LIBOR trial convictions in U.S. have now been overturned

A federal appeals court this week overturned the convictions of two former Deutsche Bank traders initially found guilty of rigging the London Interbank Offered Rate (LIBOR) index benchmark, taking back one of the U.S. government’s highest-profile regulatory victories in the wake of the 2008 financial crisis. This is according to reporting at the Wall Street Journal.

“The decision Thursday dealt a blow to the legacy of an investigation that Washington poured resources into after the financial crisis, when prosecutors were criticized for not pursuing enough cases against individual traders and executives,” the WSJ report reads. “The cases focused on how traders and brokers world-wide influenced the daily [LIBOR index] which helped set the value of lucrative derivatives they traded and made banks appear healthier.”

A panel on the U.S. Court of Appeals for the Second Circuit overturned the LIBOR convictions after reviewing evidence used in the case, finding that it did not stand up the charges of fraud and conspiracy levied against the defendants. Both men were originally convicted in 2018.

Previously in 2017, the appeals court based in New York City overturned verdicts against two other traders based on LIBOR-related charges. The decision handed down on Thursday means that every conviction reached by the United States in connection with LIBOR has now been overturned, according to the Journal.

The beleaguered LIBOR index served as the basis for adjustable-rate reverse mortgages for years. After international investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. In 2014, the Federal Reserve Bank of New York first convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternative rates, and to develop an implementation plan.

In 2021’s Mortgagee Letter (ML) 2021-08, HUD officially announced that the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program would move away from the LIBOR index for adjustable-rate HECMs and instead adopt the Secured Overnight Financing Rate (SOFR). This change constituted long-awaited guidance from the federal government, approving the industry’s preferred index while providing a timeline for how and when HUD would implement the changes.

The ML also announced the new model Note language, included in the revised model loan documents for first and second HECM Adjustable Interest Rate Notes, and incorporating the changes described in the ML.

Read the story on the overturned LIBOR convictions at the Wall Street Journal, subscription required.

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