New Jersey and dozens of other states have reached a $220 million agreement with Deutsche Bank to
settle claims that employees of the German-based financial institution were manipulating interest
rates for several years.
The interest-rate manipulation took place between 2005 and 2009, according to a settlement agreement released yesterday, and it impacted the financial transactions of several entities in New Jersey, including the New Jersey Economic Development Authority and the state public-employee pension system.
The settlement with Deutsche Bank was agreed to by 45 states in all, but the New Jersey attorney general’s office was one of eight to serve in a “leadership group” that spearheaded the investigation into the bank’s conduct. The entities whose transactions were affected by Deutsche Bank’s interest-rate manipulation will now be able to get restitution.
“This is an important settlement, not only for the potential recovery it provides for government entities and nonprofit organizations that were harmed by the actions of Deutsche Bank, but also for the message it sends,” New Jersey Attorney General Christopher Porrino said.
“When institutions manipulate financial markets for their own self-serving, profit-driven reasons, they will be held accountable,” Porrino said.
Yesterday’s agreement with Deutsche Bank is actually the second multistate settlement to come out of an interest-rate-fixing scandal that emerged during the financial collapse that led to the Great Recession. Last year, Barclays Bank and Barclays Capital Inc. resolved similar allegations by entering into a $100 million settlement with New Jersey and more than 40 other states. And the investigation into interest-rate manipulation remains ongoing, officials said yesterday.
“We will not tolerate fraudulent, manipulative, or collusive conduct that interferes with or undermines confidence in our financial markets,” New York Attorney General Eric Schneiderman said.
The interest-rate manipulation activities that led to the settlements with both Barclays and Deutsche Bank involved a financial benchmark known as the London Interbank Offered Rate, or LIBOR. A panel of banks submit their rates each day to establish the daily benchmark for 10 different currencies, including U.S. dollars. The benchmark is then used as an index for trillions of dollars worth of loans, swaps, and other transactions.
In the 75-page settlement agreement released yesterday, the state attorneys general alleged that Deutsche Bank, starting in 2005, rearranged the layout of the bank’s trading division in London so that derivatives traders ended up sitting alongside market traders who were responsible for making Deutsche Bank’s daily LIBOR submissions.
The settlement agreement also says that between February 2005 and July 2009, Deutsche Bank derivatives traders made numerous requests to their coworkers to make LIBOR submissions that would benefit their trading positions.
“Manipulation requests were frequently made on days when Deutsche Bank’s traders had large positions that were due for a rate reset that referenced LIBOR rates,” the agreement said. “The requested manipulation would either raise or lower Deutsche Bank’s LIBOR submission in order to benefit the Deutsche Bank traders’ positions at the expense of the bank’s counterparties.”
The settlement agreement also included numerous emails exchanged between Deutsche Bank traders and LIBOR submitters, including one from August 2007 when a bank manager from New York asked for a LIBOR rate to be “as low as possible” over the course of a few days.
Prior to the states’ investigation, the bank launched two different internal probes to look into high profits that its trading strategy was yielding. The settlement agreement said Deutsche Bank also attempted to influence other banks’ LIBOR submissions, and received external requests for LIBOR manipulation as well.
“This kind of conduct undermines public confidence in our financial institutions and the integrity of the financial markets, and that erosion of public confidence can result in damage to the entire economy,” Porrino said.
Transactions involving several government and nonprofit organizations in New Jersey were impacted by Deutsche Bank’s interest-rate manipulation, including the state EDA; New Jersey Common Pension Fund; New Jersey State Universities Retirement Fund; New Jersey Transit MST Retirement Trust; New Jersey Carpenters Annuity Fund; and Hudson County Improvement Authority. Those entities will now be able to seek distributions from the settlement fund, with the balance of the settlement going to cover the costs of the investigation and other uses, officials said.
The allegations included in the Deutsche Bank settlement agreement echoed those made against Barclays before last year’s $100 million, multistate settlement was announced. In that case, the states alleged that Barclays’ traders asked employees responsible for making LIBOR submissions to lower settings in order to benefit Barclays’ trading positions. A host of entities including the New Jersey Turnpike Authority and Shore Memorial Medical Center in Atlantic County were defrauded of millions of dollars by entering into swaps and other transactions with Barclays without knowing about the ongoing LIBOR manipulation, officials said last year when the settlement was announced.
The New Jersey Attorney General’s Office is part of a leadership group that’s investigating LIBOR-related bank conduct that also includes officials from California, Connecticut, Florida, Illinois, Maryland, Massachusetts, and New York.