition of specific coal miner medallion and tracking number . . .” it began. “The decedent is received wearing heavily soot stained coveralls . . . heavy soot deposition on the anterior tongue surface . . . diffuse cherry red lividity . . .” it continued, referring to a sign of carbon monoxide poisoning.
The report noted that Gary Wayne had black lung disease and that the cause of death was smoke and soot inhalation, and it went on to describe his organs. His father was sorry to know how much his son’s heart weighed.
Gary Quarles got off the swing and, because he had all the time in the world to do anything he wanted, he got in his new truck and drove down the winding two-lane road, merging with the 5 p.m. traffic of miners heading to work or home, past soaring gray silos and conveyor belts that seem to make factories of the mountains.
“Everybody here knows everybody,” he said, describing a tightly woven world in which the coal mining business infuses everything.
“This guy here,” he said, passing a house, “me and him worked together forever.”
“This guy,” he said, passing another. “He’s a mine inspector. When the explosion happened and I called, he didn’t do nothing but cry.”
“This boy here,” he said, “he’s in one of the [investigative] reports . . . he was with Gary Wayne the night before he died.”
There were neighbors who went to high school with him or his son, kids who became mine bosses or safety officials, Massey executives or their in-laws, people who knew the blessings and curses of the business because they were part of it, too, people who felt empathy but also degrees of guilt, and who lined up for three blocks for Gary Wayne’s funeral.
Gary Quarles drove past the house of his friend Goose, who survived the Upper Big Branch explosion and who said that when he sees Gary these days, he does not see a rich man but a sad one.
“That was his boy. That was his pride and joy,” he said, which was the kind of understanding that made Gary Quarles certain he could never leave here.
He drove past a local school — “Massey paid for that,” he said — and past some Little League ball fields — “I was told Massey owned those” — past Upper Big Branch, which now has a sign that reads “Coal River East.”
“At one point in time, everyone loved Massey,” Quarles said, driving along. “They gave money for ball teams, to restaurants. They owned you.”
Ted Pile, a spokesman for Alpha, said the company is committed to resolving problems and issues it inherited when it bought Massey last year.
“Everyone wants to look forward,” he said, honoring the standard agreement not to discuss details of the settlement. “It was a terrible thing that happened. I don’t think anyone wants to keep reliving that. . . . We’ve been able to do a lot since June of last year to sort of tie up some of those things and move forward.”
That requirement for secrecy is one of the things that bothers Quarles most about the settlements — that none of the families are legally allowed to speak about the details. “I really don’t like secrets,” he said. “Not at all. What’s the big deal? What’s the problem with talking about it? I don’t know.”
He pulled into Pineview Cemetery, a meticulously tended slope of headstones and bright bouquets.
“Massey paid for this,” Quarles said, standing before his son’s headstone in the early evening. “It was going to be $10,000 or more. It was way up there. Patty was going to use her debit card, but when we got home there was a message saying Massey was going to pay for all of it. All the headstones. All the funerals. All of it, Massey paid for it.”
At times, Gary Quarles has not been sure whether to be grateful or disconcerted by some of the ways coal company officials have extended comfort.
During one memorial service, his grandson Trevor was telling about how he killed a turkey.
“And Don Blankenship walks by,” Quarles said. “And Don reaches into his pocket and gives Trevor a business card and says, ‘You’re the only 12-year-old that’ll ever have this.’ ”
He wasn’t sure what to make of that.
“I don’t know,” he said.
The whole time her husband was sitting outside or driving to the cemetery, Patty Quarles, who has an image of her son tattooed on her lower leg, had been sitting on an old leather couch in a living room that has the same furniture it always had. She had watched TV, then taken a nap, then watched TV some more, then gone back to sleep.
“I know it’s hard to believe, but I was a busy person before,” she said the next day, sitting at the kitchen table. “I loved housework. Loved gardening. I’ve lost interest in everything. Now we can do whatever we want to do, but now we don’t want to.”
She had thought about moving, she said, thought about just throwing everything in a bag and heading for Florida, but she realized “wherever I’m at, the same problem will be there.”
Also, “him,” she said, pointing to her husband, who was sitting in the living room with a new pair of white headphones on, staring out the glass front door and listening to bluegrass songs by Ralph Stanley, including one he plays over and over called “I Am a Man of Constant Sorrow,” which he’s known since he was a kid.
He was humming.
“He just listens to that music and cries,” she said. “I don’t know if it gives him peace of mind. Me, I always liked music, but I don’t listen to it now. It makes me sad. Him? It doesn’t matter how sad it is.”
They have been together since she was 14. Patty Quarles does not cry as much as her husband only because she knows that if she does, then he will fall apart, and then she will fall apart, and if that happens, she said, “I’m afraid it won’t ever stop.”
During a memorial service, a time Patty Quarles was crying, a high-ranking Massey official touched her shoulder and said, “I’m sorry, I’m sorry, I’m sorry,” over and over and gave her his handkerchief, which for some reason she kept.
During another memorial service, the wife of a Massey executive whom some families hold responsible for the accident — a woman Patty Quarles has known for years — came up to her, crying.
“She said, ‘Are you mad at me?’ ” she recalled. “And I said, ‘Of course, I’m not mad at you!’ ”
More recently, before the settlement checks started arriving, a corporate lawyer, after explaining some legal details, leaned over to her and said, “I’m so sorry,” and Patty Quarles just nodded.
None of these sorries made her feel better. And the financial settlement, perhaps the biggest sorry of all, brought its own burden.
On one hand, as many miners did, her son had explicitly talked about suing the coal company if anything ever happened to him. After his divorce, he changed his beneficiaries to his two children and, as he wrote on the legal form, “Mom,” with her legal name in parentheses.
Her son’s decision told her that he trusted her to handle things right, that he wanted to take care of his children, of his dad and of her. And this was what she carried with her into the final mediation at the golf resort, when she was almost blind with a migraine headache, the blackout curtains in the hotel room drawn.
She thought about his wishes, about her grandchildren having a future outside coal mining, about her husband, who was still sitting over there humming to Ralph Stanley.
“I wanted it over,” she said. “I wanted it over so bad.”
“At the same time,” she said, and now Patty Quarles was crying, “this is your mom saying this is what your life’s worth. Like your mom has sold you out. . . . When the lawyers said 3 million I was so mad I couldn’t see straight. I wouldn’t have settled. I wouldn’t have settled for one red cent.”
And then she did.
She is legally prohibited from saying how much the settlement was. But she can say that when her husband saw the amount, she thought he was going to pass out. And that when she finally agreed to it, she felt anything but better.
“ ‘Gary Wayne, well, this is what you was worth,’ ” she recalled thinking, and in that sense, the settlement has inflicted pain on top of pain.
“He was our whole world,” Patty Quarles said. “He ate here. He’d been sleeping over here. He’d come to the door and say, ‘Hey Mom.’ I can almost still hear him. He was a 33-year-old man who never left home. His house was 40 feet away. It’s unbearable to think about what’s actually gone.”
Some weeks later, when the actual check arrived from the coal company, she said, she and her husband felt relieved to have accomplished what they are certain their son wanted them to accomplish. They felt glad for his children, grateful to their lawyers, somehow humbled and vindicated. They felt like they’d reached the end of a necessary process.
And with all of that, Gary Quarles felt as sad as ever.
“It won’t never leave me,” he said.
Patty Quarles felt something else.
“Sick,” she said. “I felt sick.”
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