On January 27, 2022, the United States Court of Appeals for the Second Circuit acquitted two former traders, Matthew Connolly and Gavin Campbell Black, who had been convicted by a jury for wire fraud as well as conspiracy to commit bank and wire fraud in a scheme to manipulate the London Interbank Offered Rate (“LIBOR”).  See US v. Matthew Connolly and Gavin Campbell Black.

While the defendants took actions that influenced LIBOR to generate trading profits, the Second Circuit concluded that the evidence failed to establish that the information they generated was actually false.  Importantly, the Court stated that the federal fraud statutes “are not catch-all laws designed to punish all acts of wrongdoing or dishonorable practices.”

LIBOR has been a key benchmark for setting the interest rates charged on adjustable‑rate loans and other financial obligations.  Manipulating LIBOR could impact the trading profits on financial products tied to LIBOR.  The process used to calculate LIBOR required that, every morning, a group of large international banks (including the defendants’ employer) submit the rate at which it “could” borrow funds from another bank and then a central authority used those submissions to calculate the LIBOR for that day.

The jury found that the defendants pressured their colleagues to alter their bank’s LIBOR submissions to benefit certain derivatives trades.  The Second Circuit, however, ruled that the evidence did not establish that the LIBOR-related statements that the defendants had induced were false: “If the rate submitted is one that the bank could request, be offered, and accept, the submission, irrespective of its motivation, would not be false.”

Instead of offering evidence that the defendants’ employer could not borrow at the rates stated in the LIBOR submissions, the government relied on evidence showing that defendants had simply influenced or altered the submissions.  But as the Second Circuit explained, there was not “one true interest rate.”  Indeed, the process for determining a LIBOR submission was based upon a hypothetical question of at what amount could a bank borrow, which was something that necessarily involved multiple variables, and thus could result in a range of potential rates at which a bank “could” borrow funds.  Because the government failed to proffer any evidence that the manipulated submissions at issue fell outside of the permissible range, the Court concluded that the government failed to prove that the submissions were, in fact, false.  Despite the Court noting that the defendants’ conduct “may have violated any reasonable notion of fairness,” absent proof of falsity, there was no legal basis for convicting the defendants for engaging in a “scheme to defraud” for purposes of the bank and wire fraud statutes.

What is most significant about this decision is how it may impact wire and mail fraud cases in the future.  The Court cautioned that these statutes should only be used to charge federal crimes when there is an alleged scheme to defraud that is perpetrated by means of false or fraudulent pretenses, representations, or promises.  Accordingly, wire and mail fraud cases should be examined closely to determine if the facts alleged are sufficient to demonstrate an actual scheme to defraud as defined by the statute.

Thank you to Zach McHenry’s contributions. Zach is a DC-licensed lawyer, residing in Texas and supervised by Texas lawyers.