- Former Barclays trader Alex Pabon was sentenced to two years and nine months in prison for his role in LIBOR fixing.
- He was released from prison in March 2017 — serving just under a year.
- Pabon spoke to Business Insider about how he is “happy to see some of the truth about LIBOR ‘manipulation’ finally coming out,” which involves newly reported allegations that the Bank of England was instructing traders to “lowball” rates.
- He adds “low-level traders have been served up as fall guys to protect these more powerful senior bankers.”
One of the biggest financial scandals in recent history reared its head again when secret recordings of phone calls between two former Barclays traders were leaked this month. The transcripts suggested that the Bank of England (BOE) gave instructions to commercial banks to keep the London interbank offered rate (LIBOR) low.
Alex Pabon, a former Barclays trader who was convicted of LIBOR fixing in July 2016, told Business Insider that he is “happy to see some of the truth about LIBOR ‘manipulation’ finally coming out,” and that Britain’s central bank is finally being brought back into the picture.
“Evidence of lowballing, the practice of requesting dishonest rates which involved senior bank management, the British Bankers’ Association, and the Bank of England, was generally not allowed at my trial,” Pabon told Business Insider in a call from Houston, Texas. The BBA is the trade association for the UK banking sector.
Low-level traders have been served up as fall guys to protect these more powerful senior bankers.
“I spent almost a year in prison for requesting honest rates within a range at which the bank could actually borrow pursuant to acceptable bank and industry practice. Low-level traders have been served up as fall guys to protect these more powerful senior bankers. I look forward to the full truth coming to light.”
LIBOR is the daily measure showing the interest rate at which banks will lend to each other. It is used to set the price of hundreds of trillions of dollars worth of financial products. The LIBOR rate was rigged by traders from numerous banks, who agreed amongst themselves to submit rates that were either higher or lower than the rate should actually have been. Prosecutors said it allowed them to make more money on trades.
Pabon was one of the four traders convicted of the crime in July 2016. He was found to have asked for more than 30 changes to Barclays’ LIBOR submissions even though he told the court that he knew changing the LIBOR number affected the valuations of swaps — a type of credit derivative based on interest rates. After being sentenced to two years and nine months, and ordered to pay £2,300 within 14 days, he was released in March 2017. Pabon served half his sentence and, because he is a foreign national, had another nine months shaved off when he was deported back to the US. He spoke to us from his home in Houston.
Now, more trials of other traders have transpired and secret recordings have been leaked that allegedly show the BOE wanted banks to report artificially lower rates. The truth is “finally” coming out about the whole financial scandal, he says.
“This is not scapegoating but the focus has been on only one particular aspect of LIBOR (the setting of the rate). People don’t realise that there is one particular aspect of LIBOR, that there is LIBOR low-balling and high-balling before and after these periods,” he said.
“People don’t think about what the culture is at the time and why it was seen as acceptable to do what we did. It was simple. You sent a request for a LIBOR level. We say ‘we have a position and we want you to consider this position’ to someone at the same bank.”
“We work so hard for these [jobs] and we go to school and work hard to get the degrees, we compete hard, and it’s hard to get into these trading positions. The last thing you’re going to do is risk your career for a small amount of money. It doesn’t add up. People just look at one small aspect of this case and not look at the whole picture.”
Barclays declined to comment on the details of this feature.
Where it all started
Pabon was born and raised in Houston, Texas, and made his way into banking after a degree in industrial engineering at Texas A&M University. He received a Masters in Financial Engineering from t
he University of California, Berkeley.
His masters was a quantitative degree, which is like an MBA but specialising in the mathematics of finance. He then started working at the French bank BNP Paribas on the short-term interest rate desk in 2002. He was in charge of pricing financial products, and then moved into trading fixed income products such as swaps and forward-rate agreements.
In 2004, it all changed for Pabon. He was recruited by Barclays, which was in the process of building its presence in fixed income products by hiring from other major investment banks. Pabon said, “you were just being pulled and poached to Barclays.” Barclays wanted its new talent to be “profitable and replicate your business” from your previous place of employment, said Pabon. Other people were hired from banks such as Deutsche Bank and Goldman Sachs.
He moved to Barclays from BNP Paribas with his old boss, Fred Gourtay, and went into short-term US dollar trades.
“So everyone was new, there wasn’t really a prevailing culture amongst the desk. There was not a set Barclays culture when I got there, as there weren’t a lot of employees in that area,” said Pabon. “But I did get the impression that they were a very aggressive bank.”
Part of his role was to set LIBOR — the wholesale interest rate in which banks lent to each other. This was only a small element of a much more complex job that saw him work from at least 6.30 a.m. until 5.30 p.m. each day.
“The job is very busy. You’re never really away from your desk. Even when you were out of work, you were never truly ‘away.’ I think that’s the slightly unique thing with banking. When you walk in at 6.30 a.m., you don’t have time to do anything apart from your job,” he said.
I did get the impression that they were a very aggressive bank
“You did not go out for lunch for an hour. And I don’t think I ever logged onto the internet while I was at work (for anything other than work).”
Just two years later in 2006, Pabon left Barclays as he was “tired of the business” and “wanted to have a break.” He said the nature of the job, where you are always “on” was “obviously draining.” He took the opportunity to have a year off work and relaxed and travelled a little.
He had a stressful time the previous year. His boss, Gourtay, had been “terminated” from Barclays following the loss of $US40 million due to three bad trades the pair had made, according to Bloomberg’s report of Pabon’s trial. Gourtay has never been accused of wrongdoing for anything related to LIBOR fixing.
Pabon remained at the bank after Gourtay left, he said, but after a year it was time to move on.
“I originally didn’t know how long I would take off but it ended up being a year. But then I started getting bored,” he said. Pabon then went to trade for himself and did some projects here and there.
In 2010, he received his first “order” from the US regulator Financial Industry Regulatory Authority (FINRA). An order from the regulator is a notification that it is looking into your historical actions at work for some reason. It stated that five years previously, he had possibly sent inappropriate emails related to LIBOR. He said he was pretty calm about it because, after all, “the order wasn’t anything specific” and he sent so many emails during the time they mentioned, he didn’t really know what they were talking about and did not think he did anything wrong.
After some questions from FINRA, he continued with his life and said he did not do anything “substantial” until he took a job at a software company in 2012.
Meanwhile, banks started settling with regulators in the UK and US over LIBOR fixing, and in turn public anger grew over bankers seemingly behaving badly. Politicians focused on the individuals, and public prosecutors were looking to put traders’ heads on proverbial spikes.
First the prosecutors came for the banks, then the traders
In 2012, Barclays became the first bank to settle with UK and US regulators for its “serious, widespread” role in trying to manipulate LIBOR, and paid £230 million in total. The Financial Services Authority, the Financial Conduct Authority’s predecessor, worked with the U.S. Commodity Futures Trading Commission, the U.S. Department of Justice (together with the Federal Bureau of Investigation), and the Securities and Exchange Commission.
Later, the Royal Bank of Scotland, UBS, Lloyds Banking Group, Citigroup, Deutsche Bank, JPMorgan, and brokerages RP Martin and ICAP, all settled with authorities and paid fines related to their role in LIBOR manipulation since 2012.
In 2012, when Barclays settled with the regulators, the authorities published highly embarrassing transcripts of trader conversations that, they said, showed that “a significant number of employees,” including senior managers, colluding to manipulate markets and then bragging about it.
Here is just a snippet from the reams of transcripts that the CFTC released to the public:
The transcripts ranged over a few years. The CFTC and FSA said that the communications ranged from 2005-2008. Here is another snippet from 2007:
And in 2008:
And this is where Pabon says that people need to look at the whole picture and question why the traders would speak so openly about the way they were setting LIBOR and why, even after those traders left, the people replacing them would request LIBOR levels in the same way.
“For example, when I left [Barclays] in 2006, Ryan [Reich] (who was later charged, tried, then acquitted) took my seat. He wasn’t doing the exact same job [overall] but eventually he was trading in the exact same seat I was in and he was giving requests the same way I did,” said Pabon.
“I never even met him. So this second guy from Princeton, who I never met, is supposedly doing this criminal activity a month after I left, you’ve got to ask why and look at the broader view and go ‘OK maybe these guys didn’t understand what was wrong.'”
You’ve got to ask why and look at the broader view and go ‘OK maybe these guys didn’t understand what was wrong.’
Pabon said that he was merely following orders to set LIBOR a certain way. But, he stipulates, he was not doing it mindlessly. “It did not mean that your boss can ask you whatever he wants and you do it without room for thought, unless it was completely egregious and something where you go, ‘what are you talking about?’ You just do it,” said Pabon.
“Your boss is more experienced and you assume there is a reason [behind the order]. There is not much room in finance for more questioning of motives. The day after trading, you may have time to question it but there is a hierarchy and you take the orders and execute.”
Pabon did not think he did anything wrong and it was for this reason he was pretty calm about receiving that first order from FINRA.
“The UK authorities never contacted me until December 2013 and I didn’t read the press [about the LIBOR scandal unfolding]. But I did become concerned from the tone from the UK’s Serious Fraud Office. The letter they sent me wasn’t really information presented in a way that they were kind of looking and finding out what happened — it was ‘we’re coming to get you at some stage.’ That’s when I first started getting concerned,” said Pabon.
“But I thought that nothing would come out of it because when you looked at all the emails and evidence, they wouldn’t charge us.”
But that wasn’t meant to be.
Former traders Peter Charles Johnson, Jonathan James Mathew and Stylianos Contogoulas were charged on February 17, 2014. Then in April 2014, Pabon, Jay Vijay Merchant, and Ryan Michael Reich were also charged.
“I was living in Houston at the time and I remember getting an email at five in the morning from the attorney that I had been charged. I didn’t have a strong reaction but my wife [Julie] was devastated. She is an attorney so her reaction made me even more concerned and I thought maybe I was downplaying this situation too much,” said Pabon.
From there, he had to fly over to the UK to be charged, which was stressful in itself but it was “a tough time” for his wife especially since she was pregnant.
“I obviously set my expectation low as I wanted to be prepared for the worst”
Like dominoes, a dozen banks and brokerages have settled with authorities since 2012. In the background, US and UK regulators and fraud offices were investigating individual traders that were involved in the whole conspiracy.
Tom Hayes is perhaps the most famous of the total 5 LIBOR traders who were convicted. Hayes — who was initially jailed for 14 years in 2015, but had his sentence reduced to 11 years on appeal — was a trader making millions in bonuses as the scandal came to light and became one of the most recognisable faces of the affair.
After Hayes was sentenced,
Pabon and the other charged traders were still in the midst of their own trial of “conspiracy to defraud” in relation to LIBOR fixing in 2015.
Not knowing how the case was going to pan out, Pabon said he and his wife Julie took the decision to induce her labour two weeks before his court date so he would be there for the birth of his son Christian.
In July 2016, Mathew, Merchant and Pabon were convicted by a jury after an 11-week trial. The jury could not reach verdicts for two of their co-defendants, Stylianos Contogoulas and Ryan Reich (both were acquitted a year later).
Pabon was sentenced to two years and nine months in prison, while Mathew and Merchant were convicted of four years and six and a half years respectively. Merchant’s sentence was later reduced to five and a half years on February 22, 2017. Their former colleague Peter Johnson was also sentenced to four years having pleaded guilty before the start of the trial.
The week between the date Pabon was convicted to the time he was sentenced was “probably the worst week of my life,” he said.
“I spent my time walking around London and the whole thing was depressing — I was buying clothes I didn’t want, I was buying clothes to go to prison. I didn’t know what my sentence would be, although I did prepare myself for a six-year sentence, which I think was the maximum I could have got. I obviously set my expectation low as I wanted to be prepared for the worst.”
He was sentenced in Southwark Crown Court, and then sent to Wandsworth Prison — the largest in the country. It is a category B prison for men, which is for “those who do not require maximum security, but for whom escape still needs to be made very difficult.” He was there for two months until he was moved to a category C prison.
He said Wandsworth was “not a good place.”
“I was in my cell for 23 and a half hours a day, with just 30 minutes outside of your cell. You could either use that time to exercise or have a shower or make a phone call. But those 30 minutes were not scheduled so one time I was let out at 2 a.m. and I had to use that time to call my wife,” said Pabon.
“We didn’t have a TV in the cell but we had a radio and I just listened to the radio and read for two months. I was, though, fortunate to have a good cellmate. But when I moved to a Category C prison it was better. I had a job and worked so I was busy.”
But Pabon said that his time in prison didn’t fundamentally change him nor shape him dramatically. He said it may be “weird” but it was a lot worse on his family than on him.
“When I was in prison, it was hard on my family as they don’t know what it is like, they have never been — so their imagination can run wild. I don’t take anything negative away from being in prison. It was difficult but I am not taking about any negative aspects,” said Pabon.
In late March 2017, Pabon was released. Under UK law, he could be released on good behaviour and serve just half his sentence. But since he is a foreign national and was deported by home, that shaved off another nine months. In total, he was in prison for eight months.
The night he got off the plane back in Texas, his family threw him a party and then another one the next day. He spent the first week of freedom “enjoying being around family.”
“At the moment, I am just enjoying being around family and I am not thinking of what I will do next,” he said when BI asked if he was thinking about what he will do for a job or go back to a software company for work.
But while the prison part is over, the stress is definitely not over
“I will obviously move on at some point but I am purposely not letting my mind think about it because when I do, I get stressed out about it. I know with a conviction, it will change what I can do now. Right now I am focused on time with my family,” he said, while his two-year-old son Christian was laughing and playing in the background on the call.
He also credits his wife for standing by him and keeping the family together during the difficult years.
“She has done so much for the family over the course of all this. It wouldn’t have been possible without her. I’m sure she’s happy now that I’m back and she’s been giving until the end. But while the prison part is over, the stress is definitely not over. But she’s grateful I’m out of prison.”
Pabon is right though. This was not the end of the saga.
The role of the Bank of England and the BBA during the LIBOR fixing scandal
The Bank of England has consistently said it did not know until much later about LIBOR rigging and lowballing.
However, a recording from 2008 uncovered by BBC Panorama appears to contradict the BOE’s claim. A transcript of the secret recording between a senior Barclays manager, Mark Dearlove, and Barclays’ LIBOR submitter Peter Johnson, states that Barclays had “some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”
The BBC claims that the conversation took place on the same day, October 29, 2008, as a phone call between former BoE deputy governor Paul Tucker and CEO Bob Diamond, on which LIBOR was discussed. Diamond and Tucker later told the Treasury Select Committee in 2012 that they only become aware of lowballing after 2008. Tucker stepped down from the BoE in 2013.
A Bank of England spokesperson sent the following statement to Business Insider:
“LIBOR and other global benchmarks were not regulated in the UK or elsewhere during the period in question. Nonetheless, the Bank of England has been assisting the SFO’s criminal investigations into LIBOR manipulation by employees at commercial banks and brokers by providing, on a voluntary basis, documents and records requested by the SFO.”
“The Bank is committed to publishing materials relating to the SFO’s investigations into benchmark manipulation when it is appropriate to do so.”
“Until the SFO’s ongoing prosecutorial activity relating to LIBOR and other benchmarks has concluded, the Bank is not in a position to publish these materials.”
The recording re-aired two key issues:
1. It reignited the argument that traders had been instructed by senior managers to keep LIBOR down at the behest of the BOE. Both Hayes and Pabon told BI that they were not allowed to include this argument in their defence. Court documents that surfaced in November 2016 said that senior figures at the BOE reportedly knew about the rigging as early as mid-2007.
2. It seemingly contradicts evidence given by former Barclays CEO Bob Diamond and ex-deputy Bank of England governor Paul Tucker to UK politicians in 2012. Treasury Select Committee MP Chris Philp told BI that he will push to reopen an investigation into LIBOR fixing.
Diamond said to the BBC, following the publication of the recordings: “I never misled parliament and I stand by everything I have said previously.” Tucker did not respond to the BBC’s questions regarding the same recording.
Tom Hayes, the former trader serving 11 years in prison, told BI “the involvement of the Bank of England in lowballing LIBOR was a key plank of my defence.“
“The prosecution did not give me the evidence I needed to prove it and my jury were misled. It is my view that there should be an urgent public inquiry into the real LIBOR scandal: where central banks, politicians and the British Bankers’ Association colluded to get artificially low LIBOR rates,” he added.
Hayes, who said he is still appealing, added that “traders like me should not be in prison — we were only requesting LIBOR submissions that reflected market conditions.”
Pabon thinks his case would have gone a lot differently if the jury knew about the BOE’s alleged involvement.
“It is always easier to bring regulatory action rather than criminal prosecution against the firms themselves”
In January 2016, former ICAP brokers Colin Goodman, and Danny Wilkinson, ex-brokers from RP Martin Terry Farr and James Gilmour, and Noel Cryan of Tullett Prebon all faced the jury and were found not guilty.
Their trial lasted 15 weeks, but the jury was out for less than a day before revealing its verdicts.
said in a statement at the time: “It has turned our lives upside down. Realistically, we should never have been here. We feel we’ve been scapegoated. There are things to be answered but we are not the ones who should be answering them.”
It has turned our lives upside down. Realistically, we should never have been here. We feel we’ve been scapegoated
The Guardian reported that Read said the case had been a sham and that the SFO “didn’t investigate it properly and didn’t listen.”
Alison McHaffie, a partner with law firm CMS, also told The Guardian at the time that “apart from being acutely embarrassing to the SFO, these verdicts show how difficult it is to demonstrate criminal activity by individuals for this type of type of market misconduct.
“It is always easier to bring regulatory action rather than criminal prosecution against the firms themselves. In future, the regulator will find it easier to pursue disciplinary actions against individuals for wrongdoing.”
The SFO director David Green said
: “The key issue in this trial was whether these defendants were party to a dishonest agreement with Tom Hayes. By their verdicts the jury have said that they could not be sure that this was the case. Nobody could sensibly suggest that these charges should not have been brought and considered by a jury.”
Meanwhile, Ryan Reich, Pabon’s successor in his trading chair at Barclays, and another trader,
Stylianos Contogoulas, were acquitted by a jury of conspiracy to defraud charges at Southwark Crown Court on April 5 and April 6, 2017.
During the trial, the defence said the SFO expert witness Saul Haydon Rowe was found to be texting banker friends while he gave evidence asking for definitions of trading terms, according to the Financial Times and the BBC.
This called into question his ability as an expert. Rowe had also testified as an expert at Pabon’s trial.
The court heard how Rowe sent a text during Hayes’ trial in June 2015:
“Got caught out on a couple of points, eg where yen Libor futures contracts trade. Not my area, and I didn’t get one sound bite in that I wanted to get.”
- ROWE: “I don’t know the usual trades stir [short-term interest rates] people put on but I’m learning.”
- TRADER FRIEND: “Trouble is, out of context it’s actually quite hard to interpret. You get used to the methodology of the people around.”
- ROWE: “Yes I agree. That’s what I see on all my cases but it doesn’t help when I have to explain a few emails and look knowledgeable.”
“You have misrepresented your expertise to the SFO and to the juries,” Reich’s lawyer said to Rowe in court in March, according to Bloomberg.
“I suggest you have failed to comply with your basic duties of disclosure, and that you have concealed, rather than revealed, the sources of statements which you have presented as your own opinion.”
Rowe replied: “There are many suggestions. And I think I disagree with them all.”
Rowe also told the court “they are basic questions, so I could make sure I got the basics correct.“
You have misrepresented your expertise to the SFO and to the juries
He also said, according to the BBC covering the trial, that he had several conversations with the SFO about whether it still wanted him as an expert witness considering he had not been a trader of investments based on short-term interest rates. He said the SFO asked him to remain as their expert witness in the LIBOR trials.
The court heard that expert witnesses are obliged to disclose all the sources of information they have consulted
under the Criminal Procedure Rules 2015. Rowe was asked if he had read those rules, and Rowe said he did not know.
Rowe said in a truth statement that a report titled “Libor and Interest Rate Markets, Products, Concept and Terminology” was his own work. That report was used in all four UK trials related to LIBOR fixing. However, the court heard that it was in fact written by his colleague.
Rowe claimed that it was fair to say it was his work considering he had reviewed the work and could defend it in cross examination.
A spokesperson from Turing Experts Limited, which is where Rowe came from, told BI: “We are conducting an investigation into these matters.”
I feel strongly that the result of my case would have been different if we had been provided full disclosure on the SFO’s only trading expert, which was provided in the second LIBOR trial
Pabon says he didn’t know Rowe needed help with his expertise until after his trial. Rowe’s testimony was used in all the SFO’s LIBOR trials:
“I feel strongly that the result of my case would have been different if we had been provided full disclosure on the SFO’s only trading expert, which was provided in the second LIBOR trial,” said Pabon.
“He turned out not to be an expert in interest rate trading and it was suggested that he misled the jury in regards to his expertise. Additionally, in the second trial, the jury had actually been asked to consider whether as a matter of fact any trader deliberately broke the rules or caused false Libors to be submitted. Both of these points were new information to a jury that unanimously acquitted the traders in the second LIBOR case after only a few hours of deliberation.”
The SFO did not return with any additional comment.
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