Commentary - Barclays - NYDFS Last Look Settlement

Potential misunderstanding

This case is not about any ‘controversy’ with Last Look as a practice in general. It is often stated that Last Look is controversial. It is true that there are valid arguments against it, usually advanced by Market Takers. There are at least as many valid arguments in favour of it. This is common in business. But these arguments are not relevant to this case. The following facts prove that the acceptability of Last Look in general was not at issue in this case:

Neither Barclays nor the NYDFS have claimed that Last Look is unacceptable.
Barclays continue to use Last Look near identically to how they used it prior to 2015, as do most similar businesses. The NYDFS monitor was apparently content for this to happen.
No Regulator has prohibited Last Look in eFX.
The Bank of England endorsed Last Look as within best practice.
4 other Regulators investigated Barclays use of Last Look and imposed no censure or sanctions.

Why did Barclays agree to sign the Consent Order?

Barclays litigation department and senior management were unwilling and/or unable to protect their own reputation, their shareholders’ money or the rights of their employees. Given the distinct misrepresentations, distortions and abuses of power contained in the Consent Order, why did Barclays agree to sign it?

It is necessary to understand the context in which this settlement was reached. Barclays had just been fined very heavily for the FX Fixing case by several Regulators and for the LX Dark Pool case shortly prior to this. Not to mention numerous earlier fines and sanctions for other cases. The fines for the FX Fixing case ran to over a billion dollars and the final settlement with the NYDFS for that case was being held up by this new investigation into Last Look. In the dystopian world of Barclays litigation dept. closing out one more of their many ongoing cases for a mere $150 million may have been perceived as a ‘good result’.

There is very little upside for an individual in a crisis ridden organisation to take a stand against unjustified regulatory demands. It might be thought that defending the shareholders’ interests would be a counter weight but in reality the shareholders are a quite distant and diffuse concept compared to an aggressive regulator who can end careers and reputations at the stroke of a pen. Certainly public opinion will be strongly biased against a bank claiming harsh treatment in a dispute with a Regulator regardless of the facts of the case.

A likely explanation for Barclays submission to the NYDFS is that it was simply the path of least resistance¹. The terms ‘settlement agreement’ and ‘consent order’ are misleading in their implication of mutual agreement/consent about the basis for the fine. In reality the NYDFS has been constituted with a concentration of the powers and that are rightly separated in most credible enforcement agencies. The NYDFS acting effectively as prosecutor and judge has one principal sanction it can impose – namely to remove a firm’s banking licence. This is understood by both regulator and regulated firms alike as a nuclear option. It forms the explicit context of every ‘negotiation’ by which the NYDFS impose other lesser sanctions on firms.

“Only one month after the bank got a letter from Lawsky² saying that its New York banking license would be revoked unless it settled up, it agreed to pay Lawsky’s agency $340 million.” …

“Gibson Dunn’s Lee says that many criminal lawyers “perceive the [DFS] settlements to be unfair, because they have so much leverage and are able to use that leverage as a threat to coerce” banks into paying large fines.” Unfair or not, she adds, “the banks are caving.” ” Newsweek 2014

To avoid the nuclear option, firms can be compelled to comply with unreasonable demands or close down their entire US operations. The evidence presented here indicates that this case is an example of extra-judicial corporate extortion. An analogy with the UK criminal justice system, would be if the functions of the CPS, police force, judiciary and jury system were to be combined into a single body and then that body were driven to obtain convictions and fines. The distortion of justice that would follow from this is obvious.

Taking the statements made by Barclays lawyers internally and in their response to the NYAG subpoena and comparing them to the statements their General Counsel signed up to in the Consent Order is very revealing. Their clear understanding of the truth about the application of Last Look is evident in many of the quotes presented in the dissection of the Consent Order. Is it ethical to state one set of facts to one regulator and months later ‘confess’ to contradictory complaints with another? Many, including me, will have sympathy for Barclays’ predicament when faced by the DFS’ unreasonable demands. It could be argued that a firm has the right to submit to unjustified complaints if they deem it commercially expedient, but not if by doing so they implicate their own employees in bogus ‘misconduct’. The end result is, that Barclays have managed to turn being the victim of another organisation’s misconduct into a reputational disaster for themselves.

“To repudiate morality while laying claim to it” – George Orwell 1984

Readers who are resistant to the idea that a US Regulator might act in bad faith should consider what their attitude would be if the same events happened with a Nigerian government entity. International businesses constantly face the requirement to make payments to foreign government agencies, officials and firms. They go under various euphemistic labels such as ‘licence fee’, ‘facilitation payment’, ‘advisory service agreements’ etc. These are often reluctantly accepted as a cost of doing business in different countries. It is also widely understood that coerced confessions were (are?) commonplace in the criminal justice system. They were usually extracted from serial offenders who knew they would be unlikely to be believed over the enforcement agencies prosecuting them. Barclays is just such a corporate serial offender.

If the reader can accept this exists as part of the business environment in some countries and for some accused criminals in UK & US, then they should examine what prejudices are preventing them accepting this as a possibility for financial regulation in New York.

The rewards from the hyper-aggressive approach taken by the DFS are enormous:

“During his time at NYDFS, Lawsky³ raised the bar for regulation and enforcement, sometimes implementing rules and requirements that exceeded federal standards. He led the department in assessing $6 billion in penalties⁴” American Banker

In other recent cases brought against them Barclays have stated publicly that a regulator:

“had overstepped his legal authority” and “do not believe that this suit is justified, and we have a duty to our shareholders, clients and staff to defend our position” …”The bank also said the attorney general had made selective and misleading use of documents”

“Barclays thinks the DoJ’s claims are “disconnected from the facts” and that it has “an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands.”…“A board can’t let $2bn slip out of the door just for the sake of a quiet life.”

However the calculation appears to be different when the sum was ‘only’ $150 million in the Last Look case.

In both these cases Barclays backed down and did negotiate a settlement behind closed doors despite asserting strongly that the cases were unreasonable or unjustified. Given that the Last Look complaint came in between these 2 cases, it is likely that this more submissive approach had been adopted as their chosen tactic in that case as well

What are the lessons for Barclays shareholders?

This case serves as an indication of how baseless a set of accusations Barclays are prepared to submit to and at what price. In this case Barclays shareholders have paid out:

$150 million to the NYDFS
$50 million to a small group of US clients
tens of millions of dollars⁵ on their internal investigation
$1 million⁶ attempting to defend a simple unfair dismissal case
$2 million paying a senior employee for over 3 years to not work for the firm but to fight it instead

All of these costs are unjustified and very likely avoidable. Items 4 & 5 are a direct result of the delaying tactics employed by Barclays both in their internal disciplinary and the Employment Tribunal processes.

Even if 4 Regulators investigate an issue and find nothing to censure, this won’t preclude another Regulator imposing a massive fine along with the associated legal costs and reputational damage. Given the number of Regulators to which an international financial firm like Barclays is subject, there are multiple opportunities to experience the kind of treatment received in this case.

Do not imagine your interests as a shareholder are necessarily paramount when senior staff make decisions. Regulators can exert a far stronger influence on decision making than shareholders.

What are the implications for Barclays employees?

The details of some of the abuse of employment rights is described in detail here. What lessons should Barclays employees take from this case? Firstly, watch your back – if and when it becomes expedient for the firm to sacrifice you they will do so regardless of guilt. Understand that in the horse trading done in private between Barclays lawyers and regulators your interests can be completely ignored and your statutory rights violated if necessary. Look to your own defence – do not assume that in a regulatory enquiry you and the firm are fighting the same fight. The firm’s lawyers may give this impression at first while they need your co-operation. In my case they were happy for me to defend the firm vigorously with 4 different regulators for many months but then literally one day after my final interview with a regulator they decided to suspend me. So you should look to build your own defence of your own conduct independently of the firm’s defence. In practical terms this means gathering your own evidence, in particular written documents, emails & chats. It is against company policy for you to send these documents to personal email addresses so your only option will be to print hard copies. This will leave a record but is vital. Once the firm decides they want to sacrifice you they can and will block attempts by you to obtain documents supporting your case. This can be overturned at an Employment Tribunal but at very significant cost and delay.

Secondly do not imagine that any or all of the following facts will save you:

you were following the direct and specific written instructions within Barclays policies⁷
you were following the direct and specific written instructions of Barclays senior management ⁸
you were following the direct and specific written instructions of Barclays lawyers ⁹
the Compliance function understood in detail the conduct in question and never raised any objections¹⁰
you were continuing a long standing practice which pre-dated you
you were acting in line with all similar businesses in the market
the firm afterwards continues the practices for which you are investigated

“To be conscious of complete truthfulness while telling carefully constructed lies” – George Orwell 1984

Finally, do not expect anything from the firm’s internal disciplinary process. This could be a sham. In this case the senior manager – John Mahon – who served as ‘disciplinary manager’ simply lied and lied and lied again in the course of effecting the dismissal. This was demonstrated in the Tribunal using written documents supplied by Barclays. In addition, the employment judge described the testimonies under oath of both Barclays’ senior managers who conducted the disciplinary hearings as

“opaque and contradictory” and that “they were trying to advance justifications for their decisions which had not been in their minds at the time”.

However you must engage with the process in good faith. The details of the disciplinary process will form a large part of any subsequent Employment Tribunal case. Keep careful records of all communications and make any reasonable requests for access to emails, chats, documents etc. (not necessarily hard copies but electronic access and search capability) – the firm’s refusal to comply with these requests will count strongly against them in the Employment Tribunal.

The evidence presented on the Consent Order indicates strongly that Barclays must/should/did know it was unjustified. Their own lawyers’ statements show that many aspects of the Consent Order they had just signed were unwarranted. The inference is there to be made, that Barclays chose to confess to ‘misconduct’ they don’t believe in for reasons of commercial expediency. However in doing so they have unfairly destroyed the reputations and careers of their own employees – this is beyond disreputable.

What are the lessons for Barclays clients?

In short, being aggressively litigious pays. Even if you have signed a legal agreement consenting to a Barclays practice such as rejecting your orders, and then engage in trading behaviour which triggers valid defences, endorsed by regulators, you may be rewarded for suing the firm. Barclays will settle for huge multi-million dollar amounts even in cases which they assert have no merit.

What does this case tell us about financial regulation?

The abuse of power demonstrated by the NYDFS in this case is extremely serious. In the case that any interests attempt to extrapolate this to the reputation of financial regulation more generally, it must be noted that the U.S. Dept of Justice, the New York Atty. General, the Federal Reserve Bank of New York and the FCA all investigated these issues and took no actions against Barclays in this regard. Hence sweeping criticism of financial regulators in general is not supported by the facts of this case. I believe strongly that financial regulators in general perform a vital and difficult role in testing circumstances with great integrity and professionalism.

So what is different about the NYDFS compared to these other regulators, that they would try and succeed in constructing a case such as this? Firstly the NYDFS is faced with a much easier task when bringing a case than a regulator such as the US Dept. of Justice or the New York Attorney General. The NYDFS can simply use a catch all phrase and declare that a bank “has conducted banking business in an unsafe and unsound manner” whereas these other regulators actually have to specify a particular law which has been broken and how when bringing a case.

Secondly, these other regulators need to build a case which can stand up to cross-examination in front of an impartial adjudicator (a judge or jury). While many cases brought by these regulators are settled before they get to court, this nonetheless imposes some external standards on them. The NYDFS however can simply require a regulated entity to pay a huge fine on pain of losing their banking licence. So the balance present in normal legal situations where the prosecutor and judge are separated is absent.

Thirdly, because most cases with the NYDFS result in a secretly negotiated settlement, there is no public refutation of their accusations. Barclays employees and shareholders deserved a public rebuttal of these criticisms – this is my primary motivation in writing this website.

Finally, it is reasonable to assume that the NYDFS is motivated to obtain ‘convictions’ and fines as are most prosecuting agencies. This is not inherently corrupting provided there is the corrective of an impartial and independent adjudicator who will determine guilt and punishment on the facts of the case.

Newsweek reported on the then head of the DFS, Benjamin Lawsky:

“Lawsky has been the gatekeeper of the all-important New York licenses since August 2011, when he was appointed head of the newly created DFS. He has never actually yanked a bank’s license, but he routinely threatens to do so—even when a company agrees to a guilty plea—and that’s usually enough to get DFS (and New York state) in on the payout.”

It is instructive to give an insight into the perverse nature of regulatory investigations like this one mounted by the NYDFS. The NYDFS in reality outsource the investigation to the firm. Barclays is forced to hire external legal firms to run the investigation of itself at huge expense. They use search terms¹¹ to trawl through millions of electronic communications. These Barclays lawyers then have to sift through this mass of documents to decide what they think may be ‘problem’ communications. These are then provided to the NYDFS for them to start building their case. The term ‘cherry picking’ is scarcely adequate to describe this process.

The NYDFS may then interview key staff. In my case on the explicitly stated basis that it was the start of their investigation and they just wanted to understand the background issues. There was certainly no suggestion that they were going to try and have me dismissed nor did they present any ‘case’ against me which I could have defended.

Then the same lawyers who helped build the prosecution case try and argue the defence case in private negotiations with the NYDFS – but never in front of an impartial adjudicator. Whatever emerges from this process – essentially the size of the fine imposed – is the diametric opposite of open justice.

There has been an enormous and unjustified transfer of money from UK shareholders of Barclays to the inhabitants of New York state. If the UK’s FCA was minded to, they could certainly have constructed cases against US banks in London over their uses of Last Look. These could easily be stronger than the DFS’ case against Barclays. It is a matter of general public interest why New Yorkers should get the equivalent of a free hospital ¹² paid for by a UK bank when the gift is not reciprocated¹³.

A recent statement by the US DoJ on a completely different case provides an interesting perspective on these aspects of financial regulation:

“The FBI is committed to holding accountable those who disrupt the level playing field to which companies in the United States and around the world are entitled.”

Are UK banks in New York competing on a level playing field with US banks in London? If not, what is to be done about it?

What is the real substance of the Consent Order?

Once the misrepresentations and distortions of the Consent Order are stripped away, what are we left with? A tiny, unrepresentative handful of examples of junior staff not being forthcoming with a few clients about Last Look rejects. They were not acting on any official policy or in response to senior management instructions. And where Barclays was, in any case, under no legal obligation to inform clients about the details of Last Look.

The DFS has been silent on the rights of Hedge Funds and Brokers to engage in abusive behaviours¹⁴, that generate toxic flow. While on the other hand objecting vehemently to the manner in which Barclays chose to defend themselves against such behaviour. Questions must be raised about the motivations of an enforcement agency that condemns anti-shoplifting measures and the publicising thereof, while remaining silent on the abusive behaviours that these measures were defending against.

I cannot know what motivated for example the NYAG¹⁵ to take no action against Barclays over Last Look. However the NYAG will certainly have scrutinised the responses to the subpoena they issued to Barclays, including the data on the highly selective nature of its application. It may be reasonable to speculate that they did not view defending the rights of sophisticated Hedge Funds and Brokers to profit from abusive behaviour as an important part of their mandate.

What should a financial regulator’s judgement look like?

It is instructive to compare the substance and style of the Consent Order with 2 types of document produced in fair legal processes:

(a) Indictment / list of charges (in criminal cases) or witness statements and submissions of the claimant (in civil cases)
(b) the written or oral judgement of the court / tribunal.

Documents in group (a) are unashamedly one-sided representations of the case those in (b) are scrupulously impartial and must give full consideration to the evidence and arguments presented on both sides of the case.

The Consent Order is a quite unabashed example of a document of type (a) but should be of type (b). Even more so given that there was no impartial adjudicator in the process. The dissection of the substance of the Consent Order shows it has all the hallmarks of a ‘prosecution’ document – extremely unrepresentative cherry picking of evidence, complete absence of any justifications or responses from the ‘defence’. This highlights a fundamental distortion in the way some financial regulators operate. The situation is equivalent to a District Attorney (US) / Crown Prosecution Service (UK) simply deciding that their indictment will become the judgement.

A standard text appended to charges ¹⁶issued by the US DoJ states:

“An indictment is merely an allegation and all defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law”

This principle seems very distant from the principles which operated in this case.

What are the lessons for foreign financial firms operating in the US?

The choice of state in which to head-quarter your operations is critical. Firms wishing to avoid the costs and reputational damage described in this case might be well advised to consider other states. For example UBS is a very close competitor of Barclays in the electronic FX market and employed Last Look, but is head-quartered in Connecticut. I am not aware of any investigation mounted by the state financial regulator in Connecticut in regards to Last Look. In this respect at least Barclays and UBS have not been competing on a “level playing field”.

What does this case indicate about Barclays legal representation?

“To forget whatever it was necessary to forget then to draw it back into memory again at the moment when it was needed and then promptly to forget it again. And above all to apply the same process to the process itself” – George Orwell 1984

This case provides numerous examples that raise concerns about the quality or utility of Barclays legal advisers, some of which are discussed below.

The illegality of the Consent Order is described here. The obvious question is whether Barclays lawyers knew the Order violated New York Law and simply did not care, or they did not know because they were negligent in checking the legality of the legal agreement they signed. If it is the former, then Barclays have knowingly conspired in a violation of the law in their own commercial interests. Whichever is the true explanation, it reflects very poorly on their legal advisers. Barclays employed the services of 2 prominent external New York legal firms to lead this case along with the close involvement of their in house litigation dept. lawyers. There were a lot of highly paid eyes on this case.

It is well known that any UK firm wanting to fire an employee cannot simply be acting in response to a 3rd party’s request. They have to run an impartial and independent disciplinary process instead. At the Employment Tribunal Barclays lawyers argued strongly that they had done precisely this and that the Consent Order had not determined the dismissal. Unfortunately for them, one of their own lawyers gave the game away by reminding the committee which needed to approve the dismissal in writing that:

“The members will recall that the terms of the DFS November 2015 order required Barclays to ‘take all steps necessary to terminate’ DF’s employment”.

This was highlighted critically in the Tribunal’s judgement:

“I was conscious that another senior employee at the Bank appeared to view the Claimant’s dismissal as the inevitable consequence of the DFS Order”.

If a firm has set itself to behave in this duplicitous fashion, the shareholders would at least expect their lawyers to tell a consistent story, lest their bad faith is publicly exposed like this.

The number of easily demonstrable (and in one case, confessed) falsehoods stated by Barclays lawyers in the Employment Tribunal is another remarkable fact of this case. It very likely contributed to them losing the case.

The Terms and Conditions legal agreement was very carefully drafted by Barclays lawyers to protect the firm against unfair litigation. As described here, it would very likely have protected them from being sued by a small group of litigious US clients. However the decision was then made – presumably on legal advice – to capitulate to that case at the cost of $50 million. It is hard to see the purpose of carefully drafting legal documents if the firm then chooses to not avail themselves of the protections they provide.

Following a long wait, confirmation was received from their lawyers that Barclays eFX business could go ahead with releasing the symmetry change to Last Look in September 2014. A member of Barclays Legal Dept. sent an email to a member of Compliance and the Head of Sales stating:

“I have now heard back from external counsel and I share their view that unless the changes [to Last Look] represent a change to the terms and conditions with customers, they see no need, from a legal perspective, to reach out to customers to inform them of the changes”.

So Barclays have paid for legal advice telling them that they did not need to notify clients about any changes to Last Look (there are no implementation details about Last Look in the Terms and Conditions). A year later they surrender to a hugely expensive Consent Order in which one of the repeatedly alleged deficiencies was not communicating openly with clients about Last Look. For front line staff this type of behaviour is extremely troubling. Having sought and received legal advice confirming the validity of their actions, they then discover that this provides no safety at all if Barclays later deem it expedient to discard the ‘protection’ promised in that advice.

The expense in terms of legal costs and reputational damage caused by fighting and repeatedly losing the unfair dismissal case could easily have been avoided completely with a sensible settlement negotiation at the outset. Instead Barclays chose to divert the resources of countless employees and external lawyers in the 3½ year process of constructing a reason for dismissal and then the hopeless attempt to defend their conduct in the Employment Tribunal. Aside from the morality of this approach, it seems to demonstrate a severe lack of judgement on the part of their legal advisers.

In Barclays response to this website they wrote: “We also note that the further disclosure of Barclays’ response to the NYAG Subpoena may violate certain laws and regulations of the State of New York.” The relevant facts behind this statement are:

Barclays disclosed this document prior to the Employment Tribunal Hearing without requesting any special treatment of it. Which they were entitled to do.
The document went into the papers (bundle) in a public hearing of a UK tribunal. And was referred to and quoted from repeatedly by me in the hearing.
All documents presented in a UK court case, unless specifically ruled otherwise by the court/tribunal¹⁷, become public domain documents as soon as the hearing begins. This is a fundamental principle of ‘open justice’ strongly enforced in our legal system.
The response to the NYAG subpoena has been in the public domain since January 2018. It was not made public when I published this website a year later.

For Barclays lawyers to then issue threatening statements implying I may have violated New York Law is remarkable. If, and it is a big if, any laws or regulations have been violated in this regard, then it was by Barclays and their lawyers when they released the document. Again this seems to show a striking degree of ignorance and/or incompetence on the part of Barclays lawyers.

What should have happened instead?

The issue of how to balance the rights of employees when firms negotiate deals with enforcement agencies about alleged wrongdoing is not unique to this case. It has been recognised that there is the potential to prejudice the treatment of employees when these deals are negotiated in secret without their knowledge or input.

The FCA explicitly reject findings against an individual if they were made secretly behind closed doors as was the NYDFS’ finding in this case. Section DEPP 6.2.9-A of the FCA Handbook states: “an SMF manager is not bound by a finding of the RDC, a court or a tribunal, which he or she was not privy nor party to.” This shows that the FCA at least, are concerned about the potential injustice of these backroom deals to the rights of individual employees. Ironically, so are Barclays own lawyers. In the Employment Tribunal, comparator evidence was presented of other senior Barclays employees who had experienced serious regulatory criticism and sanctions or managed businesses that were heavily fined, but who had all kept their jobs.¹⁸ In the attempt to exclude this evidence, Barclays counsel stated:

“The evidence involves serious allegations about the conduct of named individuals who are not involved in these proceedings, and who are not here to defend themselves”.

This is of course an admirable defence of the rights of some Barclays employees, unfortunately not one that they apply fairly across all their employees. In fact this exactly describes the NYDFS Consent Order in which managers were effectively named, were not involved in the proceedings and not there to defend themselves.

The recent case of alleged fraud involving 3 former Tesco executives offers a close parallel to the issues in this case. In that case, Tesco signed a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO) which named the 3 subsequently acquitted employees. The Guardian stated:

“The SFO gets a “win” without having to put its case against the company in front of a jury. But the rights of individuals seem to have suffered along the way.”

However the situation in the Last Look case was even worse. In the Tesco case, they were only allowed to release the DPA after the trial verdict as it was so prejudicial to the individual employees. In the Last Look case, the Consent Order was published with a press release ahead of any Barclays disciplinary process or the Employment Tribunal case. What is more, Barclays employees repeatedly referred to the Consent Order to justify the dismissal and argue against fair remedy, even after they had been found guilty of unfair dismissal.

About the author

I, David Fotheringhame, am the former Head of Automated Flow Trading for eFICC employed at Barclays from 2010-2016. I am the manager whom the NYDFS ordered to be dismissed. I represented myself in several hearings in the UK Employment Tribunal. I won: large parts of the preliminary hearing forcing disclosure of documents, the Liability judgement and then the Remedy judgement. I was ordered to be re-employed and to be reimbursed for 21 months of back pay. Barclays refused to comply with both of these orders.

I have written this website because there is a strong public interest in the facts about the conduct of the NYDFS and Barclays being reported. Various groups have an interest in being warned about the conduct revealed in this case. There are 80,000 Barclays employees and likely millions of Barclays shareholders ¹⁹ In other recent cases faced by Barclays, they have made public statements resisting regulators and defending their actions. Although often going on to settle out of court for large sums nonetheless. On the Last Look case however no such defence has been issued. This website corrects that omission.

The pages on this site are tightly tied to facts which have been publicly cross-examined in a UK Employment Tribunal, and other public source documents. This page presents the author’s proposed explanation of and opinions on the case based upon the extensive facts presented throughout the website and elsewhere.

Both Barclays and the DFS were sent copies of this website prior to its publication and invited to comment on it or identify any errors of fact. Barclays response appears here. The DFS did not reply.