A long-running investigation into Wall Street's manipulation of interest rates is heading into a stark final chapter as authorities around the globe push Deutsche Bank to pay a record penalty and accept a criminal guilty plea for the unit at the center of the case.
Deutsche Bank, Germany's largest financial institution and one of several banks linked to the gaming of interest rates, is in talks to resolve the case as soon as this month, according to people briefed on the matter. A deal — which involves federal prosecutors as well as New York State's financial regulator and regulators in London and Washington — would be one of the last cases to arise from the sweeping investigation into the London interbank offered rate, or Libor.
The contours of Deutsche Bank's planned settlement, described by the people briefed on the matter who were not authorized to speak publicly, show the perils of going last. Collectively, the authorities are expected to collect more than $1.5 billion from Deutsche Bank, eclipsing all past settlements with banks accused of Libor manipulations. The Justice Department also conditioned the deal on one of the bank's British subsidiaries' pleading guilty to fraud, in what would be the most significant banking unit to accept a criminal plea in the Libor investigation.
A settlement, while providing some closure to Deutsche Bank, would not end the bank's legal problems. Just as lawmakers cast Goldman Sachs as a villain in the wake of the financial crisis, and as JPMorgan Chase's platinum reputation suffered from multiple investigations, Deutsche Bank now appears to be financial regulators' bête noire — at least for the moment.
The bank, which supporters portray as more of a punching bag for regulators than a problem child in the financial system, also faces investigations into currency manipulation and violations of United States sanctions against countries like Iran.
In addition to those inquiries from prosecutors and the New York regulator, Deutsche Bank's American operations butted heads with the Federal Reserve, first for lax internal controls, and then when a unit failed the Fed's annual stress tests because of what were called "substantial weaknesses." (That unit was the only bank taking the Fed's stress test for the first time this year, and Deutsche Bank has said it is "committed to strengthening and enhancing its capital planning process.")
In a statement, Deutsche Bank said, "We continue to work with the authorities that are reviewing interbank offered rates matters."
In the past, the bank has said it has "undertaken significant measures to enhance its systems and controls." And according to two of the people briefed on the matter, the bank has dismissed about a dozen employees tied to the Libor case.
With that case, a final phase gets underway in an investigation that has unnerved the banking world for years. Since the first Libor settlement in 2012, when Barclays paid $450 million and avoided criminal prosecution, fines have climbed and guilty pleas have become more common.
Against that backdrop, prosecutors are also pursuing guilty pleas from banks suspected of manipulating the prices of foreign currencies. In recent weeks, prosecutors have negotiated with four banks — JPMorgan Chase, Citigroup, Barclays and the Royal Bank of Scotland — about having one of their large units plead guilty. Those cases, which would include the first guilty pleas from giant American banks in decades, could be announced as soon as next month.
Still, the new cases may not mollify critics who question why no top Wall Street executive went to prison over the 2008 financial crisis. And now, although the Justice Department has criminally charged 12 people for manipulating Libor, three of whom pleaded guilty, it is unclear whether any Deutsche Bank employee will face charges in the case.
The Libor investigation, which began seven years ago with a single investigator at the Commodity Futures Trading Commission in Washington, has not wanted for lack of government enthusiasm. Deutsche Bank is pitted against four agencies: The Justice Department's criminal division; the New York State Department of Financial Services, led by Benjamin M. Lawsky; the C.F.T.C.; and the Financial Conduct Authority of Britain, which separately cleared the bank in the currency investigation.
The agencies all declined to comment.
It is no coincidence that Libor, an average of how much banks say they would pay to borrow from one another, struck a nerve with government authorities. As a benchmark for trillions of dollars in credit card loans and other financial instruments, Libor is a cornerstone of the financial marketplace.
Evidence that banks lied about what they would pay if borrowing from other banks — using their submissions to push reference rates up or down to suit their own financial needs — set off investigations around the globe.
Since December 2013, the European Commission has penalized several banks suspected of colluding to fix benchmark interest rates. Deutsche Bank paid more than $900 million, more than any other bank, partly because of its outsize share of the market for derivative securities tied to interest rates.
Now, in the negotiations with American and British authorities, Deutsche Bank is again being pushed to pay more than its peers. According to the people briefed on the matter, Deutsche Bank is expected to pay more than the $1.5 billion that UBS paid in 2012, a measure for all other Libor settlements.
Yet the exact settlement sum remains in flux. At a meeting in Washington this week, the people said, the bank's general counsel pushed for a smaller penalty. That meeting came days after Deutsche Bank's lawyers met in Mr. Lawsky's office to discuss similar issues.
A number of factors are driving up the size of the penalty on Deutsche Bank. For one thing, questions have arisen about whether the bank was too slow to produce documents when the investigation was just beginning years ago, according to the people briefed on the matter.
The demand for a steep payout also reflects the timing of the negotiations. Unlike UBS and Barclays, which volunteered to settle early on in the case, Deutsche Bank is ineligible to collect the equivalent of an early-bird discount.
And much has changed since those early days of the Barclays case, when the bank's $450 million fine ignited an uproar in Britain that ultimately led to the ouster of the bank's chief executive, Robert E. Diamond Jr. Today, now that five Libor settlements are under the belts of American authorities, $450 million would barely grab headlines, let alone cost a chief executive his job.
And since late 2012 — when UBS's Japanese unit pleaded guilty — prosecutors have expanded their push for plea deals.
In the Deutsche Bank case, the proposed guilty plea is the product of compromise.
At one point in the negotiations, Deutsche Bank faced the possibility that its main banking arm would have to plead guilty. Instead, prosecutors chose to focus on the Deutsche Bank subsidiary, where much of the misconduct is thought to have occurred.It is unclear whether the authorities will pursue additional Libor settlements after wrapping up the Deutsche Bank case. Three American banks that have come under scrutiny — JPMorgan Chase, Citigroup and Bank of America — might face actions from regulators. But the breadth of the wrongdoing at those banks may not give rise to criminal cases.
Another wild card is Mr. Lawsky. Until now, his office has not played a role in the Libor investigation. (He does not regulate UBS, and his office was in its infancy when the Barclays case was announced.) Moving forward, it is unclear whether his office will pursue other banks, though he recently hinted at concerns about banks manipulating the markets.
"To state the obvious: Markets do not just rig themselves," he said in a speech last month. "It requires deliberate misconduct by individuals."