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UBS Unit Said to Be Close to Guilty Plea in Rate-Rigging Scandal

Gianluca Colla | Bloomberg | Getty Images

Federal prosecutors are close to securing a guilty plea from a UBS subsidiary at the center of a global investigation into interest rate manipulation, the first big bank to agree to criminal charges in more than a decade.

UBS is in final negotiations with American, British and Swiss authorities to settle accusations that its employees reported false rates, a deal in which the bank's Japanese unit is expected to plead guilty to a criminal charge, according to people briefed on the matter who spoke of private discussions on the condition of anonymity.

Along with the rare admission of criminal wrongdoing at the subsidiary, UBS could face about $1 billion in fines and regulatory sanctions, the people said.

The steep penalty, a surprise given the bank's cooperation in the case, would represent the largest fine to date in the rate-rigging investigation. In June, the British bank Barclays agreed to pay $450 million to settle accusations that it influenced crucial benchmarks.

The settlement with UBS, which is based in Switzerland, could come as soon as Monday, the people briefed on the matter said. These people cautioned that the bank's board had not yet approved the deal and it could still fall apart.

By pushing for a guilty plea, the Justice Department may be signaling a new aggressive stance.

Authorities have been reluctant to indict big banks, fearful of the potential for job losses and the ripple effect through the broader economy. If a bank pleads guilty to a crime, the case can be tantamount to a death sentence because the institution may lose its charter to operate.

With UBS, federal prosecutors are trying to strike a balance. By levying a charge against the subsidiary, authorities send a powerful message, but stop far short of putting the company out of business.

Prosecutors decided against indicting HSBC over money laundering, concerned over the repercussions to the financial system. Instead, HSBC, the British bank, agreed on Monday to pay a record $1.9 billion in penalties.

On Thursday, Senator Charles E. Grassley of Iowa, the top Republican on the Senate Judiciary Committee, sent a letter to Eric H. Holder Jr., the attorney general, criticizing the Justice Department for an "inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists," referring in part to the HSBC case.

Mr. Grassley called the fine "hardly even a slap on the wrist," given HSBC's profit.

But the UBS case offers authorities a long-awaited moment to criminally punish a big bank. While the public is still simmering over the lack of prosecutions stemming from the financial crisis, the actions against UBS could help damp concerns that the world's largest and most interconnected banks are too big to indict.

The Justice Department's criminal division, which arranged the guilty plea with the Japanese subsidiary, could also strike a nonprosecution agreement with the parent company, the people briefed on the matter said. The deal will force UBS to continue cooperating with the wider rate manipulation case.

In a statement, a UBS spokeswoman said the bank continued "to work closely with various regulatory authorities to resolve issues relating to the setting of certain global benchmark interest rates. As we are in active discussions with these authorities, we cannot comment further."

The authorities leading the case — the Justice Department, the Commodity Futures Trading Commission, the Financial Services Authority of Britain and the Swiss Financial Market Supervisory Authority — declined to comment.

As the UBS investigation comes to a close, global authorities are fast-tracking several civil and criminal cases in connection to the manipulation of important benchmarks, including the London interbank offered rate, or Libor.

Regulators and prosecutors have uncovered evidence that points to a systemic problem with the rate-setting process, which underpins trillions of dollars of financial products like mortgages, student loans and credit cards.

Authorities contend that some bank employees reported false rates to squeeze out extra trading profits and deflect concerns about their health during the financial crisis.

The fallout from the Libor case could be significant. The Royal Bank of Scotland has indicated that it could announce penalties before its next earnings release in a couple of months. Deutsche Bank also has set aside money to cover potential fines. In all, the investigation has ensnared more than a dozen big banks.

The push for criminal charges at UBS caught the bank off guard.

After settling a tax evasion case in 2009, the bank was eager to cooperate with authorities and gain leniency in the Libor case. UBS, for example, reached a conditional immunity deal with the antitrust arm of the Justice Department, which was supposed to protect the bank from criminal prosecution under certain conditions. But the deal did not extend to the Justice Department's criminal division, giving authorities some leeway to take action.

With its reputation and profits on the line, the bank moved to dissuade the criminal division from pursuing charges. Bank officials have been meeting with authorities in Washington in a last-ditch effort to influence the outcome, according to the people briefed on the matter.

Eventually, the bank agreed to the broad contours of a settlement that included a guilty plea by the Japanese subsidiary. The bank is still negotiating the final elements of the deal.

Prosecutors are also expected to charge a former UBS trader who featured prominently in the investigation. On Tuesday, Britain's Serious Fraud Office arrested three men in connection with the Libor case, including Thomas Hayes, a 33-year-old former trader at UBS and Citigroup, according to people with knowledge of the matter. The three men, which also included two people who worked at the British brokerage firm R P Martin, were released on bail the same day.

A lawyer for Mr. Hayes could not be located.

Mr. Hayes is expected to be a central figure in the case against UBS. The UBS settlement is likely to include accusations that Mr. Hayes and other employees colluded with traders at other banks to influence the direction of interest rates, as part of a broader scheme to increase their profits. Some UBS traders have been suspended or fired over the matter.

Mr. Hayes built his reputation as an interest rates trader at UBS. He worked at the Tokyo office of UBS from about 2006 to 2009 before departing for Citigroup. Citigroup fired Mr. Hayes the next year, for approaching a trading desk about influencing the yen-denominated Libor rates, and the bank reported his actions to regulators.

The role of Japanese operations came to the forefront last December when the country's regulator sanctioned both UBS and Citigroup. Local regulators discovered that traders at the banks had tried to manipulate the Tokyo interbank offered rate, or Tibor, a main benchmark for borrowing in Japan.

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