UBS Pleads Guilty, Pays $1.5 Billion to Settle Rate LIBOR Probe (Update 1)

Updated to include DoJ criminal charges against UBS traders

NEW YORK ( TheStreet) -- Swiss banking giant UBS ( UBS) said on Wednesday it will pay a total of $1.5 billion to global regulators to settle a multi-year interest rate manipulation probe. The bank's Japanese subsidiary also entered a rare guilty plea with the U.S. Department of Justice in relation to its rate-rigging.

Previously, the bank agreed to U.S. sanctions for facilitating billions in U.S. tax evasion and money laundering.

With the settlement and guilty plea, UBS joins a growing list of banking conglomerates that have had their reputation stained by rate manipulation and money laundering probes in 2012.

In June, Barclays paid $450 million to settle a host of rate manipulation allegations with that signaled widespread fraud in the market. The settlement eventually cost Barclays ex-CEO Bob Diamond his job and served as a first read on how large fines would be for a rigging scandal of a commonly used benchmark rate, the London Interbank Offered Rate, otherwise known as Libor.

Currently, U.S. banking conglomerates such as Citigroup ( C), Bank of America ( BAC) and JPMorgan ( JPM) have referenced Libor-related liabilities in litigation reserves or risk factors attached to earnings filings.

Earlier in December, HSBC ( HBC) of Britain reached a record $1.92 billion settlement with U.S. authorities on a probe that alleged the bank facilitated billions of dollars of bank transfers to Iran and helped laundering money for Mexican drug cartels.

UBS record-sized Wednesday Libor settlement signals escalating fines in the probe, given the extent of alleged misconduct.

In its settlement, the Dept. of Justice and Britain's Financial Services Authority alleged UBS's misconduct stretched a half-decade between 2005 and 2010, and details released with the investigation paint a picture of collusion and misconduct.

Trader A: "If you keep 6s unchanged, i.e. the six month JPY LIBOR rate unchanged today... I will f-----g do one humongous deal with you... Like a 500,000 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, $100,000... whatever you want ... I'm a man of my word," a transcript of a phone call released by the FSA states.

While emails show misconduct at various UBS units, the alleged violations occurred mostly in the bank's Japanese unit, and involved Yen-denominated Libor rates. The violations escalated with the 2008 financial crisis, as traders colluded to mask borrowing costs and financial struggles.

Libor and overnight rates denominated in other major currencies are a key reference rate for short-term bank funding, interest rate swaps, corporate bonds and even consumer financial products like adjustable rate mortgages. A manipulation of the rates may have unfairly impacted the borrowing costs of homeowners, governments and corporations, as banks allegedly tried to profit or curb losses tied to floating interest rates at the height of the financial crisis.

In the $1.5 billion UBS settlement, the Commodity Futures Trading Commission and DoJ will take in roughly $1.2 billion fines, while Britain's FSA will receive a $260 million fine. A remaining $65 million was taken by Swiss regulators, and was deemed the bank's gains from its multi-year manipulation.

"We discovered behavior of certain employees that is unacceptable," Sergio P. Ermotti, chief executive of UBS, said in a statement. "We deeply regret this inappropriate and unethical behavior," he added.

Wednesday's fine exceeds the amount UBS reserved for regulatory settlements, causing the bank to forecast a wider than previously estimated loss of $2.7 billion for the fourth quarter.

The bank had set aside $975 million for legal settlements and fines, and it faces a slew of restructuring charges after announcing in late-October it would cut 10,000 jobs worldwide and exit key trading businesses in the U.S. HSBC, by contrast, paid a fine roughly in line with provisions it set aside.

The DoJ also said on Wednesday two senior UBS traders, Tom Alexander William Hayes and Roger Darin, have been charged with conspiracy in a criminal complaint. Hayes was also charged with wire fraud and a price fixing violation from in an alleged rate-fixing scheme, the DoJ said in a statement.

UBS shares were little changed on Wednesday, falling 12 cents to $16.64 in afternoon trading.

Still, for UBS and HSBC, billion dollar-plus sized fines could have been worse. The New York Times reported in mid-December that U.S. lawmakers were considering a far more punitive enforcement of HSBC's money laundering violations that could have precluded the bank from operating in the U.S. Meanwhile, a guilty plea in the U.S. - UBS is alleged to have manipulated seven different rates - could have spelled a similar fate for the Swiss bank.

In 2009, UBS paid a then record a $780 million fine with U.S. tax authorities to settle a tax evasion scandal that landed former employees in prison and unveiled billions in unpaid taxes among thousands of wealthy Americans. Recently, a UBS trader, Kweku Adoboli, was given a seven year prison sentence for a multi-year rogue trading scheme that caused the bank a $2.3 billion loss.

Other European banking conglomerates have also come under scrutiny for violating U.S. controls, such as anti-money laundering regulations. On Monday, Standard Chartered ( STAN) paid $327 million to federal and state authorities to settle allegations the bank transacted payments for restricted Iranian and Sudanese clients.

In June, ING settled with U.S. authorities over restricted payments to Iran and Cuba for $619 million.

Meanwhile, roughly a dozen global banks -- including many of the largest lenders in the U.S. -- face regulatory fines related to the manipulation of short-term interest rates.

-- Written by Antoine Gara in New York

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