A decade after the first conviction, the Supreme Court has quashed Tom Hayes' and Carlo Palombo's convictions for conspiracy to defraud in relation to benchmark submissions, finding trial judges misdirected the juries.
Background
Tom Hayes and Carlo Palombo were two among several traders convicted for conspiring between 2006 and 2010 to influence key benchmark interest rates used in financial markets: in Mr Hayes' case, the London Inter-bank Offered Rate ("LIBOR"); and in Mr Palombo's case, the Euro Inter-bank Offered Rate ("EURIBOR").
A benchmark rate is an interest rate intended to reflect the current cost of borrowing in a market. It can be used as a reference point in a variety of transactions, including financial derivatives. Banks participating in the setting of the benchmark rate were asked to submit the rate at which that bank (for LIBOR), or prime bank (for EURIBOR), could borrow funds at a specified time each day. Submissions were sought from a set number of banks, in order to reach an average rate.
The Serious Fraud Office ("SFO") prosecuted Hayes and Palombo under the common law offence of conspiracy to defraud, arguing that they had agreed to procure rate submissions that were false or misleading and intended to favour their trading positions (and so prejudice the economic interests of swap counterparties).
Hayes was convicted in 2015 and sentenced to 14 years' imprisonment (later reduced to 11) and Palombo was convicted in 2019 and sentenced to four years' imprisonment. Both convictions were upheld in two separate appeals. However, in 2023, the Criminal Cases Review Commission referred both cases back to the Court of Appeal in light of the US Second Circuit's decision in United States v Connolly and Black. In that case, the US court rejected the "one true rate" theory of LIBOR submissions, holding that if a rate was within the range the bank could have legitimately submitted, it was not false or fraudulent—even if influenced by trading advantage. The UK Court of Appeal dismissed the renewed appeals but certified a question of law of general public importance, paving the way to the Supreme Court.
The Supreme Court's Decision
The Supreme Court certified the following question:
"Whether as a matter of law upon the proper construction of the LIBOR and EURIBOR definitions:
(a) If a LIBOR or EURIBOR submission is influenced by trading advantage, it is for that reason not a genuine or honest answer to the question posed by the definitions; and
(b) the submission must be an assessment of the single cheapest rate at which the panel bank, or a prime bank, respectively, could borrow at the time of submission, rather than a selection from within a range of borrowing rates."
In a unanimous judgment delivered by Lord Leggatt, the Supreme Court answered both parts of the certified question in the negative, allowed both appeals and quashed the convictions.
The core issue was the legal directions given to the juries by the trial judges.
The LIBOR and EURIBOR rates were set daily for different currencies and time periods. For LIBOR, banks had to submit rates by answering the following question: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11.00 am?" (the "LIBOR question"). The question for EURIBOR was very similar.
The prosecution case against Mr Hayes rested on the allegation that he had procured the submission of rates which were "false or misleading" because they were not genuine assessments of LIBOR and were influenced by Mr Hayes' trading positions. The Supreme Court found that because a submission in answer to the LIBOR question requires subjective assessment, the submission of a rate could only be "false or misleading" if it did not represent the submitter's actual opinion of the relevant borrowing rate. Further, the Court stated that the fact that a submission was influenced by trading advantage did not, in itself, make it false or dishonest. The form of the indictment in the EURIBOR prosecution was "materially identical" to the charge against Mr Hayes, and the Supreme Court applied the same analysis.
Crucially, the Supreme Court disagreed with the previous English court judgments, noting that there is rarely a single correct rate; instead, a range of rates may honestly be submitted in answer to the LIBOR question, based on market data and professional judgment. This was the purpose of the system where multiple banks submitted rates, and was particularly the case when low market liquidity meant that no actual trades had taken place that day and the submitters' decisions were based on a number of other data sources.
Mr Hayes and Mr Palombo had admitted in their defences that when considering a range of potential borrowing rates they had tried to influence submitters to submit figures within that range which would advantage their trading. However, they both denied that they had attempted or conspired to induce others to submit rates which did not represent their genuine opinion.
At Mr Hayes' trial, the judge had directed the jury that a submission influenced by trading advantage could not, as a matter of law, be a genuine or honest answer to the LIBOR question. In Mr Palombo's case, the directions were less stark but still flawed in conflating legal interpretation with factual assessment. The Supreme Court found that these directions removed from the jury the decision as to whether the defendants had procured the submission of rates that did not reflect the submitters' genuine opinion.
The Supreme Court clarified that, at trial, it was for the jury, not the judge, to determine as a question of fact whether the defendant sought to procure the submission of rates that did not reflect a genuine opinion of the relevant borrowing rate in response to the LIBOR (/EURIBOR) question. The judge should not have directed the jury, as a matter of law, on what constitutes a "genuine" answer to the LIBOR or EURIBOR question; rather, it is for the jury to decide whether the submissions represented the submitter's actual belief, even if commercial interests were taken into account.
As it was conceivable that the juries could have found that rates submitted were genuine answers to the LIBOR (/EURIBOR) question, irrespective of whether they benefitted the traders, the trial judge had misdirected the jury. The Supreme Court noted that, despite "ample evidence on which a jury, properly directed, could have found [both Hayes and Palombo] guilty of conspiracy to defraud", the convictions were unsafe. The SFO has since confirmed that it will not seek a retrial of either defendant, as doing so would not be in the public interest.
Following the judgment, several other former traders have announced their intention to challenge their convictions in light of the ruling. The FCA has also revoked Mr Palombo's ban from the financial services industry and discontinued its regulatory proceedings against Mr Hayes. Both actions were based on the now-quashed convictions.
Implications and Commentary
The Supreme Court's decision shows the challenge in bringing criminal prosecutions in cases involving subjective financial assessments under the common law:
The Court found that the particulars of the alleged conspiracy were "hopelessly vague". Even with further and better particulars (prompted by defence requests), the core allegations remained imprecise. The Supreme Court noted that, especially for a broad offence like conspiracy to defraud, the content of the alleged agreement and the dishonest means must be specified with "reasonable certainty and clarity" so that both the defendant and the jury understand what must be proved. This lack of specificity in the pleadings "sowed the seed" of the confusion that ultimately undermined the safety of the convictions. The Supreme Court's observations may prove helpful to defence applications in future cases, seeking early-stage judicial directions requiring the prosecution to particularise its case with greater specificity.
The judgment also highlights an evidential challenge for criminal prosecutions involving subjective financial assessments. As noted above, answers to the LIBOR (/EURIBOR) question could involve a range of rates which could be submitted in good faith. If the prosecution had been able to demonstrate that a submitted rate was not only motivated by trading advantage, but was in fact outside the range of rates that could honestly be submitted, the case for fraud would have been much stronger. In the absence of such proof, it was not possible to establish that the submissions were false or misleading in law, let alone dishonest. This may make it harder to successfully bring similar prosecutions in future. However, the existence of the statutory benchmark manipulation offence (see section 91 of the Financial Services Act 2012) means that prosecutors now have a more targeted tool available.
Finally, the Supreme Court's obiter comments further raise questions around future prosecutions of the common law conspiracy to defraud offence. The judgment describes the continued existence of conspiracy to defraud as a common law offence, following developments under the Criminal Law Act 1977 and the Fraud Act 2006, as "controversial". Lord Leggatt considered whether the offence could have been charged differently, suggesting a fraud by false representation under section 2 of the Fraud Act 2006. It will be interesting to see whether the judgment will impact the way in which fraud charges are indicted and prosecuted going forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
