Economic Collapse

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'Flipped' Bankers Aid U.S. in Foreign-Exchange Probe

Criminal Charges Are Expected as Early as Next Month

By Christopher M. Matthews, Devlin Barrett and Emily Glazer
Sept. 14, 2014 6:27 p.m. ET

U.S. investigators have turned multiple bank employees into informants in a far-reaching probe of possible manipulation of currency markets, and are preparing to seek criminal charges against individual traders as early as next month, according to people familiar with the investigation.

Justice Department prosecutors and Federal Bureau of Investigation agents have "flipped" a number of bank employees who remained at their jobs, secretly gathering evidence against their colleagues by engaging in exchanges with suspects about possible crimes and recording them, these people said.

It isn't clear which banks had secret informants cooperating with the government investigation. The probe, which is focused on alleged rigging of the $5.3 trillion-a-day foreign-exchange markets, has ensnared many of the world's largest financial institutions. U.S. banks including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., are under investigation, as are foreign banks including Barclays, HSBC, Standard Chartered, UBS, Deutsche Bank and BNP Paribas, according to people familiar with the investigations.

The use of secret informants in the currency probe comes amid a growing push by U.S. prosecutors to bring criminal charges against individuals accused of wrongdoing at large financial institutions. It indicates investigators have expanded their list of targets beyond those implicated in internal documents and electronic chats obtained by the government. Whether prosecutors are able to go higher up the bank hierarchy to seek charges against executives or others remains unclear.

The Justice Department has been under pressure since the 2008 financial crisis to show it is holding individuals accountable for financial wrongdoing. Banks have paid billions of dollars in fines for their roles in the 2008 financial crisis—most recently Bank of America Corp.'s $16.65 billion settlement over the sale of flawed mortgage securities—but have largely avoided criminal charges against employees.

For more than a year, global investigators have been looking into misconduct in the foreign-exchange market, including possible efforts by traders to manipulate currencies to maximize profits and minimize losses, according to people familiar with the investigations.

The initial probes were propelled, in part, by a separate inquiry into allegations that employees at numerous banks rigged the London interbank offered rate, the interest-rate benchmark also known as Libor. As banks struck deals to cooperate in that probe, their assistance produced new leads on possible manipulation of currency exchanges, these people said.

The investigation has led to the suspension or firing of more than 30 traders at around a dozen banks in the largest foreign-exchange dealing hubs. Many banks have been cooperating with investigators and are in settlement negotiations.

In the U.K., the Financial Conduct Authority has begun settlement talks with Barclays, Citigroup, HSBC Holdings, J.P. Morgan, Royal Bank of Scotland Group PLC and UBS, according to people familiar with the matter. Some banks have begun preliminary negotiations with authorities in the U.S., and some settlements are possible before the end of the year, though the talks aren't as advanced as those with the U.K. regulator, the people said.

Evidence-gathering in the probe, including the secret investigative work inside the banks, is largely complete and the investigation is now mainly centered on presenting evidence to a U.S. grand jury to obtain criminal indictments of traders, according to people familiar with the matter. Many of the suspects reside in Europe and extradition requests are possible, one person familiar with the matter said.

Banks including J.P. Morgan, Citigroup and Morgan Stanley received letters from the Federal Reserve and the Office of the Comptroller of the Currency this summer detailing the findings of the agencies' investigations and warning of enforcement actions, a person familiar with the matter said. The banks initially had 15 days to respond, but received extensions. Some of the banks replied in September, the person said.

The so-called forex probe has been a test for U.S. investigators seeking to unravel alleged crimes that span global finance. It also has tested the ability of multiple governments—and multiple agencies within those governments—to investigate, coordinate and prosecute suspected wrongdoers in an area where no single country or agency has clear authority over the others.

The settlement negotiations have been convoluted, in part, because of the sheer number of agencies involved and their varying interests. That has complicated banks' preference for coordinated, simultaneous settlements.

In the U.S., the primary agencies are the Justice Department's criminal fraud and antitrust sections and the Federal Reserve, the people familiar with the matter said. The Commodity Futures Trading Commission, the Securities and Exchange Commission and the OCC also are involved, as are state regulators.

The FCA is driving the investigation in the U.K., the people familiar with the matter said, and the Bank of England and the Serious Fraud Office also have joined the fray. The FCA said the investigation has led to "unprecedented global cooperation" between global financial authorities, including requests from other regulators in 52 instances. A raft of other regulators also are involved.

There are currently multiple settlement options on the table. Regulators could work out joint settlements, possibly with their counterparts overseas, while other agencies could go it alone, according to people familiar with the matter. The banks could pay billions in fines each, the people said, though nothing is definite and the banks haven't yet agreed to any final figures.

Write to Christopher M. Matthews at [e-mail], Devlin Barrett at [e-mail] and Emily Glazer at [e-mail]

http://online.wsj.com/articles/flipped-bankers-aid-u-s-in-foreign-exchange-probe-1410733662