10:24 a.m. | Updated LONDON – British authorities made the first arrests in the global investigation into interest-rate manipulation, an inquiry that has ensnared the world’s biggest banks.
The Serious Fraud Office of Britain said on Tuesday that it had arrested three people in connection with rate rigging. The three men, who are aged between 33 and 47 and are British citizens, were taken into custody by police in early morning raids at their houses on the outskirts of London.
One of the people is Thomas Hayes, a 33-year-old former trader at Citigroup and UBS, according to people with knowledge of the matter. At least one of the other two men worked for R P Martin, a British brokerage firm that previously surfaced in the Canadian investigation into rate manipulation, another person briefed on the matter said.
British criminal authorities typically make arrests at the early stages of an inquiry, and the actions do not necessarily mean the individuals will be charged with any wrongdoing. A Citigroup spokeswoman declined to comment. A UBS spokesman declined to comment. A lawyer for Mr. Hayes could not immediately be identified.
The arrests mark a new phase of the sprawling rate-rigging inquiry.
Regulators around the world are investigating more than a dozen big banks that help set benchmarks like the London interbank offered rate, or Libor. Such benchmark rates are used to determine the borrowing costs for trillions of dollars of financial products, including credit cards, student loans and mortgages.
In June, the British bank Barclays agreed to pay $450 million to settle charges that some of its traders attempted to manipulate Libor to bolster profits. Authorities also accused Barclays of submitting low rates to deflect concerns about its health during the financial crisis. The scandal prompted the resignations of top bank officials, including the chief executive, Robert E. Diamond Jr.
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Regulators are now pursuing a number of criminal and civil cases.
The Royal Bank of Scotland is talks with authorities. The bank said it would likely disclose fines before its next earnings report in February.
The Swiss bank UBS is close to finalizing a settlement deal with American and British authorities. The bank is expected to pay more than $450 million to settle claims that some employees reported false rates to increase its profit. When American authorities announce their case against UBS in the coming days, Mr. Hayes is expected to figure prominently, one of the officials said.
Mr. Hayes built his reputation as a trader at UBS. He worked at the Swiss bank from about 2006 to 2009, before departing for Citigroup.
But his career at Citi was short-lived. In 2010, the bank suspended him after he approached a London trading desk about improperly influencing the Yen-denominated Libor rates, a person briefed on the matter said. He was fired in September 2010, and the bank reported his suspected actions to authorities.
UBS also implicated Mr. Hayes to authorities, according to another person briefed on the matter. The Swiss bank discovered that Mr. Hayes worked with traders at other banks to influence rates, according to officials and court documents.
Mr. Hayes emerged in court documents this year filed by Canadian authorities. The documents — collected by Canada’s Competition Bureau, the country’s anti-trust authority – highlight an alleged scheme in which Mr. Hayes and other traders colluded to push Yen Libor rates up and down. The Canadian investigation, which spans conduct from 2007 to 2010, also referenced traders at JPMorgan Chase HSBC, Deutsche Bank and the Royal Bank of Scotland.
The traders, the documents said, at times corresponded via instant messages on Bloomberg machines. While the flurry of activity took place outside Canada, the trading affected financial contracts in the country that were pegged to Yen Libor.
“Traders at participants banks communicated with each other their desire to see a higher or lower Yen Libor to aid their trading positions,” the Canadian documents said.
The traders also relied on middlemen at brokerage firms “to use their influence” on other banks that set Libor, according to the documents. The brokers included employees at R P Martin, a person briefed on the matter said.
Under British law, Mr. Hayes and the other men can be held for 24 hours. The authorities can then apply for an extension if they need more time for questioning.
The Serious Fraud Office started a criminal investigation into Libor manipulation in July, in response to the furor over the rate-rigging scandal at Barclays. The criminal investigations by the British authorities and their counterparts at the Justice Department parallel similar civil inquiries by international authorities, including the Commodity Futures Trading Commission and the Financial Services Authority, the British regulator.
The arrests come as the agency tries to repair it reputation. In April, the new director of the Serious Fraud Office, David Green, pledged overhaul the office after a series of mistakes by the organization.
Legal professionals say the appointment is a step toward rejuvenating the agency, which has lacked significant firepower to police London’s financial services section. The Serious Fraud Office has been given extra resources by the British government to pursue a criminal investigation related to Libor.
“The S.F.O. works incredibly slowly,” said a defense lawyer representing individuals implicated in the Libor inquiry, who spoke on the condition of anonymity because of the ongoing investigation. “It’s not surprising that people have been arrested. But how long it will take to lead to criminal charges is another matter.”
Azam Ahmed contributed reporting.
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