Target: A Scapegoat's Guide to the Federal Justice System

By Matthew Connolly

Ever wonder about how the federal justice system really works? Now you can experience it, really feel it, up close and personal. Welcome to Matt Connolly’s world. It starts with the Libor investigation into Deutsche Bank, followed by Matt’s “interview” with the FBI. Then comes his indictment and a trial in the country&rsq

• Language: English
• Publisher: Unpolished Press
• Release date: Jul 15, 2019
• ISBN: 9780999757253

Book preview

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Table Of Contents

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Target

Copyright © 2018 by Matthew Connolly All rights reserved.

Second Edition: 2020

ISBN 13: 978-0-9997572-5-3

ISBN 10: 0-9997572-5-3

Formatting: Streetlight Graphics

No part of this book may be reproduced, scanned, or distributed in any printed or electronic form without permission. Please do not participate in or encourage piracy of copyrighted materials in violation of the author’s rights. Thank you for respecting the hard work of this author.

This is a work of fiction. Names, characters, places, and incidents either are the product of the author’s imagination or are used fictitiously, and any resemblance to locales, events, business establishments, or actual persons—living or dead—is entirely coincidental.

1

M

emories are funny little things.

At least mine are. Not only are they still pictures, those still pictures have feelings associated with them. Sometimes those feelings make perfect sense, other times not so much. Let me try to explain. One memory I have is from college. My fraternity had a Halloween party and costume contest every year. I am sitting at our house bar in my costume. I am looking down at a small bottle of Jack Daniel’s whiskey and a beer. I am playing dice with a girl in a Genie outfit that was probably made with no more than half a wash cloth. I was a freshman and had just won the costume contest. The prize was the whiskey. I had wrapped a hundred feet of cable wire around my torso and cut out big circles of cardboard for my neck and my waist. I was a spool. No, not a fool, although I probably can’t argue that either. A spool of cable.

That picture memory should be good, right? It had everything a man could want in it. Whiskey, beer and pretty girl. I hate that fucking memory, brings me nothing but regret. Let’s just say I ain’t no oil painting. I got no rap. A little chubby. Huge forehead. Not a chick magnet. But I had a chance with the genie that night. I did nothing. Got nervous and made an excuse to leave. What an idiot.

See what I mean? All my still picture memories have different feelings associated with them. I will spare you the one of me getting my pubes shaved before my hip operations. Here is a G rated one instead. Foley Park in New York City. June 2, 2016 at 7:45 a.m. Sitting on a bench in a suit, waiting to surrender to the FBI. It’s like looking at a polaroid. That’s how I see it. I even see a squirrel as I look down the line of benches. Weird, I know.

I shudder a bit when I think of that memory. I am also thankful. Shudder that I had no idea what was in front of me from that day forward. Thankful that I had no idea what was in front of me that day forward. It would have made it worse.

Some memories you wish you could go back and change, some you want to re-live, and some you are thrilled to death you got past and you wonder how you survived. My surrender falls into the latter category. So, while we are waiting in the park for my lawyer to arrive to take me in, we can go back and refresh how the fuck I got here.

Ignorance is bliss. I ain’t that smart. Sometimes that’s a good thing. It’s normal to fret and worry about what may happen in the future. I am not normal either. Most times my brain does not wander into good or bad speculation on the future. I think that’s what makes me a happy person. I’m just not smart enough to be worried and miserable. Oh yeah, and bourbon helps. There I am in a nutshell.

I am here because of Libor.

Libor is a benchmark financial index. It’s almost like the Prime Rate or maybe the S&P 500 stock market index. It’s supposed to give a person a quick snapshot of what is happening in the market without going into the details. The details of how Libor was derived changed and morphed a few times over the years. It was created in the 1980’s as a way for the banks that set the index to all share loans and risk using the Libor rate as the benchmark. As an example, if a customer needed 500 million dollars, and none of the banks wanted to lend the full amount, the loan could be broken up between the lenders, all using the blended rate that Libor was. It was supposed to make things easier and flexible and it served its purpose well for a while.

Initially, each of the panel banks would post the rate in each tenor (1 day to 365 days) where they would loan money to another prime bank. Prime just meant a bank with a high credit rating. So the rate was a loan rate to start out. Since the banks in the index were all prime banks and were 95% doing trades with just each other, it was a simple way to throw a rate on something. The index employed a trimming process where the highest and lowest rates were dropped from the calculation. This was supposed to filter out some of the noise, since it was an imprecise endeavor. The trimming process also kept the banks in check from playing games because one bank could not move the overall rate to gain an advantage. In those days, there was also another check in the process. The rate each bank posted in each tenor was a live rate. If a bank posted a stupid low rate one day, all the other 15 banks in the process could call that bank up and make them loan money to them at that price. The price had to be somewhat of a market rate or the other banks could arbitrage the outlier and the offending bank would lose money. Then it changed. Here is where the story gets creepy as only the UK banking sector can get.

In 1998, the calculation changed from a loan rate to a borrow rate. Why? I have no idea. How? I have no idea. Who decided? I have no idea.

At the time, the British Banking Association (BBA) was in charge of Libor. Not really sure anyone knew who they were. At some point a committee called the FXMM was formed, consisting of one member of each bank to meet with the BBA and discuss Libor issues. I don’t know when that committee was formed or if they decided to change the way the rate was calculated. But it gets fucking hilarious from there. Someone changed the definition of Libor but never announced it, the BBA just updated their web site. Here is why that was so funny.

I was in New York and learned what Libor was from reading an old Money Market text book in the early 1990’s. It was a loan rate. When the definition changed in 1998, I had no idea. It was a big change, three to four basis points. I don’t think I found out until well after the investigation started in 2010 of that change. I should be embarrassed, right? Mr. Fucking Banker is trading shit that he doesn’t even know the details of. Here is where it gets funnier and why I’m not embarrassed. At least half of the banks that set the rate never knew the change was made. Here is why.

Libor was the little golden goose of the BBA and the UK banking system. The more it was used the more licensing money was brought in, and the more the UK stayed relevant as a banking center. They guarded this product like the golden goose it was. Even back then. Remember that, as it gets more important as the years go on. People would come and go on this FXMM committee that ran Libor.

When none of the changes were announced, new people would come onto the committee and even they had no idea the definition had changed. And they were the jamokes setting the fucking rate. Tons of documentary evidence exists of that occurring, which boggles my mind. So after 1998, half the panel set the rate one way and the other half set it the other way. That’s some crazy shit right there, especially when we find out that even until 2008 the setters at Deutsche Bank still did not know and were adding 4 whole basis points to get to the loan rate. Which was the totally wrong rate. God damn that’s so fucking funny. For those skeptical, I now have forty pages of BBA meeting minutes and thirty FBI interviews to show you.

So starting in 1998 each bank was supposed to post the rate where they could theoretically borrow money in the market from another bank if they needed it. On some random, unfixed amount. It was a benchmark, not a real rate, so it was meant to be imprecise. That created another problem. On a daily basis, each bank could borrow money at multiple different rates. For instance, if a person goes to one bank to borrow for thirty years, and then goes to another bank for the same thirty years, chances are the rates will be similar, but different. Especially if the amount is random and unfixed. The solution to that was to let each bank pick arbitrarily from the rates available to it for its Libor rate that day.

The range.

I had no idea of any of this. I found all of these details as my case went on. All I had known about Libor was gleaned from a trip to London I took in 1996. I had just started at Deutsche Bank the year before to start a Commercial Paper desk (not related to Libor). I spent a week in London rotating to all the different desks as a stranger. What I took home from my day on the Libor desk in London in 1996 was simple. It’s a loan rate. Each bank has bid/offer flexibility. Trimming makes flexibility possible, making only bank to bank collusion against the rules. I did not find out anything further for fifteen years.

Jeez, now even I’m starting to get confused. Where the hell were we? It’s only 10 a.m. right now but all this Libor talk is giving me the urge to switch from brown energy (coffee) to brown courage (bourbon).

Okay, I’m retraining my thought. I think the death knell for Libor as a viable product was in 1999-2000. That is when banks stopped lending to each other because of balance sheet restrictions in the accounting world. That was what caused Libor to become a daily guess. Just a guess. In 2000 I took over the bank Asset and Liability desk at Deutsche Bank. I immediately found that Libor was not doing what is was supposed to do. The numbers did not correlate to anything. I decided to abandon any trading in Libor products with the exception of the futures, which were only loosely tied to the daily settings. The two deciding factors for me were the lack of underlying transactions for Libor as well as the close-knit London bank mentality. It made sense for me to find other products to manage my risk. A New York person would never be able to sort out Libor. I take pride in figuring out Libor was not a viable product seventeen years before the UK and the markets finally figured it out and decided to abandon it as well. I know what you’re thinking. How can you be patting yourself on the back, asshole? You ended up getting charged. Touché.

I blissfully had no contact in the Libor world from 2000 to 2005 at my own accord. Then I got forced into taking over a derivative desk (2005) and that is where my problems started. On the bank Asset & Liability desk, the only customers I had were cash customers, borrowing or lending cash. That meant that I had sole discretion in every other product I used. My choice. The derivative desk was different. It was a market-making desk. That means that customers would come in to that desk and ask for the traders to make them a market. So instead of you deciding what products you are involved in, the customer dictates. One of the derivative desk responsibilities was for the Libor product, so I begrudgingly had to accept it was back in my life. I would still try to keep it out as much as I could.

To this day I estimate the total time I spent on Libor from 2000 to when I left Deutsche Bank in March of 2008 was less than 30 minutes total. Total. I guess if I go to trial and get found guilty and go to the big house I will have to calculate how much time I spend in prison per minute of my involvement with Libor. Even I can do that calculation. I think.

2

N

ow that you know what

Libor is (or was), let’s go back to the beginning of the investigation. It wasn’t even a pimple on my ass in 2010 or 2011 when a few articles came out. I only remembered I had issues with our London office over Libor (and everything else they did). That was it. The first few articles in the press that snuck out were regarding collusion between banks. That pertained to banks working in a group to align their risk and then have rate submission discussions between them. A cabal of banks together could move the index substantially in their favor. Even Mr. Half-an-hour of Libor (my wife calls me Mr. five-seconds) knew collusion was against the rules. I also thought collusion between banks was probably a reason why Libor was never where I thought it should be. I now know that was only a part of the problem. Either way, I felt victimized by what was going on in the Libor arena in London so I was happy someone was finally going to get to the bottom of how fucked up Libor was. Ends up my wife has been right all these years. I really am an idiot.

I had been out of the business for three years at that point and only had one trader involved with Libor from 2005 to 2008. Everyone else I had steered away. He had no choice but to be involved. When I took over the desk in 2004/2005, I terminated two Libor-only traders. I never used them to make Libor hedges for me in my cash business, so they were dying a slow death anyway. When they departed, anything Libor related was sent to Parietti. He was a smart fella and in charge of Overnight Index Swaps (OIS) for the desk. Parietti lived in my town, three or four times a year and after I left the bank, he and I and a few others would grab a beer or ten. One of those times he told me Deutsche Bank was also investigating its Libor department. I was not surprised, nor did I care. I was not even worried about Parietti at that point. I still did not remember anything other than hating Libor and that I was being proven right about it. I knew I’d never broken any rules in it and I had doubted that Parietti had either. Ah, the bliss of ignorance rears its ugly head.

The next time I saw Parietti a few months later in 2012 or so, he seemed depressed and told me that the Libor investigation was casting a black cloud over Deutsche Bank. I was more worried that he would be guilty-by-association with our London office. I had no idea what happened at Deutsche Bank after I left. A person just assumes the world stops and stays static, like their memories after they leave. That would be another assumption that would bite me in the ass. But I was still not paying attention.

When I heard Parietti left Deutsche Bank in late 2012, I was also told that he left with all his deferred compensation intact. To me that was a good sign, that his conduct was investigated and he was deemed free and clear to go on with his life. If he had done something wrong, there was not a chance in hell they would let him leave with money they could have clawed back from him. After all, two traders from Deutsche Bank that were colluding with other banks had been fired and their deferred compensation was taken back by the bank. I thought things were going swimmingly. I was proven right about Libor and I had the forethought to keep New York out of the mess. Now I feel like a fool, and certainly not a spool. I know it makes me look now like a moron or worse, but that’s how I felt at the time. I don’t mind being wrong and looking like an ass; it won’t be the first time and it won’t be the last time.

As 2013 started, I was under the impression the Libor investigation was over at Deutsche Bank and the only bad shit they found was the two guys they fired. You could have knocked me over with a feather when Deutsche Bank legal started calling me at the beginning of 2013 to go over a less-than-handful amount of emails. If they would have called me six months previous, I would have spoken to them just to make sure Parietti did not get hassled for something I instructed him to do. Since Parietti was free and clear, I assumed Deutsche Bank was just tying up loose ends as the investigation finished. I declined to speak to them and figured it was all over. I figured the last step would be that the government would agree on a fine with Deutsche Bank and life goes on.

So, ya know all that I just wrote about how the investigation worked? Well, that is absolutely what I thought would be happening at the time. It ends up I was so far off about how these types of investigations go that I have to chuckle at what a simpleton I am. I found out the hard way I was wrong about how it was all going to work. The next two things that happened smacked me in the face like a one-two punch from Tyson.

First, Deutsche Bank legal called and told me they had given my contact details to the Department of Justice. What the fuck does that mean? was about all I could spit out on that call. They told me to get a lawyer and that they would indemnify (pay) me for it. They claimed it could mean anything. I was suspecting that wearing milk-bone underwear may be attracting the dogs. That was the left part of the 1-2 punch. The right came a day or two later when the FBI drove by my house as I was leaving on a booze run. Then the FBI called me that night to say they were investigating my colleagues in London and wanted to talk to me. He said they were just starting the investigation. Just starting? It will all become clear later. For now, let’s soldier along in the story and we will revisit the investigation later. Hopefully when I am good and buzzed.

Deutsche Bank was paying for my lawyer, so I was happy to talk to the FBI. I thought they’d be interested to get to the truth and sort it all out. I still didn’t feel worried, more like hassled. I had pulled the rip cord on the whole fucking financial business five years previously. Five years. And I could not remember a damn thing. I better start trying to remember, that’s for sure.

After speaking to the lawyer that Deutsche Bank found for me, I wanted to gather as much information as possible from Deutsche Bank so I could refresh my memory. My lawyer and his junior lawyer were liaising with the DOJ to sort out an interview date. We picked a day to visit Deutsche Bank’s external counsel to read these emails and listen to whatever tapes they had. It was a big waste of time. The rules say that only emails or tapes I am on can be listened to. There were maybe three or four emails and one or two tapes. All useless and standard. I had remembered by that point that starting in 2004 we were told to communicate all of our Libor risk to our submitters who input the rates in London. I did not even question for a minute that those emails were a problem. I was speaking to our own bank following the policy from the hotshot executives in London. Back then I was so happy to have my job considering what I knucklehead I was that I would not fart without checking that it was not against the rules. As my lawyer said leaving that day, You can’t have a conspiracy with yourself. I was more worried that I did not have enough memory refreshed to help the investigation, I was not worried about my part in it. My stupidity must be getting old to you by now. Think about how my wife feels, she has been dealing with it for twenty-eight years now.

After we set the date in May 2013, for the interview with the DOJ, other alphabet soup agencies were coming out of the woodwork to be included in the interview. I let my attorney figure out the rules of the interview, I did not give a shit. The truth is the truth. I had a queen-for-the-day proffer. Apparently that agreement means any truthful statements you make in that interview cannot be used against you in a proceeding. Just like everything else, I found out that was a big lie as well. I’ll know for next time. Haha.

DOJ. FBI. CFTC. FCA. Who the fuck was not there? Bring ‘em all in so I only have to say it once. We went to a building in downtown New York, some anti-trust building. In some dingy conference room, fifteen to eighteen people used drills on my knees and water torture to extract Libor information from me. Nah, just your basic question and answer session with an ambush mixed in for good measure. There were one or two emails Deutsche Bank never showed me that appeared in the interview. Big deal. The interrogators also inferred I was having conversations about Libor with Bank of America. Those conversations turned out to be with our Business Area Controllers. BAC was what we called our internal accountants; the brain surgeons at the DOJ thought it was BOA because BAC is Bank of America’s stock symbol. That really should have been my first sign that they didn’t have a fucking clue what they were talking about. It should frighten us all. Truly.

So after over seven hours of answering every damn question with everything I could remember, I got to go home. My lawyers were not worried, neither was I. Their advice was go live your life, who knows what, if anything, would happen next. That was May, 2013. I did not hear anything from the government until September, 2015. We will get back to that later.

3

F

or now, let’s get back

to the investigation. I have been so kind as to lay out my lack of mental acumen by telling you what I thought was going on behind the scenes in the investigation. Now let’s go to what was actually happening during that time. Of course, I found out all of this later. To the best of my knowledge, this is how it played out. There are some interesting details I have not confirmed yet, so I won’t speculate here. But I hope to confirm them someday because it’s really quite extraordinary.

After a few articles in 2008 and 2009 regarding Libor problems, other banks started internal investigations. At the same time, the Commodity Futures Trading Corporation (CFTC) and the Securities and Exchange Commission (SEC) were getting interested. One of the UK banks disclosed its own bunch of emails to the CFTC and the race was on. There was a mixture of communications. Some were traders communicating with submitters (similar to mine, called fine-tuning), some were banks co-ordinating submissions with other banks (collusion), some were communications about artificially keeping each bank’s submission low to make it look like they were not having funding problems (lowballing). Finally, there were communications of submitters using their brokers in London to mislead each other to get the overall rate to move (badgering the brokers).

So, there was a lot of different activity going on within the Libor world. The CFTC got those communications and I am sure they thought they were going to light the world on fire. So they opened up more investigations. In the UK, the FSA, later to become the Financial Conduct Authority (FCA), was slow getting to the ball. A combination of not wanting to kill the golden goose for the UK, and also wanting to sort through the rules to make sure they separated the permitted conduct from conduct against the rules. While they were doing that the US agencies were speeding forward and other alphabet soup agencies in the US were joining the party. They never tried to understand how Libor was administered by the BBA. They never looked at the whys of the situation. They were committed.

Not only were they committed, their assumptions were putting the UK agencies in a very awkward place. They were accusing the UK agencies of being slow, stupid, or corrupt. By the time the UK agencies had sorted through what the rules were and why certain conduct was within the rules and certain was not, it was too late. They had been run over by the US authorities and needed to toe the line, or else they would be cut out of the big fines the banks were going to have to pay. The bulk of the communications sounded much worse than was the actual conduct. But it was too tough for the banks to fight about nuances, so they got on their knees and started paying.

That was the big picture. At Deutsche Bank, they got a request from one or the other alphabet soup agencies in the US to start culling through the communications. The CFTC told Deutsche Bank an internal investigation would not be sufficient. They instructed Deutsche Bank to hire outside counsel to do a full investigation. This was sometime in 2011. From that point forward you had the following parties involved.

Deutsche Bank Lawyers

External lawyers from some Paul, Weiss place

CFTC

SEC

DOJ/FBI

FCA

BOE (Bank of England)

US FED (Federal Reserve NY)

NY DFS (NY Department of Financial Services)

I’ll bet I missed a few as well. I got the privilege of listening to all those agencies fight and snipe at each other at my interview. It was sadly comical.

We all know the mistakes one big government agency can make. The bigger the agency, the bigger the mistake. Now add all these agencies and two different countries. No wonder it ended up where it did. My head hurts and I need a fucking drink. Back in a minute.

OK, now that I got a full glass, let’s soldier on and I’ll try to regain my composure.

I’m back. Feeling better now. Where were we? Oh yeah, the investigation. The government knows this will be a huge, multi-bank investigation. They also know they have the banks by their little raisins. The solution is to instruct the banks (in this case Deutsche Bank) to hire independent outside counsel and do a full blown investigation. They keep the government agencies abreast of the investigation and the government lets counsel know where they want to go next. After the investigation is complete, the independent counsel hands over the results of the investigation to the government. They do presentations called white papers. Some of those presentations actually disappear after they are given so no one can reference them again. Sounds pretty dodgy to me. The best part for the government is they make each bank pay for their own investigation. Deutsche Bank spent 100 million bucks. I should have gone to law school.

Another thing that makes me feel uneasy about this arrangement is that it muddies the independent waters. I’m sorry, I might have been born at night but I was not born last night. If Deutsche Bank is footing the bills, they are also getting some type of access to the investigation. Knowing the players up the line at Deutsche Bank during those years, I can only imagine the shenanigans. I was left exposed as well by not being employed by the bank anymore. I was an easy target to throw