Royal Bank of Scotland Group Plc managers condoned andparticipated in the manipulation of global interest rates,indicating that wrongdoing extended beyond the four traders thebank has fired.

In an instant-message conversation in late 2007, Jezri Mohideen,then the bank's head of yen products in Singapore, instructedcolleagues in the U.K. to lower RBS's submission to the Londoninterbank offered rate that day, according to two people withknowledge of the discussion. No reason was given in the message asto why he wanted a lower bid. The rate-setter agreed, submittingthe number Mohideen sought, the people said.

Mohideen wasn't alone. RBS traders and their managers routinelysought to influence the firm's Libor submissions between 2007 and2010 to profit from derivatives bets, according to employees,regulators and lawyers interviewed by Bloomberg News. Traders alsocommunicated with counterparts at other firms to discuss whererates should be set, one person said.

“This kind of activity was widespread in the industry,” saidDavid Greene, a senior partner at law firm Edwin Coe LLP in London.“A lot of the traders didn't consider this behavior to be wrong.They took it as the practice of the trade. This is how thingsoperated, and it seemed harmless.”

RBS, 81 percent owned by the British government, is one of atleast a dozen banks being probed by regulators worldwide overallegations that traders colluded to manipulate the benchmarkinterest rate so they could profit from bets on interest-ratederivatives. Barclays Plc, Britain's second-biggest bank, was fined290 million pounds ($470 million) in June for rigging the rate,used for more than $300 trillion of securities ranging frommortgages to student loans. Chief Executive Officer Robert Diamondand Chairman Marcus Agius resigned in the aftermath.

Regulators are now probing RBS's yen, Swiss franc and U.S.dollar sales-and-trading businesses, all part of the fixed-incomedivision Fred Goodwin expanded before he was ousted as CEO in 2008,said two people who asked not to be identified because the bank'sinternal investigation, begun more than two years ago, is still inprogress. Investigators are focusing on the firm's swaps,inflation-trading and foreign-exchange teams, as well as onmoney-market traders who made daily Libor submissions, the peoplesaid.

The rate-rigging allegations are the biggest blow to theEdinburgh-based lender since it took 45.5 billion pounds fromtaxpayers in the largest bank bailout in history and Stephen Hesterreplaced Goodwin. Analysts including Morgan Stanley's Huw vanSteenis estimate the scandal may cost RBS, the country'sthird-biggest bank by assets, more than any U.K. competitor.

RBS fell as much as 1.8 percent and was down 1.2 percent at268.20 pence as of 11:45 a.m. in London trading today.

Rate-Setting

The process of setting rates was open to abuse because RBSfailed to establish guidelines until June 2011, four peoplefamiliar with the business said. Managers encouraged rate-settersto discuss Libor with traders across the company as a way ofensuring the bank's submissions reflected market conditions,particularly after money markets froze in 2007, the people said.These communications — by e-mail, instant messages and telephone —are the focus of regulators' probes.

The bank's seating arrangements helped facilitate theseinteractions. Money-market traders who made the firm's daily Liborsubmissions sat on the same desk as derivatives traders whoseprofits rose and fell depending on where Libor was set, threepeople said. When the rate-setters were away, derivatives traderswere asked by managers to make the submissions themselves, thepeople said.

The U.K.'s Financial Services Authority imposes no restrictionson banks to prevent communications between traders and rate-settersabout Libor beyond a broad requirement for them to identify andprevent conflicts of interest, according to guidelines posted onthe agency's website.

RBS fired four employees last year for allegedly rigging Liborrates. So far no senior managers have been suspended or fired,according to a person with knowledge of the matter.

The bank is weighing disciplinary procedures against someemployees, one person said. As part of the probe, in-houseinvestigators have to draw the distinction between undue influenceand reasonable sharing of information within the firm, two peoplesaid.

Mohideen Denial

Mohideen, who joined RBS in 2006, was put in charge of ratestrading for Europe and the Asia-Pacific region in 2010. In January,he welcomed an award presented by Risk magazine naming RBS as thetop provider of inflation derivatives as a “great endorsement” forthe unit, which allows customers to speculate on consumer-priceindexes, according to a statement from the bank. He also sits onthe global rates board of the Association for Financial Markets, aLondon lobbying group.

Mohideen denies he pressured anyone to submit false rates.

“That didn't ever happen,” he said by telephone.

He referred all further questions to RBS spokesmen. The banksaid in a statement that its internal probe into rate-rigging iscontinuing and that it's cooperating with regulators.

“We have to make an apology for the behavior of a few of ourtraders,” Finance Director Bruce Van Saun said in an Aug. 3Bloomberg Television interview as the bank posted a 22 percent dropin second-quarter operating profit.

Hester told reporters on the same day that, for the industry,Libor has “more to do with the wrongdoing of individuals than it isto do with a systemic problem.”

Libor is calculated by a poll carried out daily on behalf of theBritish Bankers' Association that asks firms to estimate how muchit would cost to borrow from each other for different periods andin different currencies. The top and bottom quartiles of quotes areexcluded, and those left are averaged and published for individualcurrencies before noon in London.

Regulators are examining whether traders tried to rig benchmarkrates for profit, sometimes by colluding with their counterparts atother firms. They also are examining whether some lendersunderstated their borrowing costs during the financial crisis toappear healthier than they were.

At RBS, watchdogs are focused on whether traders attempted torig the benchmark rate for profit rather than whether the firmartificially depressed its Libor submissions to look better, twopeople familiar with the probes said.

The Monetary Authority of Singapore is asking lenders who arepart of the Association of Banks in Singapore's rates-setting panelto review the process for non-deliverable forward foreign-exchangecontracts, the central bank said in a statement yesterday. Banksshould report any irregularities immediately and take disciplinaryaction against any staff involved, it said.

The banking group sees “the need for stringent and robustprocesses to be in place to ensure the credibility and integrity ofthe rate-fixing process in Singapore,” it said in a statement.

Goodwin Expansion

The alleged manipulation followed an expansion at RBS underGoodwin, Chairman Tom McKillop and Johnny Cameron, chairman of theinvestment bank. The company's balance sheet ballooned to 2.4trillion pounds in 2008 from 369 billion pounds in 2001, Goodwin'sfirst full year as CEO.

Goodwin didn't respond to a request for comment through hispublic-relations firm. Cameron didn't reply to a telephone messageleft at Gleacher Shacklock LLP in London, where he's a senioradviser. McKillop didn't answer requests for comment left at Swissdrugmaker Evolva Holding SA, where he is chairman.

The traders RBS fired last year for inappropriately seeking toinfluence yen Libor submissions are Tan Chi Min, the company'sSingapore-based head of Asian delta trading, which makes marketsfor clients seeking to trade securities tied to interest rates andalso places its own bets on their future direction; Neil Danziger,a yen foreign-exchange trader; and Paul White, one the bank's mainrate-setters in London. Andrew Hamilton, a London-based Swiss francrates and foreign-exchange trader, also was dismissed for askingWhite to change RBS's Libor submissions for the franc.

The former employees declined to comment or couldn't be tracedthrough the Internet or directory assistance.

At least three more traders were suspended for similar conduct,two of whom were later reinstated, people familiar with thesuspensions said. While U.S. regulators are examining wrongdoing byU.S. dollar traders, no one has been fired.

Tan sued the bank for wrongful dismissal in December, allegingin his suit at the Singapore High Court that rate manipulation wassystemic at RBS and involved traders and managers across thecompany.

Senior Managers

Tan also named Mohideen in his lawsuit as one of the managerswho sought to influence RBS's yen Libor submissions. Other managerswho acted in the same way, according to Tan's suit, include RobertBrennan, now Singapore-based head of treasury markets for Asia, andKevin Liddy, the London-based global head of short-terminterest-rate trading.

The practice was well-known to senior managers including ScottNygaard, global head of RBS's treasury markets in London; ToddMorakis, the Singapore-based head of trading for emerging markets;and Lee Knight, the Tokyo-based chief operating officer of globaltrading, Tan said in his filing.

RBS said in a statement that it's contesting Tan's lawsuit.Nygaard, Morakis, Brennan and Liddy declined to comment whencontacted by Bloomberg. Knight didn't respond to phone and e-mailmessages.

RBS is among 13 banks that set yen Libor, 18 that determine U.S.dollar Libor and 11 that submit Swiss franc rates.

By influencing their own bank's submissions, traders could nudgewhere Libor was fixed each day, helping to boost the value of theirderivatives holdings, Andrew Verstein, a lecturer at Yale LawSchool, said in a paper to be published in the Winter 2013 issue ofthe Yale Journal on Regulation.

This strategy was employed by traders on RBS's swaps,inflation-trading and foreign-exchange desks, all of which builtpositions using derivatives whose underlying value was determinedby where benchmark rates were set, the people with knowledge of thebanks' trades said.

Attempts to rig the rate would be even more effective if done incollusion with counterparts at other firms. Former RBS traders WillHall and Brent Davies are among six people named by Canada'sCompetition Bureau in a probe into interest-rate rigging. Thebureau accused the London-based traders in papers filed with theOntario Superior Court in May of agreeing to participate inattempts to coordinate yen Libor submissions by at least six banks.The regulator is focusing on former UBS AG trader Thomas Hayes,according to a person briefed on the probe.

Interbank Conspiracy

Employees at RBS, HSBC Holdings Plc, JPMorgan Chase & Co.,Citigroup Inc., Deutsche Bank AG, as well as interdealer brokersICAP Plc and RP Martin Holdings Ltd. were involved in theconspiracy, the Canadian regulator said. Spokesmen for the firmsdeclined to comment on the suit. Greg Scott, a spokesman for theCompetition Bureau, wouldn't comment about Hayes.

Hayes worked as a trader at RBS between 2001 and 2003, accordingto the Financial Services Authority register. Hall and Davies leftRBS in 2009, the register shows. Hall now works for Morgan Stanleyin Australia, and Davies is at ICAP in London.

Davies didn't respond to e-mail and text messages, and Halldidn't reply to e-mail and phone messages. Hayes couldn't be tracedthrough the Internet or directory assistance.

Another former RBS trader, Philippe Moryoussef, is beinginvestigated by regulators for leading attempts to rig the eurointerbank offered rate, or Euribor, while he was at Barclays bycolluding with traders at other firms, a person with knowledge ofthe matter said. Moryoussef left Barclays to join RBS in 2007 andworked there until 2009. He didn't return messages sent throughLinkedIn and couldn't be contacted through directory searches inSingapore or London.

The Libor scandal may cost the industry about 7.8 billion poundsin fines and settlements of civil lawsuits, van Steenis, aLondon-based banking analyst at Morgan Stanley, wrote in a July 12report to clients. For RBS, the bill may be as much as 1.1 billionpounds, he said.

The bank is in talks with regulators, making it difficult toestimate the size or timing of any potential settlements, twopeople familiar with the discussions said.

Hester, 51, probably will survive any fine, according to SimonMaughan, a banking analyst at Olivetree Securities Ltd. in London,because he took over in 2008, after the alleged Libor manipulationbegan, and couldn't have been expected to have oversight of allparts of the business immediately.

“There's no doubt that this isn't going to be good for Hester,”Maughan said. “But I'd be very surprised if he's forced out”because of it.

Bloomberg News

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