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Regulators Try to Beat Clock in Rate Probe

09/20/2012 | The Wall Street Journal

U.S. prosecutors are seeking more time to complete their investigation of alleged interest-rate fixing, while banks ensnared in the probe are trying to turn the clock to their advantage as they battle lawsuits claiming damages from rate-rigging.

The Justice Department recently asked several banks to sign ​“tolling​” agreements, in which the companies promise they won​’t challenge any enforcement action on the grounds that the alleged wrongdoing occurred beyond the statute of limitations, people close to the investigation said.

The requests were sent to all the major banks under investigation, these people said, including Citigroup Inc., Deutsche Bank AG, J.P. Morgan Chase & Co.,Royal Bank of Scotland Group PLC and UBS AG.

The Commodity Futures Trading Commission, which is leading the civil arm of the U.S. probe, asked the banks for tolling agreements earlier this year, people familiar with the matter said. It isn​’t clear how many banks have so far signed the Justice Department or CFTC agreements.

A spokeswoman for the Justice Department and a CFTC spokesman declined to comment.

Even as prosecutors continue the criminal probe, U.S. officials have grown concerned that the investigation into whether banks manipulated the London interbank offered rate could be stymied by the statute of limitations. This can make it harder to punish firms or individuals for frauds that took place more than five years ago.

Investigators are running an increasing risk of bumping up against this five-year time-bar in some federal laws as they scrutinize conduct that dates back to the 2008 financial crisis or earlier.

Barclays PLC admitted in June that some executives and traders tried to manipulate Libor and other benchmark rates from 2005 through 2009. The British bank paid about $450 million to U.S. and U.K. regulators to settle the allegations.

The political firestorm sparked by the Barclays pact has been followed by intense behind-the-scenes activity. Prosecutors in the U.S. and U.K are investigating several traders involved in the alleged manipulation, according to people familiar with the probe. And regulators on both sides of the Atlantic are pursuing continuing criminal and civil probes of a number of banks.

Regulators aim to follow the Barclays deal with pacts with other banks under investigation in coming months and years that could involve settlements totaling billions of dollars, according to people close to the probe. Settlement talks between RBS and government agencies are at an advanced stage, and a deal likely will come before the end of the year, the people said.

But deals with some of the other banks could take much longer to work through, said people close to the probe.

This is partly because of the sheer scale of the investigation. A dozen or so regulators are hunting for possible rate-rigging by at least 16 financial firms on three continents. Not all those firms will necessarily be charged. Meantime, the government wants to keep all its options open. The banks are expected to sign the tolling pacts rather than risk provoking prosecutors into filing charges simply to beat the clock, according to people close to the investigation.

Daniel Richman, a law professor at Columbia University, said big financial firms usually agree to regulators​’ requests for tolling agreements. ​“It​’s certainly not in [the banks​’] interests to rush the government to pursue the case,​” he said.

One reason is because any government enforcement actions could provide powerful added ammunition for a number of private lawsuits filed against banks on the panel that sets U.S. dollar-Libor. The banks are fighting lawsuits by investors and others claiming to have suffered losses from the alleged rate manipulation.

“Another settlement could give us access to valuable bank documents that arent yet available publicly,” said David Kovel at law firm Kirby McInerney LLP, who is representing investors in one of the lawsuits.

The private litigation, rather than the fines imposed by regulators, could end up being the biggest financial cost for some of the banks involved in the Libor scandal, said James Cox, a law professor at Duke University in Durham, N.C. If successful, damages from these class actions could run into tens of billions of dollars, according to legal experts.

​“So they​’ll be thinking carefully about how the timing and terms of any deal with the government could affect the class actions,​” Mr. Cox said.

All the banks targeted by the lawsuits in June filed motions seeking to have the proposed class actions thrown out, or at least narrowed. Among other things, the banks argued that some of the claims were now out of date because of the statute of limitations - an argument rejected by lawyers for the alleged Libor victims.

The legal battle over the validity and scope of the lawsuits could have a critical impact on the banks​’ eventual liability for Libor. It could also be affected by any further deals with the government.

​“Ours is a landscape of shifting sands,​” U.S. District Judge Naomi Buchwald, who is hearing the proposed class actions in Manhattan federal court, said last month. ​“There are external regulatory developments that may well impact this case.​”

A ruling on the scope and validity of the proposed class actions isn​’t likely before the first half of next year, said people familiar with the matter.

Barclays​’s admission of misconduct in its settlement with the Justice Department already is being used in the court battles over the proposed class actions.

Write to Jean Eaglesham at