The SEC and Libor Research Paper

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Securities and Exchange Commission (SEC)

Accounting Irregularities and Missing Internal Controls in the LIBOR Currency Manipulation Scandal

The London Interbank Offered Rate, or Libor for short, was the recent subject of collusion between some the world's largest banks to manipulate the exchange rates; no one seems to know for sure when these banks began to manipulate the exchange rate, but some reports show these activities beginning in 2003, or possibly much earlier (McBride, Alessi, & Sergie, 2015). The Libor rate represents a benchmark interest rate in which banks lend to each other in London interbank market. The exchange rate is calculated daily and determined by a submission of eleven and eighteen banks who submit their average borrowing rates for the day.

The Libor rate was considered to be a fairly reliable benchmark for determining an amount of interest that was used in determining short-term transactions and this rate had indirect implications for a wide range of international economic implications around the globe. For example, hundreds of trillions of dollars in securities and loans are based upon the Libor published rate which included everything from government and corporate debt to auto, student, and mortgages (McBride, Alessi, & Sergie, 2015). This analysis will look at the role of the bank's external auditors and their negligence in the oversight of internal controls in reference to the Libor rates that UBS offered.

Banks, Libor, and Auditors

The Libor rate was manipulated upwards or downwards for a variety of different reasons with collaboration from the banks who were responsible for providing their bank's average rate in which they borrowed money. For example, traders at Barclays would coordinate with other banks to alter the daily rate downward by telling Libor calculators that it could borrow money at relatively inexpensive rates to make the bank appear less risky and insulate itself (McBride, Alessi, & Sergie, 2015).

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However, there was not one bank alone that really had the opportunity to significantly sway the rates since the rates were based on averages from a number of different banks.

The fraud was perpetrated by individuals within the banking networks that worked together daily a close knit network that evolved, and in which a small group of people effectively had the opportunity to influence the Libor rate. For example, at the Swiss bank UBS at least 2,000 requests for "inappropriate submissions" to the key rates were documented and at least 45 individuals "including traders, managers and senior managers were involved in, or aware of, the practice of attempting to influence submissions," the FSA reported and feared every one of those submissions was potentially suspicious (Treanor, 2012). For example, on 18 September 2008, a trader explained to a broker (Treanor, 2012):

"if you keep 6s [i.e. the six-month Japanese yen Libor rate] unchanged today ... I will fucking do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that ... I'll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I'm a man of my word"

UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC's charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap….....

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