In this Profit & Loss exclusive opinion piece, Rohan Ramchandani, who was recently acquitted of FX market manipulation by a jury in New York, breaks his silence on the case and gives his perspective on why he believes the prosecution’s arguments were fundamentally flawed.
Cast your mind back to 2008. Lehman Brothers collapsed, the financial crisis ensued, causing a global recession, which in turn led to unemployment climbing and house prices falling. People lost their homes.
There was public outrage at what happened, aimed primarily at global “bankers” though few understood exactly what role individuals had played. Nonetheless, in the following months, one question in particular recurred in the press, namely “who is being held accountable?” This was to prove the start of a multi-year “anti-banker” campaign provoking regulators and prosecutors to go hunting for blood.
And yet despite this, as the film The Big Short portrays dramatically, only one (and not very senior) executive was ever prosecuted for alleged misdeeds related to the financial crisis. Spurred on by this failure to satisfy the public demand for heads to roll, in the years that followed, prosecutors – particularly in the US – developed an insatiable appetite to go after the banking industry.
Libor was the first big story that regulators and prosecutors latched onto after the financial crisis. The allegations were that traders were dishonestly making Libor submissions based on their firms’ positions, as opposed to reflecting the “true” borrowing costs of the firms. Subsequently, when the alleged FX wrongdoing story first broke in the summer of 2013, regulators around the world were convinced they’d stumbled upon ‘Libor II’ and saw another chance to go after banks and individuals, for alleged manipulation.
This was the backdrop to what turned out to be the most difficult and challenging five years of my life. By then, almost everyone in the financial services industry – let alone the FX industry – had heard about the Foreign Exchange Fixing “Scandal”. It focused on allegations that competing traders from financial institutions were colluding to manipulate benchmark trades. At the centre of the “scandal” was a chatroom allegedly calling itself “The Cartel”, on which regulators and prosecutors around the world decided to focus in order to make examples of its participants. I was a contributor to this chatroom (and, just for the record, the chatroom itself was never actually called “The Cartel” in Bloomberg).
Because of this, for the last five years my co-defendants and I have had to fight back against a web of deception created by the US Department of Justice (DoJ) as it determined to prosecute us. The public was consistently misled in the press. At trial, it was eventually revealed that there was no manipulation, no cheating and no dishonesty. This is despite the DoJ using the word “cheating” to describe our conduct in its press release announcing our indictment and using it a further 14 times in its opening statement at trial. In fact, as we of course knew all along, the DoJ could not demonstrate one example of any counterparty anywhere in the world losing even one dollar through trades with us.
Counterparty, not competitor relationships
The Statute under which we were prosecuted is known as the Sherman Act, which is part of US competition law. The DoJ only criminally prosecutes hardcore anticompetitive conduct (known as a “per se” violation) – examples of per se violations are price fixing and bid rigging.
So, the DoJ decided to label our conduct “price fixing & bid rigging” in order to prosecute us and try to send us to jail for up to 10 years. Yet there are several reasons why its attempt flopped and in fact should never have been allowed to progress to trial.
For starters, the DoJ fundamentally failed to understand how the FX spot market operates. My fellow chatroom members were not my competitors, they were my counterparties. A classic competitor relationship would be Coke and Pepsi: two firms that compete to sell soft drinks to consumers. What Coke and Pepsi don’t do, is buy and sell soft drinks from each other all day.
By contrast, in the unregulated OTC FX spot market, traders at different financial institutions buy and sell currency from each other all day long. I bought and sold more currency from the likes of JP Morgan, Barclays, RBS, etc, than I did from the banks’ customers. It is not a competitor relationship, but rather a counterparty relationship. Yes, the BANKS themselves are competing financial institutions, but the competition is through the sales function of competing for customers in the FX market. The antitrust laws are designed to protect consumers, yet, rather oddly, the DoJ’s allegations had nothing to do with competition for customers.
Also, the DoJ relied on two theories. One was the now infamous “fix” theory, in which the DoJ alleged that my chatroom participants and I somehow manipulated the 13:15 ECB and 16:00 WMR Fix for EUR/USD. There were three ways in which we were alleged to have manipulated the fix: matching, building the ammo and double teaming.
Put simply, matching is when a chatroom member offsets their position against another chatroom member inside or outside the chatroom, and it was alleged this was done to preserve the larger position of another chatroom member, or to “clear his path”. Building the ammo is when two traders are in the same direction at the fix and one trader passes on their risk to another trader. And finally, double teaming is when two traders are in the same direction and both, independently, trade their own positions with the confidence that they are likely to be in the net direction of the aggregate market supply/demand.
However, not once during the trial did the DoJ display any evidence (or theory) as to why the final fix rate to clients would be different as a result of any of these strategies (anyone with a basic understanding of the fix can see why none of the strategies changes the net supply/demand in the market, and whether two traders buy 100 million each or one buys 200 million and the other buys 0, 1+1 always equals 2).
It is also worth pointing out that, from the DoJ’s perspective, essentially anything you do from the moment the information is shared is criminal. Take the situation where two traders share their net fix position and they just happen to be in the same direction. Trader One says they are going to trade their position. Now, whatever action Trader Two undertakes is criminal, according to the DoJ, because if Trader Two trades the position they have apparently “double teamed” the fix, if they give the position away to Trader One they have “built the ammo”, and if they match outside the chatroom they have “cleared the path” for Trader One.
In short, the DoJ fix theory was that three or four traders somehow manipulated the most liquid currency pair in the world (EUR/USD) at the most liquid time of day (ie, the 4pm WMR Fix) without changing the net supply/demand in the market, by simply offsetting risk with each other, or trading their banks’ net fix positions, which need to be traded regardless of who is managing the risk.
However, the DoJ’s primary theory – despite all the media focus on the “manipulation of the fix” – was in fact the so-called “stand down” theory, that we had an agreement not to front run. According to this theory, a counterparty reveals an open risk position when they need to buy or sell currency to fulfill a customer’s order. The allegation was that the traders receiving the information would NOT deliberately misuse the information and not front run the trader who revealed the open risk position, but rather would use that information for the purpose of sourcing more favourable liquidity.
The flaw in the DoJ’s argument is that this conduct allowed traders to receive better (not worse) execution prices for their banks’ customers, as they would be able to “axe flows” with each other at midmarket rates. Such conduct is deemed to be “pro-competitive” not “anticompetitive”. It should also be obvious to anyone in the industry that it would be completely unethical to deliberately front run the information, and the net effect would be worse execution for customers.
What was clearly demonstrated at trial is that people do not need an agreement not to front run; it is common decency, just as people do not have agreements in society not to steal from each other because it is widely understood ethical behaviour. Either way, I would prefer to have been convicted for acting ethically and not front running rather than deemed to be acting unethically and ‘innocent’. The DoJ’s theory of criminal liability was simply mind-boggling.
The “star” witness
Where the government completely failed in its burden of proof is that it only had a sole cooperating fact witness, Matt Gardiner. Matt Gardiner was not only a member of the chatroom in question, but a good friend to all of us.
Mr Gardiner stated on the stand that he reached out to his former employers to indemnify him and accepted UBS’s indemnification because “it wasn’t financially possible to tell the truth”. He decided to cooperate with the government in return for a nonprosecution agreement (a free pass) for, not only the alleged antitrust conduct in our chatroom, but also for unrelated unilateral allegedly fraudulent conduct at his former employers, as detailed in a letter dated August 23, 2018, that was presented in court (Defendant’s Exhibit 969). It is also relevant to note that Mr Gardiner revealed on the witness stand that he thought he faced up to 30 years in jail for his alleged illegal conduct, which may go some way in explaining his motive (to say whatever he needed to in order to get complete immunity).
Even more baffling is that, even after Mr Gardiner signed his non-prosecution agreement, it was revealed at trial that he had appealed a ban from working in financial services that he received from the Swiss Financial Market Supervisory Authority, FINMA (the Swiss equivalent of the UK’s Financial Conduct Authority, which determines whether an individual is fit and proper to work in the Swiss financial industry). So, ironically, the DoJ wound up using as its sole fact witness at criminal trial, someone who believed that they were fit and proper to work in financial services, while simultaneously needing to testify that they were part of a criminal conspiracy.
You might have expected the DoJ to have known better than to use Mr Gardiner in such a role, given that he or his lawyers met with the DoJ 53 times prior to his testimony and he revealed he had spent some 1,500-2,000 hours working on the case. Yet despite this, at an event in December, the judge overseeing our trial made a host of comments in which he criticised the DoJ for not preparing its witnesses adequately. Specifically, US District Judge, Richard Berman, said that the DoJ witnesses were “very schooled”, meaning that they were heavily prepared to deliver the details that the prosecutors wanted to be put forward in the case, but that they “had blinders on” and struggled when asked to talk about any other details. As a result, the judge stated: “On cross examination, [defense counsel] just destroyed most of these witnesses.” (While Judge Berman didn’t name our case specifically, it was widely understood that he was making comments about our case as he described it as a recent criminal trial involving three defendants focused on the FX markets).
It is also important to point out that on the stand, Mr Gardiner admitted under cross examination that at the time the conduct took place he never thought he did anything wrong or illegal, he never thought he was part of a price fixing conspiracy, and at any time during his time of employment if anyone from compliance would have told him what he may have been doing is problematic, he would have stopped there and then.
Given Mr Gardiner’s relatively exculpatory testimony, there was no way the DoJ was ever going to come close to meeting its burden of proof. Yet it continued with the prosecution, ruining my reputation and that of my co-defendants and upending our lives and those of our families for the past five years. By contrast, the UK’s Serious Fraud Office thoroughly investigated our conduct for over 18 months and concluded that the alleged conduct even if “proven and taken at its highest” would not constitute an offence under English Law.
The role of a prosecutor is to seek justice. As officers of the court and representatives of the country, they take an oath to do so. As such, these prosecutors should be just as interested in ensuring the freedom of the innocent as in bringing the guilty to justice. Unfortunately, the DoJ prosecutors in this case transgressed so far beyond these wellestablished principles that they were willing to put people in jail for 10 years for conduct that the UK had concluded was not illegal, and where even in the US they could not prove any harm or illegal intent, and moreover did not have any judicial familiarity with the affects of the conduct. I do hope some senior officials in the DoJ take a good, hard look at why this prosecution ever took place and that the relevant prosecutors will be held “accountable” for such a monumental error in judgement.
I still get asked a lot of questions on why we decided to waive extradition and fight these charges. The entire US criminal justice system is geared towards forcing individuals into guilty pleas. Just look at the statistics: 97% of criminal indictments end in a guilty plea, while the remaining 3% that go to trial end in a 90% win rate for the DoJ. So, from the moment you have been indicted, the probability that your case will end in an acquittal is a mere 0.3% (1 in 300).
I suspect that the penalty of trial causes a lot of innocent people in the US to plead guilty because the option is: plead guilty and take an 18-month sentence in a prison camp or go to trial and lose, meaning that you are facing 10 years in a potentially medium security prison. Despite these odds, my world-class legal team at WilmerHale and I were (rightly) convinced that the law and the facts were on our side.
Was I scared? More than I’ve ever been able to admit. But In the face of such a potential miscarriage of justice, as I see it, there are two choices: slump into a perpetual state of depression and defeatism or get your sword out to fight for your life. I’m forever grateful that my codefendants and I chose the latter. Fortunately, in the end what the DoJ failed to understand in over five years, a jury of New Yorkers did in just over three hours, resulting in our resounding acquittal.