Plea bargaining hits banks with a backhander

By:
Jon Macaskill
Published on:

The business of selling out your employer for a cash reward is still in its infancy. But the slow grinding of the wheels of regulatory justice is throwing up increasing numbers of employees who are providing evidence against employers to dodge or mitigate punishment.

The various Libor investigations under way across the world are already providing examples of whistle-blowing, or at least self-exculpatory finger-pointing.

RBS has followed Barclays into the dock of reputational shame with the revelation of internal messages sent by Tan Chi Min, a former trading head in Singapore who was dismissed for allegedly trying to manipulate Libor. Tan did not take his dismissal lying down and is seeking to demonstrate in court that RBS condoned attempts to fix Libor settings.

The arrest in London of Kareem Serageldin, former global head of CDOs at Credit Suisse, in a move to extradite him to the US on charges of faking CDO prices to boost his bonus, was a reminder that the authorities are prepared to go to great lengths to secure financial market convictions, once they have turned a witness. Serageldin was originally charged in February in New York in his absence, after two of his former subordinates said they had manipulated CDO prices at his direction.

Current hedge fund insider-trading cases in the US demonstrate how the authorities are becoming increasingly adroit at deploying carrots as well as sticks to secure information.

In the last week of September, just before Serageldin’s arrest, Rajiv Goel became the third cooperating witness in the US case against former Galleon hedge fund head Raj Rajaratnam to receive a sentence of probation, despite admitting to insider trading. Having secured a record 11-year sentence for insider trading against Rajaratnam, the US authorities are now demonstrating that they will deliver on promises of leniency made to potential witnesses who turn on bigger targets.

In the same week that Goel was put on probation and Serageldin was arrested came further indications that the US government has broadened the net in its investigation of past and present employees of Steven Cohen’s SAC Capital hedge fund group. The trial of former SAC analyst Jon Horvath starts at the end of October and could throw up further evidence.

Identifying a potential whistle-blower is easier for a hedge fund manager than a senior banker. Even in a fund group such as SAC that runs multiple portfolios in effective competition with each other, there is still a relatively manageable number of employees with access to confidential information.

The big investment banks each have tens of thousands of employees and an abundance of possible motives to divulge information.

The trial of former UBS employee Kweku Adoboli is providing a reminder of the difficulties banks have in preventing rogue trading, which is effectively continuing in-house fraud. The task of monitoring potential whistle-blowers is much greater, as that pool could include any employee who has observed some malpractice, and the motivation is not limited to staff members who are trying to save their own skins.

A forthcoming book by former Goldman Sachs director Greg Smith will mark another step in his attempt to embarrass his former employer, and earn some money. Smith’s infamous Today is my last day at Goldman Sachs article for the New York Times was a blow to the bank as it tried to get past its many reputational mishaps, but it did not provide any evidence of actual malpractice.

The accusation that Smith’s fellow derivatives sales staffers at Goldman were focused almost entirely on maximizing profit certainly did not surprise anyone on Wall Street or in the City. But it put the bank back in the spotlight and presumably the new book will at least contain some nuggets about boorish or dubious behaviour by Goldman executives that will cause further embarrassment.

Goldman’s PR machine has been trying to portray Smith as a disgruntled former employee who resented his relatively junior status after more than a decade at the bank.

That might be a justifiable response, but it will do nothing to push Smith’s next set of accusations out of the headlines when his book is published. And each rebuttal by Goldman of an allegation by Smith will keep the stories ricocheting. The model of the modern whistle-blower is a flexible one, and banks will have their work cut out responding to future disclosures.