The Spider Network

by David Enrich

  Gary Spratling, a mustachioed partner from Gibson Dunn’s San Francisco office, delivered the bad news to UBS executives: If the bank didn’t play its hand right, it was headed for billions of dollars in financial penalties, or worse. After all, prosecutors in the United States seemed to be dying to give the public what it wanted by filing criminal charges against a major bank. But Spratling—a master tactician and a specialist in antitrust law—had an idea. Antitrust laws in many countries included provisions granting immunity or leniency to those who were first to report problems. (In the United States, antitrust regulators even give partial amnesty to the second company to tattle.) If UBS raced to the authorities in the United States and elsewhere before anyone else did, and not only confessed its own sins but also promised to help build cases against its rivals, it might win leniency. Spratling made it clear that there didn’t seem to be other good options.

  So, starting in December, UBS and its lawyers embarked on a worldwide damage-control tour, meeting at least a dozen antitrust authorities and banking regulators in Switzerland, England, the United States, Japan, the European Union, even Canada. At each stop, the bank owned up to what it had found—what looked like an industry-wide effort to skew yen Libor and other iterations of the benchmark—and supplemented its admissions with a sampling of the e-mails, chat sessions, and recorded phone calls that the internal investigators had unearthed so far. The bank offered to provide extensive cooperation, including by serving up UBS employees as witnesses and countless gigabytes of electronic evidence, in exchange for full or partial immunity.

  It was a seminal moment for investigators. Here was one of the world’s biggest banks, delivering what looked like a ready-made case on a silver platter. Until now, the Libor inquiries had focused mainly on two things: the practice of lowballing and the idea that individual traders at a handful of banks like Barclays were doing bad things in isolation. The investigations had been confined to a narrow time period—2007 and 2008—and only the U.S. dollar flavor of Libor. Now it was clear that the suspect activity occurred over a much longer period and in multiple Libor varietals. And, most important, it looked like there was a network of collusive behavior. That meant the scandal was much bigger than a random, haphazard attempt at manipulation, and it demolished banks’ claims that this was the work of just a few bad apples.

  Spratling had reason to be optimistic about his plan. One reason was that he knew how the system worked. Before joining Gibson Dunn, he had spent twenty-eight years working in the Justice Department, rising to become a deputy assistant attorney general in charge of prosecuting international cartels—precisely the type of case that UBS was now owning up to being part of. Thanks to his long government career, Spratling had fostered some useful relationships. One of those was with his former subordinate, Scott Hammond, who by 2011 was the top criminal prosecutor in Justice’s antitrust division. Hammond had helped devise the leniency program for self-reporters that Spratling now hoped to take advantage of. The two men remained close.

  Spratling’s strategy worked even better than he reasonably could have hoped. Antitrust authorities in Washington, Brussels, and Bern tentatively accepted the bank’s deal and offered it at least partial immunity. But the bigger victory, the more stunning one, was that UBS somehow ended up in a position to set the course of the unfolding investigations. As part of its agreements to cooperate, UBS volunteered to handle the massive task of sifting through millions of pages of records and interviewing witnesses. That appealed to the regulators, who were constrained by tight budgets and busy schedules and didn’t want to squander scarce resources on a wild-goose chase. But it also meant that crucial work—the act of laying the first bricks in the investigative foundation—was outsourced to a very biased party. UBS and its high-priced hired guns would now be the ones determining which evidence and witnesses showed up on regulators’ and prosecutors’ radar screens. If UBS didn’t discover certain evidence, or decided for whatever reason not to share it with the authorities—well, it would probably never come to light.

  So, before sending out subpoenas to UBS to ascertain the potential roles played by its senior executives in the scandal, the CFTC asked Gibson Dunn how to frame the legal documents. The law firm insisted that the subpoenas’ scope be narrowed to only look at formal boardroom minutes and other official company documents, not e-mails, chat transcripts, phone calls, or handwritten notes—and the CFTC agreed, bowing to the firm’s assertion that anything wider would be unmanageable. When Gibson Dunn reported that UBS had destroyed all of the recordings of employee phone calls in Tokyo, there was nothing much that investigators could do. Nor did they complain about the fact that UBS had blacked out the identities of certain people, presumably executives, included on various internal e-mail chains that the bank handed over. And they had to trust Gibson Dunn’s matter-of-fact determination that eight million of the documents that UBS had initially flagged as relevant to the investigation simply wouldn’t be available to U.S. or British regulators because they were housed on the bank’s Swiss computers and therefore fell under the country’s stringent bank secrecy laws.

  This was a fantastic turn for UBS, which could now attempt to confine the investigation to an isolated group of wayward employees who no longer worked for the bank or at least already had been suspended. Sure, mistakes were made, but the guilty parties had been cleared out and the bank had come clean. Even better, UBS could steer the investigators away from the corner offices. And so, when the CFTC asked Gibson Dunn to come up with a list of individuals who should be on the subpoenas that the agency was preparing to send to UBS—names that would determine the search terms that the bank used to sieve through millions of pieces of internal communications—one was especially prominent: Tom Hayes.

  * * *

  After leaving Tokyo, Hayes and Tighe flew to Barbados. The newlyweds stayed at Sandy Lane, a luxury beachfront resort frequented by celebrities. After the trauma of the past few months, and the washed-out honeymoon, they felt they deserved the sunny break—although it was marred by a blowout fight after Hayes, who uncharacteristically had consumed multiple boozy drinks, caused a scene accosting a retired Scottish soccer star, Gordon Strachan, whom he spotted at a gala dinner. Back in England, they moved into a large apartment in a converted sugar warehouse in an increasingly gentrified London neighborhood. It was just down a busy street from where Tighe had lived before she moved to Tokyo. The flat in Sugar House was much nicer than anywhere she’d lived on her own, though, decked out with polished wood and with a well-dressed doorman standing sentry downstairs.

  Hoping to return to the banking industry, Hayes got to work looking for a new job. Around the turn of the year, he went with Read and another former colleague to watch a cricket match in Sydney with tickets paid for by ICAP. The excursion had been lined up before Hayes was fired, but he regarded it as a good omen that the tickets hadn’t been revoked—he wasn’t that toxic. Once back from Australia, he started dialing up his old industry contacts to see if there were any nibbles. The first, in early 2011, came from Bank of America. After cleaning up the mess left by its hasty Merrill Lynch acquisition, the North Carolina–based bank was back in expansion mode. In January, Bank of America flew Hayes in for two days of interviews in its new skyscraper in midtown Manhattan. As a reference, he listed Cecere, who had told him he’d be happy to help. In late March, Hayes e-mailed Citigroup’s HR woman in Tokyo—the same one who participated in his firing—and told her that she would be hearing soon from “my future employer for a reference.” (The HR woman said Citigroup would confirm Hayes’s dates of employment and wouldn’t say anything else.) Hayes and Tighe confidently prepared to move to New York, but when a Bank of America executive happened to mention the plan to one of Hayes’s former bosses at UBS, the job disappeared.

  Deutsche Bank seemed to have gotten cold feet, too. A second interview was canceled. “You weren’t careful enough,” Mark Lewis explained. Hayes e-mailed him a few more times, hoping something had cha
nged. Lewis didn’t respond.

  Hayes wasn’t stupid. He could see what this meant: His financial career was over. It was a sad, sobering moment. But life went on. Hayes had never learned to drive. Before moving to Tokyo, he had taken lessons, but he spent most of the time sitting in the passenger seat, explaining his tortured love life to the bemused driving instructor. In 2011, at age thirty-one, he decided it was time to get a license. Despite taking lessons, he flunked the test. On his second attempt, after committing the entire British highway code to memory, he passed. Having transferred his obsession with all things Porsche to one of its German rivals, he celebrated by buying a dark gray Mercedes SL500 convertible, a blue four-door Mercedes AMG sedan, a dark blue Mercedes minivan, and a black Mercedes 4x4. He gave a Mercedes coupe to his younger brother, Robin, a grade school teacher who had been driving a beat-up Volkswagen. Robin appreciated the gesture, although he was self-conscious driving the flashy £60,000 car through his school’s working-class neighborhood.

  That fall, Hayes enrolled in a one-year MBA program at Hult International Business School in London. He recognized that one of his weaknesses, after a career as a solitary trader, was working with others. In fact, that had been a weakness going back to his adolescent days. “I’ve got to learn how to be a normal individual,” he thought, “rather than just some guy who just does what the hell he wants whenever he wants.” He aced most of his classes, putting him on track to finish second in his class of aspiring business leaders.

  * * *

  Even before UBS came clean, the CFTC and some Justice Department officials had heard the name Tom Hayes. He’d appeared in snippets of conversations that UBS previously had handed over as part of its simulation of cooperation, and he also had scattered cameos in chat transcripts that one or two other banks had produced for the agencies. But he hadn’t been a central figure. Then, in January 2011, when UBS lawyers showed up at the CFTC offices, Meister scanned through some of the materials the bank was disclosing. Hayes was all over the documents. He came across as a typical Wall Street guy: arrogant and angry, a bit of a bully. Meister imagined him living large, partying into the wee hours at raucous Tokyo nightclubs. It would feel good, he thought, to nail this guy.

  Obie—who with Meister’s arrival had been demoted to running the enforcement department in the CFTC’s New York office—had his doubts. Sure, Hayes looked like the most enthusiastic and skilled practitioner of Libor manipulation in Tokyo, but Obie recognized that this man was a bit weird. He seemed to exhibit hallmark traits of someone with Asperger’s syndrome—obsessiveness, naïveté, obliviousness to social niceties, an inability to see things from other people’s perspectives. All of that, Obie felt, made Tom Hayes a good target to try to flip; he probably would have plenty of dirt to dish on his superiors, and—emotionally removed—less loyalty to anyone but himself.

  Meister, however, was in a hurry. He wanted the first batch of Libor cases to reach fruition by early 2012. It was an ambitious deadline, but it would be a huge achievement to mark the end of his first year at the CFTC. Plus, it would help pacify the impatient and micromanaging Gensler, who wanted regular, sometimes daily, updates on the investigation’s progress.

  * * *

  Around the same time as the CFTC visit, UBS and its squadron of lawyers showed up at Justice’s antitrust office, which sat in the department’s main headquarters on Pennsylvania Avenue in Washington. But neither the bank nor the antitrust bureau alerted the fraud team in the nearby Bond Building, and William Stellmach was furious when he found out. Doughy-faced and nebbishy, his pleated pants hiked up higher than was fashionable, Stellmach had joined Justice’s fraud division in July 2010. His nerdy appearance belied his tough pedigree. He had spent the prior several years as a federal prosecutor in New York. When he arrived in Washington for the new job, he was thrust into Justice’s nascent Libor investigation. Stellmach, along with his colleagues Robertson Park and Denis McInerney, had begun to see the case as the vehicle for sating the public hunger for Wall Street prosecutions. The trick was to find some individual bankers who could be served as red meat.

  There was a history of tension between Justice’s fraud and antitrust sections—generally friendly competition, but sometimes not-so-friendly clashes over jurisdiction. With UBS’s visit to antitrust, Stellmach perceived Spratling and the bank as trying to spark an internal Justice turf war aimed at getting the antitrust team—led by Hammond—to grant immunity and leaving the fraud section out in the cold. Stellmach complained to Spratling, who denied that was his goal.

  One morning in early spring, trying to make peace, Spratling’s team returned to Justice, but this time to the Bond Building for a belated presentation to Stellmach and his fraud colleagues. The gathering was held in a well-appointed conference room on the fourth floor, designed as a venue for greeting foreign dignitaries—a far cry from the dingy Flag Room. No sooner had the session begun than a squabble broke out. Spratling was under the impression that his pals in antitrust had given assurances that, thanks to the bank’s cooperation, nobody at Justice would file charges against UBS or its employees. That’s not how Stellmach and Park saw it. A grant of immunity from antitrust covered only that section’s investigation, they explained; it didn’t bind the fraud division. It was inevitable that someone was going to get charged—after all, one of the main points of the Libor investigation was to prove that U.S. prosecutors could finally nail someone. And, based on what the prosecutors had been picking up from their counterparts at other agencies, UBS and its former employees were starting to look like the most promising targets.

  Spratling, trying to convince the prosecutors not to charge either his client or its current employees, volunteered to bring UBS employees to Washington to serve as Justice’s guide dogs. He also walked the lawyers through hundreds of pages of evidence. UBS had certainly done its homework, matching up internal communications and Hayes’s requests to brokers with actual movements in UBS’s Libor submissions and occasional fluctuations in the benchmark itself. They weren’t huge moves—only a couple of basis points in one direction or another. And it wasn’t possible to definitively prove causation; it was conceivable that UBS’s submissions might have moved without Hayes’s pressure. (Another drawback: It involved a Japanese, not an American, interest rate, which meant it had less impact on, and therefore less cachet with, the U.S. public.) But for the first time, Stellmach and Park thought they were looking at evidence of real manipulation—the type of stuff that could actually hold up in court and that might have affected the wide range of institutions and individuals that had purchased derivatives to protect themselves from volatile interest rates. The damage to one person’s credit card bill might have been negligible, but when you added up all of those credit cards, all of those car loans, all of those mortgages—well, it didn’t look quite so minor. And the blatant nature of the e-mails and chat snippets resolved any lingering doubts about whether the evidence could be open to a more innocent, benign interpretation.

  Hayes, in the course of that hours-long gathering, emerged as the obvious target. “He’s the one,” Park told colleagues afterward. That was just as UBS wanted it. In subsequent meetings, witnesses provided by UBS would describe Hayes—slim and not quite six feet tall—as large and physically intimidating. The shepherd’s pie anecdote resurfaced, casting Hayes as potentially violent. He was beginning to resemble a bogeyman. Nothing had been formalized, but in their heads, Stellmach and Park finally had their man.

  * * *

  On the afternoon of Friday, March 11, 2011, a violent earthquake rumbled up from more than fifteen miles beneath the surface of the ocean off Japan’s northeastern coast. It shook buildings all over the country, but the worst damage came from the sea. The shifting underwater plates unleashed a tsunami of biblical proportions, with a wall of water thirty feet high bulldozing Japan’s coastal prefectures. It ruptured a nuclear power plant. More than sixteen thousand people would perish.

  In Tokyo, Alykulov felt the quake
and its aftershocks and then watched, awestruck, as news reports showed the extent of the damage caused by the tsunami. He decided it was time to get out of town. A few months earlier, UBS had suspended him from his job. He was still getting paid—that way the bank could ensure that he and others in similar situations would cooperate with the Americans—but his career prospects were in doubt. It was a jarring, embarrassing turn for someone who not long ago had thought he had a bright future as a trader. After a few glum days, he started trying to figure out what to do with his life. As a first step, he went back to Kazakhstan. Then he decided to learn yet another language. He set off for Spain, keeping in close touch all the while with the Washington criminal defense attorney—a tall, buzz-cut trial lawyer named Nate Muyskens—that UBS had hired to represent him. Muyskens told him he was eventually going to need to come to Washington to meet with FBI agents and Justice prosecutors. So after Alykulov returned to Tokyo from Spain just in time for the earthquake, he packed his bags and, without telling anyone, got on a plane to Washington. It was all such a blur that he forgot to bring a suit. On the car ride into town from Dulles International Airport, Alykulov stopped at a department store and dropped $500 on a new suit so that he could look presentable when he showed up at the Bond Building. He charged it to UBS—after all, this trip was on behalf of his employer.

  By the time he arrived in Washington, Alykulov had worked himself into a lather, convinced that this trip would culminate with him in a jail cell. The easygoing Muyskens, whose clients ranged from bank traders to Justin Bieber, told him to chill—all he had to do was cooperate, he explained, and Justice would promise not to prosecute him. But Alykulov wasn’t wild about that idea. He knew Hayes by now was one of the main targets. Alykulov didn’t much like Hayes, but he knew his former boss regarded him as a friend, and the thought of knifing someone in that situation made him a little queasy. Plus, he was genuinely fond of Tighe. When the time came for their appointment at the Bond Building, Muyskens had to physically push Alykulov out the door to walk the few blocks down New York Avenue. Even when he got there, Alykulov seemed to have trouble explaining what he’d actually done wrong. Gradually, though, he overcame his compunctions—he told himself that he had an obligation to UBS and its thousands of employees to help resolve this mess—and spent dozens of hours serving as a much-needed Sherpa for the prosecutors and FBI agents.