Banking giant Westpac last week admitted its fixed income trading desk engaged in “unconscionable conduct” in 2016, after a long-running prosecution by securities regulator the Australian Securities and Investments Commission (ASIC).
The bank hammered out a settlement with ASIC at the Federal Court, leading to a $1.8 million fine that Justice Michael Lee described as “risible”. Westpac also has to pay around $8 million in ASIC’s legal costs.
The case involved “frontrunning” by the bank’s traders, who double-crossed their clients in the run-up to executing one of the largest trades in the history of Australian money markets. The trade was an interest rate hedge on behalf of the consortium buying a majority stake in the New South Wales government electricity transmitter AusGrid in 2016.
The details of Westpac’s rogue trading make for fascinating reading for anyone interested in corporate governance in Australia. One of the nation’s largest banks used privileged information it gleaned as a party to a huge privatisation deal to place profitable trades on the money market before the deal was announced to markets.
The $16 billion AusGrid privatisation was an unsolicited offer to the NSW government, then led by former premier Mike Baird. The privatisation was later criticised by the NSW auditor-general in a stinging report. Put together by the financial wizards at IFM, and backed by the muscle of the huge AustralianSuper industry super fund, the deal hinged on a $16 billion debt package assembled by the consortium.
The consortium gave the job of hedging interest rate risk to global risk-management firm PMC Treasury. PMC shopped around for a trading desk that could do a $12 billion interest rate swap. Westpac offered the best deal with the cheapest spread, so PMC eventually gave it the gig.
But unbeknown to PMC, IFM and AustralianSuper, Westpac’s traders seized the opportunity on behalf of the desk.
Given that it was about to place a $12 billion position, Westpac’s fixed interest desk was able to get ahead of the markets. As soon as markets opened at 8.30am on November 20, 2016, Westpac’s trader started buying and selling interest rate derivatives, in what ASIC describes as an effort “to pre-position Westpac in anticipation of the execution of the swap transaction”.
These weren’t exactly small side trades. ASIC’s originating application provides details, including a purchase of $4.4 billion of Australian government bond futures, a $3.98 billion buy on interest rate swaps, and a $6.1 billion sale of futures contracts — all “while possessing inside information”. The trades were so big that Westpac’s desk had to get special internal permission from the bank’s risk office to increase its trading limits to enable the trade for the consortium; the memo to the risk office explained that “the desk’s preference is to pre-hedge up to 50% of the deal”.
The evidence before the Federal Court is eye-opening. ASIC appears to have obtained recordings of many of the key phone calls. Some of the transcripts are like scenes from the HBO/BBC series Industry, as Westpac traders and key executives exchanged increasingly agitated dialogue about to how to pull off their “pre-hedging” before the privatisation was announced to the market.
The statement of agreed facts — signed off on by Westpac as part of the settlement — includes this delicious line by Westpac’s Simon Masnick, who was then head of the fixed income desk:
Yeah I mean — I think that’s the key, is we’ve got to make sure they understand, um, it’s — we don’t want them to think it’s — it’s frontrunning.
As Westpac poured billions of dollars of trades into the market, the spreads on swaps started to blow out, costing the consortium millions. Needless to say, this got the attention of the suits at IFM and AustralianSuper. They could see the spreads starting to move, indicating that someone in the market was placing big positions.
PMC’s Chris Danielian was pulled into a conference call by AustralianSuper executive Nik Kemp to explain what was going on. He then rang Westpac’s Masnick:
Kemp (AustralianSuper): Where are the rates at?
Danielian (PMC): They’re — they’re higher. This is — hang on. This is — this is bullshit, quite frankly. They — this — this …
Danielian (call to outside line [i.e., Simon Masnick]): Hey, how are you doing? Yeah, well, not — not so good. This is — this is — this is quite frankly bullshit, man, seriously. Yeah, look, Simon, you know, we both — we can — we can — we can both see the fucking price action, yeah?
Seven years on, the eventual punishment for this conduct is a $1.8 million fine.
“It’s a risible amount in comparison to the nature of the conduct and the size of the organisation,” Lee said while handing out the wrist slap. “There is nothing I can do about that manifest and striking disparity between the nature of the conduct and the maximum pecuniary penalty provided for by the statute.” The bank admitted it made nearly $20 million from the trade in question.
According to ASIC, “Westpac’s derivatives trading desk achieved a trading profit of approximately $20.7 million on the day the swap was executed (of which $3.7 million was allocated to the sales team as commission)”.
The settlement surely raises questions, once again, about the laxity of Australia’s corporate regulation, criticised by former High Court justice Kenneth Hayne is his royal commission on financial services misconduct. Federal fines for corporate wrongdoing of this nature have since been increased, but it’s difficult to see any deterrent in action.
Last week’s settlement also means ASIC decided to drop the insider trading charges. Although Westpac has copped to the unconscionable conduct admission, none of their employees will be held individually responsible.
In other jurisdictions, this sort of thing has led to criminal charges and convictions for the individuals involved. For instance, US prosecutors have sent corporate high-flyers such as Martha Stewart and Raj Rajaratnam to jail for insider trading. In 2021, the US attorney for the Southern District of New York successfully prosecuted quant analyst Sergei Polevikov for frontrunning on a big trade for one of his clients. Polevikov received a 33-month sentence.
ASIC’s originating application in the Federal Court, for instance, named Lyn Cobley as the key figure in the deal. Cobley was the boss of Westpac’s institutional banking division at the time of the frontrunning that the bank has now admitted was unconscionable conduct. As the Statement of Agreed Facts makes clear, Cobley knew about the trades, supporting the memo to the bank’s chief risk officer for permission to make the trades.
Cobley has left Westpac, but she is still a non-executive director on the board of the Commonwealth Bank. This means CommBank has a board member who oversaw unconscionable conduct as a leader of an investment bank. She’s even on the CBA’s Audit Committee. It’s not a good look.
A spokesperson for the Commonwealth Bank declined to comment on our questions about Cobley’s role in the scandal. Crikey does not allege Cobley played any part in the frontrunning trades herself.
Prudential regulator APRA retains a set of “fit and proper person” rules that might be relevant for board directors who find themselves in hot water. The typically vague rules includes a reference to whether a “responsible person” has “the competence, character, diligence, honesty, integrity and judgement” to properly perform their duties. It will be interesting to see whether presiding over conduct admitted to be unconscionable counts as any of these.
Those following the softly-softly approach of Australian corporate regulators won’t be holding their breath.
Clarification: The Federal Court finding was that Westpac Banking Corporation (Westpac) alone, and not the individuals named in the article, engaged in “unconscionable conduct“.
This article was amended on February 6, 2024 to change a reference to Westpac traders making “some extra money on the side”. The term “flagrant insider trading” was removed in line with ASIC’s findings.
Additional context was included about the size of Westpac’s trades: “The trades were so big that Westpac’s desk had to get special internal permission from the bank’s risk office to increase its trading limits to enable the trade for the consortium; the memo to the risk office explained that ‘the desk’s preference is to pre-hedge up to 50% of the deal.'”
Additional context was also included in relation to the money made from the trades: “The bank admitted it made nearly $20 million from the trade in question. According to ASIC, ‘Westpac’s derivatives trading desk achieved a trading profit of approximately $20.7 million on the day the swap was executed (of which $3.7 million was allocated to the Sales team as commission)’.”
It used to be said that you could do anything you wanted in business as long as you didn’t get caught. Turns out that getting caught is no longer an issue. It may take seven years but the regulator will always capitulate.
How many crimes
Can a big bank commit
Before a boss goes to jail?
The answer got blown away in a cyclone
Fines should at least recoup the profits from such egregious wrongdoing. Failing that, perhaps we need to reform proceeds of crimes processes so that when such conduct occurs, there’s a mechanism to claw at least some meaningful amount of it back
Profits plus interest, these drag out for so long considerable interest would accrue.
You’re both too soft! Fines should be multiples of the profits.
It’s obvious that a fine that is only a small fraction of the illicit profit made by Westpac is no deterrent. On the contrary it’s a green light for every other corporate crook. It also seems there is no chance of confiscating the profits made by Westpac as proceeds of crime, even though that seems an appropriate step. However, this conviction looks like proof that Westpac dudded IFM and AustralianSuper; Westpac’s illegal fun & games cost them dearly. So what chance if any is there of IFM and AustralianSuper recovering their losses from Westpac, if necessary by sueing Westpac?
Sometimes, while results of any prosecution against a corporation is paltry, the compensation the corporation has to pay is far more telling. The Montara oil field spill is a clear example. Prosecution resulted in a fine of just $510,000. There was also no significant compensation to local fishermen and so on. But the company involved paid huge sums to compensate other corporations for not fulfilling its contracts with them.
Holding corporations accountable is clearly not working well, but the complete inability to hold any individuals to account when corporations go rogue is a huge problem everywhere and there seem to be no answers.
There are answers but nobody in authority is willing to act on them.
Maybe we could crowdsource the answers.
Once again Crikey does a good job in exposing yet another egregious case of corporate malfeasance. And of course, the readers all respond with the usual hand wringing, gnashing of teeth, and furrowing of brows over this latest example of capitalism in action.
Perhaps Crikey knows that it is on a winner with this approach, as capitalist rorts, racketeering, and assorted scams like this, are going to go on forever unless the system is changed entirely. So perhaps Crikey has a vested interest in seeing this sort of thing continuing in the longer term. Pardon my cynicism but if Crikey was sincere in wanting to bring this sort of thing to a halt then they would be advocating a more socialist approach to the economy with very severe penalties for corruption (perhaps including life imprisonment or even the death penalty for the most severe infractions). Stop wasting your time with the ‘pussy-footing’ responses.
Hell yeah. Just for once, I’d like to see an unforgiving ‘tough on crime’ stance directed at the most harmful perpetrators, rather than a few classes of thoroughly petty offenders who generate an emotive response.
Child molesters and mass murderers are small beer. The problem is, folks can’t comprehend the sheer scale of significant white collar crime, and its attendant government corruption…
The fact significant penalties don’t apply to such mega-frauds comprises vast corruption, which we should be no less angry about.