In a monumental decision delivered on Wednesday, the UK Supreme Court has quashed the conviction of former derivatives trader Tom Hayes, who was the first individual to be found guilty and jailed for manipulating the London Interbank Offered Rate (Libor). The ruling, which also saw the conviction of former Barclays trader Carlo Palombo overturned, marks a significant moment for the UK’s justice system and casts a long shadow over previous Libor-rigging prosecutions.

Hayes, a former trader at UBS and Citigroup, was convicted in 2015 of eight counts of conspiracy to defraud and sentenced to 14 years in prison, later reduced to 11 years on appeal. He has consistently maintained his innocence, arguing that his actions were not illegal and that the jury in his original trial was misdirected.

Genuine or honest

The unanimous judgment from the five Supreme Court justices found that the trial judge’s directions to the jury were “legally inaccurate and unfair,” effectively depriving Hayes of a proper opportunity to present his defence. The Court stated that it was “not possible to say that, if the jury had been properly directed, they would have been bound to return verdicts of guilty.” As a result, his conviction was deemed unsafe and cannot stand.

The core of the Supreme Court’s decision revolved around the interpretation of what constituted a “genuine or honest” Libor submission. The Court clarified that the question of whether a submission was genuine or honest was a matter of fact for the jury to consider, dependent on the submitter’s state of mind, rather than a strict legal interpretation that precluded any consideration of commercial interests. The original trial judge, in their directions, had “conflated” these two aspects, thus usurping the jury’s function.

Increased scrutiny on eComms

“It’s a landmark case when eComms monitoring was essentially mandated due to this in conjunction with the FX scandal,” said Rob Mason, director of Regulatory Intelligence at Global Relay. “One also questions the billions in fines and remediation that banks incurred to manage this risk as well as the personal challenges endured by those found criminally guilty.”

The Libor and subsequent FX market manipulation scandals, which involved traders at various banks colluding through electronic chatrooms and other digital channels, significantly heightened regulatory focus on eComms monitoring within financial institutions. These widespread instances of misconduct showed a critical failing in oversight.

Regulators, including the FCA, imposed substantial fines on banks for “failing to control business practices” and having “ineffective controls.” This prompted significant investment and mandates for financial firms to enhance their eComms surveillance capabilities, ensuring better detection and prevention of illicit trading activities and compliance breaches. While not solely mandated by the Tom Hayes case, his conviction and the broader Libor scandal, in conjunction with the FX scandal, served as major catalysts for enhanced monitoring requirements across the financial sector.

It’s not personal, it’s governance

“My view on this is that regulators need to start with the principle that it is more likely to be a structural or governance problem, and not primarily an individual problem,” said Mark Taylor, founding partner at Ibex Compliance.

“In this case the system was broken, and the Bank of England knew or should have known what was happening.”

Referencing the fall out from the financial crisis, Taylor added: “The whole issue of pursuing bankers/individuals arose after 2008 principally, and it was based on a public perception that bankers (and their bonuses) were paid too much. It’s interesting to note how this free-market outcome had to be reined in by regulation.

“Now look at the water companies, public anger is being focussed on bosses’ pay, but actually the pension funds and investment banks – in seeking a maximum return for their investors – have participated in these companies not acting in the public interest. Governments and regulators have to try to understand the structural failings of these so-called free market mechanisms and correct them, not leap to the moral high ground and target the individuals.”

A long time coming

This ruling comes after a decade-long legal battle for Hayes, who served five and a half years of his sentence before being released on license in 2021. His case, along with that of Carlo Palombo, was referred to the Supreme Court after an earlier appeal to the Court of Appeal was dismissed, following a US court decision in 2022 that reversed similar convictions for two former Deutsche Bank traders.

The Serious Fraud Office (SFO), which prosecuted Hayes and other individuals in the Libor scandal, has stated that it will not seek a retrial. This decision is likely to have profound implications for other individuals previously convicted in Libor and Euribor manipulation cases, potentially opening the door for further appeals.

Speaking outside the court, a visibly emotional Tom Hayes expressed an “incredible feeling” of vindication, stating that his faith in the criminal justice system had been restored. The judgment is seen as a personal triumph for Hayes and Palombo, and a critical examination of the process and fairness of complex fraud trials in the UK.