Forex fiddling: Commission’s wobbly case against banks

Reading through Investec’s response to the Competition Commission in its currency manipulation case really is an eye-opener. Investec has asked the Competition Tribunal, in a punchy kind of legal move, to dismiss the referral of the case from the commission on the basis that it’s that wonderful legal term, “vague and embarrassing”. Just to rub in the salt, it also asks for a declaration that the commission’s conduct in prosecuting the appeal has been “vexatious and unreasonable”. In the alternative, it asks for the commission to be more specific about what it’s claiming.
Although the claim might seem impetuous, when you read what has actually transpired, Investec’s frustration becomes very apparent. To summarise, the banks and the commission have been arguing for the best part of a year over two procedural issues:

The bank’s claim that the commission has not provided them with sufficient information about the case they intend to bring, which makes it impossible for them to respond adequately. The commission is required to set out the “material facts” of the case which would allow the banks to formulate their rebuttal.
Second, there has been a big argument about whether the cases should proceed individually or collectively, which has more or less been won by the latter proposition.This is an enormous case for the Commission. In total 17 banks have been referred to the tribunal for prosecution, including all the big US and European banks, and three South African banks: Absa, Standard and Investec. The commission should be playing its best possible game. Yet the Investec response tracks in fine detail the commission’s decision to provide more details to the bank, then its decision to not provide more details, then its decision to reverse that decision, then its decision to provide more details, then its decision to withdraw the details, and then its decision to provide more details. It’s been a mess.
The commission does have one great source of primary evidence; a record of chatroom conversations on Bloomberg. In some international cases, the chats have been pretty open-and-shut, and the result has been expensive for some of the international banks. Three traders, in particular, are in deep trouble. They formed a group called, of all things, “The Cartel” and they, among others, have caused fines for some of the biggest banks in the world totalling so far around $10bn. JPMorgan, Barclays, the Royal Bank of Scotland and a Citigroup subsidiary pleaded guilty in the US in 2015 to conspiring to manipulate currency rates and were fined $2.5bn. The traders are all facing jail terms and some are already in chookie.But the problem for the commission is that all of this stuff took place between 2007 and 2013. In the Investec case, conversations took place between an Investec representative, Clint Fenton, and Absa trader Duncan Howes using a Bloomberg chatroom. These conversations are alleged to have occurred on November 2 2011, June 30 2008, and January 8 2009. These are the only three conversations referred to in the affidavit. They all took place more than three years before the commission initiated its complaint. The problem is that the Competition Act provides that a complaint may not be initiated more than three years after a prohibited practice has ceased.
The rejoinder provides another glimpse of Investec’s likely defence. The commission, it says, does not distinguish between collusive conversations and conversations where the parties were buyers and sellers. If they are buyers and sellers, respectively, they can’t be manipulating the currency because they are on the opposite sides of the trade. In two of the three conversations, they were transparently negotiating a price as buyer and seller.
All of this seems pretty devastating, but the court has yet to decide.
But it is an intriguing battle, and I suspect one from which neither the banks nor the competition authorities are going to emerge unscathed.Here is my theory, completely speculative, of what has actually happened here. In the late 2000s, traders were just going nuts. Profits were enormous, and when that happens, nobody looks at this gift horse in the mouth. Traders were untouchable or felt themselves to be untouchable. But, as they say, it’s only when the tide goes out that you know who has a swimming costume on, and the tide went out with a vengeance in 2008.
As the ugly truth started to emerge, the US Department of Justice started to get its act together, and the mask of invulnerability was exposed. Back home in SA, the Competition Commission must have felt it was missing out on a big payday, particularly since some of the conversations included traders from SA banks. Under pressure from an administration keen to forward the “business is inherently evil” philosophical outlook under the banner of “white monopoly capital”, it decided to throw the book at all the banks it could name, partly in the hope they would quickly fold and try to put the problem behind them, which is the policy of some banks. Easy win, they were thinking at the time. And it was also a great diversion from the corruption allegations mounting against the administration.
The commission did score one victory when Citigroup decided to pay a fine of R70m. You can imagine the discussion in the boardroom in New York: “We can make this go away for $5m? For God’s sake, let’s pay it and move on.”But surprisingly, the other banks decided to force the issue. Whether that was a good idea is still to be seen, but I have to say, their case is stronger than I thought at first. The commission’s response to the “vague and embarrassing” allegation is simply to say it’s not. “These exceptions are really a way of blocking the case being heard on merits,” the commission’s divisional manager of cartels division, Makgale Mohlala, said this week.The court will decide, of course. But there are two big unresolved problems here. The case illustrates what is likely to happen to the commission if it gets to be seen as an income generator and anti-business activist, and that’s particularly significant given the changes to the Competition Act. All of the cooperation between business and the authority that has been a feature of much of the commission’s work so far will just disintegrate into myriad fractious legal disputes.
But the banks have a problem too though: as long as the case continues, their reputations will be constantly hammered.
This is the ultimate no-win situation.