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LIBOR scandal: Will Feds target not just employees, but a whole bank?

If a bank reporting its lending rates has given intentionally inaccurate numbers, that could be a crime, say experts. Prosecutors have been poring over documents related to LIBOR for two years.

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A man holds an umbrella as he looks out at London's Canary Wharf financial district from Greenwich park on July 2.

Andrew Winning/Reuters

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For a bank, a federal indictment is the ultimate black mark.

That’s why lawyers who deal in securities law say the world’s largest banks will agree to almost anything to avoid getting hit with an indictment connected to the developing scandal over the alleged manipulation of a key bank rate—the London interbank-offered rate (LIBOR).

Although the US Department of Justice is not commenting, some news reports have said it might target a bank, not just the employees responsible for the alleged transgression. The reason to go after both: frustration by officials that a financial institution was a repeat offender or perhaps impeded an investigation.

“Maybe in the mind of the prosecutor, there is such an institution and the prosecutor says, ‘We proceeded civilly with cases against you, and there is no recognition that something culturally has to change with you guys,’ ” says Jim Keneally, a partner in the white-collar practice at Kelley Drye & Warren, a New York law firm. “Maybe you need to punch them in the nose or issue a shot across the bow.”

Prosecutors have been poring over documents related to the actions for two years. What they seem to have discovered is that in the wake of the 2008 financial-industry collapse, employees at large banks were underreporting the interest rates their banks were paying to borrow money from other banks.

This partly bolstered the banks’ profits and made the banks seem to be better credit risks. However, it also hurt pensions and other institutions, which were using the LIBOR rate to offset risks in their own portfolio. Some of those institutions are now suing the banks.

Several state attorneys general are also investigating the actions. In the past, the AGs have sometimes worked together to get settlements, such as the 1998 agreement by the major tobacco companies to pay the states $206 billion over 25 years.

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