Bankers must learn collusion serves nobody’s best interests
• Antitrust cases pile up against banks worldwide over manipulation of foreign exchange rates
It has been 17 years since Boiler Room, and bankers have decided that the only lesson from “pump and dump” trading is that coldcalling investors is an inferior strategy to colluding in online chatrooms.
Unfortunately for them, anticompetitive corporate conduct serves neither the interests of a free market nor government mandates. Throw in manipulation of currency exchange rates and you’re short any legs to stand on, especially when you’re short-changing individuals and institutional investors such as unit trusts and pension funds.
Competition authorities globally have, therefore, turned their attention to the financial sector, particularly securities and foreign exchange markets.
In SA, the Competition Commission’s investigation into forex manipulation at 17 global and local banks mirrors ongoing and closed cases in the US, Europe and Asia. The facts are virtually identical across these cases: colluding in online chatrooms to artificially widen bid/ask spreads for currency pairs such as the rand/dollar. Currency traders profit from the artificial market they create, and investors lose out.
What differs across these jurisdictions, however, is how this kind of anticompetitive behaviour is dealt with.
South African authorities impose administrative penalties to a maximum of 10% of total revenue in the preceding year, although penalties are actually calculated on affected revenue in a base year. Calculating these penalties is dynamic in that it accounts for how long anticompetitive conduct has been occurring. However, the 10% cap still renders it static in effect, because one could factor the cap in ex ante as a once-off cost to colluding profitably.
This is mitigated only somewhat by the corporate leniency policy, which grants immunity to whistle-blowers such as Absa and, therefore, destabilises collusion by increasing the detection rate. Still, in the current case, banks have supposedly been profiting since at least 2007, while the corporate leniency policy was introduced in 1999.
This is where private enforcement through the civil courts comes in. It is seen as a successful way to increase the effective costs of anticompetitive conduct and directly compensate victims for harm suffered.
In the US, enforcement is almost exclusively through civil damages, where victims can seek triple damages for the anticompetitive harm. In the recent US case known as Foreign Exchange Benchmark Rates Antitrust Litigation, banks have agreed to settlements of more than $2bn with victims (mostly institutional investors) to date, to avoid further litigation and the prospect of triple damages.
The headline facts of that case are substantially similar to what the Competition Commission has alleged.
Lo and behold, SA’s Competition Act expressly allows civil damages claims. These must follow from a determination by competition authorities and cannot be claimed by a party if damages have been already awarded to them under any settlement agreement.
Earlier in 2017 the first and only award for damages arising out of anticompetitive conduct was quantified and made in SA. In Nationwide Airlines vs SAA, the High Court in Johannesburg awarded Comair (the parent of now liquidated Nationwide) R1.16bn for abuse of dominance.
While the award may still be appealed, the case highlights how civil damages are increasingly a recourse for victims of anticompetitive conduct – particularly when the money is big.
And the money is likely to be big in the forex collusion case, given the years of conduct and the fact that daily average worldwide forex trading involving the rand is somewhere in the region of $50bn. Also, there is now much more legal clarity around class certification in optin class action suits, because of recent judgments in the highly publicised Tiger Brands bread price-fixing case involving Pioneer Foods.
In light of a favourable ruling from the Constitutional Court, applicants in those cases subsequently managed to settle privately with Pioneer. Here, too, investor groups and institutional investors may be able to certify a class to bring a damages case.
Aside from certifying a class, another challenge in these civil damages cases is quantifying the harm done. Quantification in these cases is exceptionally complex and a matter for experts. No single method is preferred, although the high court in the Nationwide case settled on the relatively simplistic linear interpolation method.
This method essentially plots points in time before and after the contravention to determine a counterfactual scenario where conduct did not occur, to compare with the actual gains made as a result of the conduct.
A much more rigorous method would be needed to assess damages given the inherent volatility of currency moves, but this too can be overcome.
Most important is that investor groups and institutional investors involve themselves in the Competition Commission’s case with a view towards claiming civil damages in future.
Given the political response to this case at the highest levels, the stakes are high and the regulators are out for blood. If the allegations are true, this egregious conduct deserves the bad rap it has received, and investors should be compensated for harm suffered even if they ultimately decide to settle for an amount less than this.
Finally, it serves to mention that SA has followed the US example by including criminal liability in the enforcement mix. As of May 1 2016, managers and directors face penalties of up to R500,000 or 10 years in prison for anticompetitive conduct under the Competition Amendment Act.
As the Boiler Room character Seth Davis says: “I had a very strong work ethic. The problem was my ethics in work.”
MOST IMPORTANT IS THAT INVESTOR GROUPS INVOLVE THEMSELVES IN THE COMPETITION COMMISSION’S CASE TO CLAIM CIVIL DAMAGES IN FUTURE IT SERVES TO MENTION THAT SA HAS FOLLOWED THE US EXAMPLE BY INCLUDING CRIMINAL LIABILITY INTO THE ENFORCEMENT MIX