The Spider Network

by David Enrich

  And yet, by and large, everything seemed normal. They socialized with Hayes’s business school classmates. To accommodate their expanding family, in December they bought a large house on a quiet road in the village of Woldingham, a thirty-minute train ride from central London. The seven-bedroom Old Rectory was their dream home, spacious yet homey with raw wood floors (except in the bathrooms, whose tiles were heated). The huge kitchen—equipped with top-of-the-line appliances, a wine refrigerator, and an island countertop made of volcano granite—opened into a dining room with sweeping views of the countryside. They paid the £1.2 million (nearly $2 million) price in cash, using a chunk of Hayes’s Citigroup signing bonus. Before they moved in, they started a major renovation project, building a new three-story wing and redoing much of the house’s electrical wiring. They paid using some of the £960,000 in profits that Hayes recently had racked up trading currencies and stock indexes through an online brokerage account. Hayes, for all his sins, remained a prodigious trader, by all accounts one of the best at his craft on the planet. He found his success gratifying, proof to himself that his investing savvy wasn’t contingent on him sitting on a noisy bank trading floor; he could do it just as well from the comfort of his own home.

  On December 16, Japan’s Financial Services Agency issued a pair of two-page press releases announcing the filing of “administrative actions” against UBS and Citigroup for trying to manipulate yen Libor and Tibor. These were the first times a regulator had disciplined a bank for skewing an interest-rate benchmark, the inaugural fruits of UBS’s global confessional circuit a year earlier. But while the Japanese orders were a milestone, they weren’t much to behold and therefore attracted little media attention. The regulator didn’t impose any financial penalties—UBS and Citigroup just had to stop trading certain derivatives for slightly less than two weeks. The actions didn’t name any individuals. The UBS order referred anonymously to Hayes. The Citigroup document only referred to a character identified as “Trader B,” who along with “Director A” engaged in what the regulator described as “seriously unjust and malicious” behavior. Hayes was Trader B, and Cecere was Director A. Mccappin, referred to simply as “the CEO,” was accused of having “overlooked these actions” despite knowing about them.

  Hayes and Cecere drew solace from the fact that nobody from the Japanese regulator or the banks had contacted them as part of the investigation. And they hadn’t been publicly named. Still blissfully unaware of the intensifying U.S. and British investigations, the two men figured this was the end of the matter.

  Chapter 15

  Spiders

  Andrew Smith was in Portsmouth when his cell phone rang. He was on England’s windy southern coast with his wife, Christy, who was about to give birth to triplets. On the line was a colleague in UBS’s offices out by the Zurich airport. Several years earlier, Smith had worked there as a low-level, and largely unsupervised, trader responsible for some of the bank’s Libor submissions. Now, in May 2012, he was based in UBS’s London office.

  Smith’s colleague was calling to give him a heads-up: UBS’s human resources department would be sending him a written warning about his role in l’affaire Libor. A few months earlier, Smith had been hauled into an interview with the bank’s HR and compliance people, who had grilled him about whether he’d ever moved Libor up or down to accommodate requests from traders. The answer, of course, was yes: Everyone had been doing the same thing. It was the first moment Smith deduced that perhaps he’d done something borderline or even wrong. Ever since, he’d been wondering if another shoe would drop. Now, with impeccably bad timing, here it was.

  A day or two later, Christy gave birth, and word came from his boss that a bunch of his colleagues who had been involved with Libor had just been told they were losing their jobs—UBS’s latest attempt to convince prosecutors that any wrongdoing was perpetrated by a cluster of former employees. The good news was that Smith wasn’t among those getting a pink slip. He was just getting a warning letter. “Congratulations,” his boss said.

  Pieri and Alykulov didn’t fare so well. Both had been suspended more than a year earlier and had held out hope that they could salvage their finance careers. Alykulov was doing everything he could to impress American prosecutors while simultaneously looking for new jobs in Tokyo—he and his lawyer could see the writing on the wall. Pieri was less farsighted. Around the time he was put on paid leave, he moved to Hong Kong, expecting brighter career prospects in UBS’s offices there, away from his tarnished Tokyo reputation. He waited around in Hong Kong, collecting paychecks, submitting to interviews with UBS lawyers, and wondering when the bank would end his suspension. It never did. In May, UBS informed him and Alykulov—and more than a dozen others—that they could either resign voluntarily or be fired. That was an easy choice: Resigning didn’t leave a blemish on your employment records. As a parting blow, the bank demanded that Pieri relinquish some of the UBS shares that he’d been given as part of his prior compensation.

  Smith’s triplets were a few days old when he received the anticipated warning letter. The bank told him he had to sign it that very afternoon. His punishment was that his bonus, due to be paid out the next day, would be docked by a certain percentage—but the letter didn’t specify the percentage, and Smith never found out what his bonus would have been otherwise. That wasn’t the only thing that confused him. The letter said the warning was based on the bank’s Libor investigation and Smith’s “behavior at that time,” but it didn’t state what he had actually done wrong. Smith was left to ruminate about the possibilities. Maybe it was something dumb he’d said in a chat? Was it the fact that he’d complied with his colleagues’ requests? He wasn’t really sure, and he didn’t really care. His family had just expanded by three people, and he wanted to put the whole episode behind him. He signed the letter.

  * * *

  Now the game was truly afoot. At ICAP, two senior managers told Wilkinson in January that the FSA had decided that it was no longer appropriate for him to keep coming in to the office;* he would be suspended. Wilkinson’s employees took him out for pizza to commiserate.

  Wilkinson had plenty of company. The prior September, ICAP’s general counsel informed Read that he was being suspended. That wasn’t so bad; Read just relaxed at home in New Zealand and did nothing. Goodman and Brent Davies also were put on paid leave.

  That spring, Wilkinson was in London to see his tailor, and he and a former colleague caught up over coffee. The colleague said he’d been interviewed by the Justice Department. Wilkinson heard through the grapevine that Justice also had interrogated another former ICAP broker—someone who had hardly ever interacted with Hayes. Now that was alarming. Increasingly troubled, the brash, hedonistic Danny the Animal started going to a shrink to talk about the investigation. Goodman also was in rough shape. A psychiatrist diagnosed him with “a major depressive disorder,” put him on antidepressants, and enrolled him in individual and group therapy sessions. Over beers with a former colleague one afternoon, he sat in the pub sobbing.

  After belatedly joining the investigation, the FSA was now an enthusiastic participant. In addition to reviewing reams of evidence that it had collected from banks and brokerages, it was interviewing their past and present employees. And while the FSA was lagging behind its American competitors in terms of the physical evidence it had gathered, here it possessed an advantage: Most of the suspects in the case were British citizens who had worked in London and currently resided on British soil. The FSA, therefore, had a much easier time tapping this human intelligence. How valuable it would turn out to be remained an open question.

  That spring, Farr and his lawyers arrived at the agency’s headquarters to be interviewed. Greeted in the FSA’s lobby by an enormous sculpture of an owl bearing its razor-sharp talons, the visitors were given name tags and escorted up a spiral staircase to an interview room. The FSA had the right to compel people to honestly answer questions or be held in contempt of court, though that information co
uldn’t be used against that person in a criminal court, unless it proved to be false or misleading. Farr, who’d been ordered to appear, wasn’t happy to be there. He intended to be polite, but he had no interest in helping the FSA build cases against him or his colleagues.

  The interview got under way with an FSA agent asking Farr how often he carried out Hayes’s requests for him to talk with traders and other brokers. “I would regularly say to him I would, but it was sales talk and bravado,” he replied. “I didn’t always ask people. I just said I would.”

  Farr further explained that his band of brokers had a communal Bloomberg account—in Farr’s name and situated at his desk, but his colleagues also used it. So, really, Farr now told the investigators, it was basically impossible to say if anything that had been written in his name was actually written by him. Farr said he had an awful memory so, as much as he would love to help, he just couldn’t be sure about what he’d written.

  Trying to resolve this uncertainty, the FSA pointed Farr to a Bloomberg chat with Hayes in which Farr’s son Sam was a topic of discussion. “I just wondered if that made it more or less likely that it was you who was making these entries?” an FSA investigator wondered.

  “It could have been me,” Farr said.

  “I think the bottom line is, did you have a teenage son at that time?” the agent asked.

  “I do have a teenage son.”

  “Did you at the time?”

  “Yeah, well, he’s not a teenager anymore, but I did have a teenage son at the time.” For a moment, that seemed to settle the matter. “But the guys who I work with all know I have a teenage son as well,” Farr added. “I’m not denying this is me. . . . I said I just can’t recall that it was me.”

  Another investigator, Patrick Meaney, was losing patience. “But the point is the other guys on the desk are not going to sit there and pretend to be you and pretend that they’re talking about your teenage son.”

  “Why aren’t they?” Farr asked.

  “Because what’s the point? What would be the point of doing that?”

  “Well, they may do,” Farr said, then started to mumble about their possible motivations.

  One of Farr’s lawyers, Shah Qureshi, stepped in. “I don’t think Terry, with respect, was suggesting that anyone was trying to pretend to be him. I think his point is that others did use that line.”

  “We seem to be having a great deal of problem getting you to acknowledge that, and I’m wondering why that is the case,” Meaney said.

  “I’m not denying it’s me,” Farr said. “I said it’s likely me.” It was 5 p.m., and the interview was brought to an end for the day.

  When the process resumed the next morning, Farr still was playing games. The investigators were getting frustrated. He said he didn’t know what the word counterintuitive meant. He said he wasn’t misleading Hayes, then later acknowledged that perhaps he’d “told him the odd white lie on occasions.” He said, over and over, that he didn’t remember things that he’d spent hours chatting about. He said that, to the extent that he had seemed to agree to do anything untoward, he often misspoke in chats.

  When the interview turned to the switch trades, Farr claimed that they weren’t tied to attempts to get Libor moved in helpful directions. Instead, they were Hayes’s way of thanking Farr for the “bespoke services”—prices, information, market intelligence, trades—that he was providing. On another occasion, Farr insisted that he had no idea what Hayes was referring to when he thanked Farr for his help and Farr promised to keep helping.

  “Your answer is not credible,” Meaney snapped.

  * * *

  Early in 2012, Hayes’s name started surfacing in the media. The first reference was a Wall Street Journal article on February 7. Awkwardly headlined “Rate Probe Keys on Traders,” it reported that U.S. authorities were investigating a number of traders and that, at the center, was a British man named Thomas Hayes. The story, which ran on the cover of the Journal’s Money & Investing section, seemed to be based on reporters figuring out the identities of the anonymous individuals mentioned in the Japanese regulator’s reports a couple of months earlier. (The story also mentioned Cecere and Mccappin.) Soon other news organizations followed up with their own reports.

  Hayes had been in talks with Hult about joining the business school as a teacher to lecture students about how finance worked in the real world. The media attention led Hult to revoke the offer. Hayes panicked. He told Tighe that maybe he should just kill himself. It was the first time he’d said anything like that. He didn’t seem serious, but Tighe was alarmed.

  Notwithstanding mounting evidence to the contrary, Hayes still insisted he didn’t need a lawyer. So he was surprised to hear that Brent Davies had hired one. When he asked whether Davies thought he should find one, too, Davies didn’t hesitate: yes. Hayes’s father, a reader of the business press, saw his son mentioned and also urged him to lawyer up. Hayes ignored both of them. But Tighe put her foot down. At first, he argued, again, that since he’d done nothing wrong he didn’t need a lawyer. The disagreement escalated into yet another shouting match, and this time Tighe prevailed. Yet when Hayes contacted one law firm after another, none would represent him. The problem wasn’t that he was an unattractive client—quite the contrary. But most of London’s prestigious law firms already had been retained by other individuals and institutions ensnared in the expanding Libor investigation.

  Eventually, in March, he settled on a small firm called Fulcrum Chambers. The lawyers and their new client sat down in the Victorian brick building where they had a suite and went through his situation in detail. It was a remarkably upbeat gathering—the first indication of what would become a surreal and disastrous legal relationship. The fact that his name had been mentioned in newspapers as a key figure perversely struck Hayes as encouraging, and his lawyers didn’t disagree. “The press exposure on me is a positive sign,” he asserted. “The stuff that’s not in the press is the stuff you need to worry about. People aren’t going to leak info on me if it would jeopardize a massive investigation. People are more willing to speak if they’re not scared.” For a man as logically minded as Hayes, it was bizarre reasoning.

  The Fulcrum team discussed the possibility of Hayes suing Citigroup for wrongful termination. “They will have to pay for mistreating you,” a Fulcrum lawyer, David Williams, intoned. Another, Ivan Pearce, warned him against speaking to the press. “The information you have is powerful,” Pearce explained. “Leaking anything would weaken that power.”

  Hayes asked about the odds that he would be charged by and then extradited to the United States, which he knew from Alykulov was conducting a criminal investigation. This, he acknowledged, was the only thing that really frightened him. American courtrooms were notoriously inhospitable places for white-collar defendants, thanks in part to U.S. prosecutors’ ability to strong-arm witnesses into testifying in exchange for lighter penalties. (British prosecutors lacked such plea-bargaining powers.) And prison sentences in the United States tended to be far longer—not to mention less pleasant, given the violent conditions in many American prisons—than those imposed by British courts. Williams estimated that the chances of him facing U.S. criminal charges were “10 percent or less.” The Justice Department didn’t have an interest in getting into an extradition fight with the United Kingdom, he said. “You’re not that important to them,” Pearce added.*

  The lawyers suggested that Hayes get in touch with Cecere to see about coordinating their legal strategies. So Hayes and Tighe flew to Geneva, where Cecere had begun to work at Brevan Howard. It was a nice reunion, the women discussing motherhood, the men speculating about the direction of the government investigations. Cecere didn’t seem worried, but he soon started telling acquaintances that—to his great surprise—his former employee apparently had constructed a “spider network” to execute his nefarious Libor scheme. It was an apt handle: With strands stretching across the globe, the web trapped the naïve and unsuspecting. Cece
re, too, was trying to cast all the blame on Hayes, even though this web was in fact shared by many spiders—Cecere among them.

  * * *

  For a few weeks that spring, the financial world’s attention was consumed by another scandal in London. A trader in J.P. Morgan’s London office, Bruno Iksil, had amassed huge positions in an exotic class of derivatives called credit default swap indexes. Before long, his bets grew so big that he was controlling a substantial slice of the market and had acquired a nickname: the London Whale. As Hayes had learned, size is a mixed blessing, and when markets turned against Iksil, competitors smelled blood and attacked. Things quickly careened out of control—soon Iksil’s team was sitting on losses of more than $2 billion.

  When the media caught a whiff of what was happening—a story made infinitely sexier by Iksil’s nickname and J.P. Morgan’s reputation for having survived the financial crisis unscathed—the bank’s overconfident CEO, Jamie Dimon, dismissed the whole saga as “a tempest in a teapot.” But losses kept growing, eventually exceeding $6 billion. Regulators and prosecutors started investigating. Soon they zeroed in on Iksil’s underling and his manager as the primary culprits; both would be criminally charged. The high-ranking brass who’d thrilled to the profits Iksil generated, as well as the senior executive who supervised the disastrous investment strategy, were not prosecuted.

  * * *

  In early May, Read flew in from New Zealand to sit down with the FSA. He had been on paid leave from ICAP for eight months now, spending time with his family and volunteering at a Presbyterian retirement home, where he tended its gardens and to its frail patients. The meeting room was crowded: There were four FSA investigators, a CFTC official who had traveled from Washington (a second CFTC investigator joined over the phone), and four of Read’s own lawyers. The tone quickly grew testy. Meaney asked Read about Goodman’s daily run-throughs, with their column of “suggested” Libor data. Why, he asked, was Goodman suggesting where banks set Libor? Read said it was more a prediction, a forecast, than an instruction. “But why isn’t it called ‘predicted Libors’ if that’s the case?” Meaney pushed.