REFILE-UPDATE 8-UBS traders charged, bank fined $1.5 bln in Libor scandal

* Hong Kong launches new investigation * Two senior UBS traders criminally charged in U.S. * UBS fined $1.5 billion - second-largest fine ever leviedon bank * Penalty will widen UBS Q4 loss By Katharina Bart and Tom Miles and Aruna Viswanatha ZURICH/NEW YORK Dec 19 (Reuters) - U.S. prosecutors chargedtwo former UBS traders with taking part in amulti-year scheme to manipulate Libor and other benchmarkinterest rates, making them the first individuals to becriminally accused in the international scandal. The charges against the two traders, Tom Hayes and RogerDarin, resulted from a broad investigation into the activitiesof more than a dozen banks in the setting of prices for Liborand related rates. A day after UBS agreed to pay $1.5 billion to regulators inthe United States, UK and Switzerland, the Hong Kong MonetaryAuthority (HKMA) said the bank was being probed over itssubmissions of interbank rates there, raising the risk it couldface more fines. In settling with U.S., UK and Swiss authorities, UBS notonly paid one of the largest fines ever imposed on a bank, itsJapanese subsidiary pleaded guilty to one U.S. criminal count offraud relating to manipulation of benchmark rates, including theyen Libor. The Japanese subsidiary is where authorities allege much ofthe manipulation of interest rates occurred, as employees of thebank looked to profit on derivatives trades linked to the rates. The bank could have more trouble in store in Asia. HKMA,Hong Kong's de facto central bank, said in a statement earlyThursday in Asia that it had received information from overseasregulatory authorities about possible misconduct by UBSinvolving submissions for the Hong Kong Interbank Offered Rate(Hibor) and other reference rates in the region. UBS is the second large international bank to reach asettlement with U.S. and UK authorities, and other settlementsare expected to follow in the next few months. In June BarclaysPlc agreed to pay $453 million in fines to settleallegations its employees attempted to manipulate Libor rates. The investigation and it findings - that attempts tomanipulate Libor were fairly widespread in the banking industry- have cast doubts on the reliability of Libor as a benchmarkfor setting interest rates. The probe has also raised questionsabout why bank regulators were slow to uncover the manipulation,which Reuters previously reported dated back to at least thelate 1990s. "The bank's conduct was simply astonishing," Lanny Breuer,who heads the U.S. Justice Department's criminal division, saidin announcing the settlement. "Make no mistake - for UBS traders, the manipulation ofLibor was about getting rich." While the bank will hope that the $1.5 billion settlementwith regulators in the U.S., UK and Switzerland will draw a lineunder its penalties for its role in Libor manipulation, itremains at risk of action from regulators elsewhere for possiblerate rigging. As well as Hong Kong, there is an ongoing investigation inSingapore into the possible manipulation of benchmark lendingand foreign exchange rates. "We continue to work closely with various regulatoryauthorities to resolve issues relating to the setting of certainglobal benchmark interest rates. As we are currently in activediscussions with these authorities, we cannot comment further,"said a spokesman for UBS in Hong Kong. CRIMINAL CHARGES The Justice Department charged Hayes and Darin withconspiracy, according to a criminal complaint unsealed in U.S.district court in Manhattan on Wednesday. Hayes was also chargedwith wire fraud and an antitrust violation. U.S. and UK investigators portrayed Hayes as a ringleader ofsorts for UBS' manipulation of rates. The two men are both believed to be in Europe, according toa U.S. official. Last week, British police arrested Hayes andtwo other men in connection with the Libor probe. The two otherswere Terry Farr and James Gilmour, both of whom worked atinterdealer broker RP Martin. The $1.5 billion UBS penalty is the second largest everimposed on a bank, exceeded only by the $1.9 billion that HSBC agreed to pay to settle U.S. charges in connection withthe laundering of drug cartel money. "We deeply regret this inappropriate and unethical behavior.No amount of profit is more important than the reputation ofthis firm," said UBS Chief Executive Sergio Ermotti. The criminal complaint against Hayes and Darin also detailedhow some former UBS employees are cooperating in the probe, inexchange for a promise that they won't be prosecuted. The cooperation agreements forged in the UBS case couldprove useful to U.S. and UK authorities as they move againstother individuals and other big banks. U.S. prosecutors, for instance, are continuing toinvestigate the activities of a number of former Barclaysderivatives traders based in New York who were dismissed fromthe bank following an internal investigation into Libormanipulation. So far, none of those former Barclays employees inthe United States have been charged with wrongdoing. Libor and related benchmarks are used to set interest ratesfor trillions of dollars worth of loans around the world,ranging from home loans to credit cards to complex derivatives. Authorities said traders could benefit on their derivativespositions by nudging the prices for Libor up just small amounts,as over time the payoffs added up. Already a number of civillawsuits have been filed in the U.S. by institutional investorsclaiming they were harmed on trades because of the interest raterigging. 'NORMAL BUSINESS PRACTICE' In legal filings, Britain's Financial Services Authority(FSA) said UBS staff made "corrupt" payments to reward brokersfor helping to manipulate rates - expanding the scandal toinclude bribery. It said attempts to manipulate Libor and Euribor, itsEuropean equivalent, were so widespread that every submissionUBS made over a six-year period from 2005 to 2010 was suspect. At least 45 people at UBS were involved in the rigging,which was discussed in internal chat forums and group emails butnever detected by compliance staff, despite five audits. The FSA said a wide pool of people within UBS considered themanipulation to be a "normal business practice." In addition to traders trying to move the Libor rate up ordown to make money for themselves, senior managers at the Swissbank directed dealers to keep Libor submissions low during thefinancial crisis to make the bank look stronger. Documents filed by the FSA did not reveal the names ofindividual participants, but a source familiar with the matteridentified Hayes as the FSA's "Trader A," who the regulator said"embarked on a coordinated campaign" to influence the yen Liborrate. In 2006 Hayes told a junior submitter at UBS that he"generally coordinate " with Darin and "skew the libors abit." In early 2007, Darin trained another junior submitter andtold him the primary consideration for UBS's yen Liborsubmissions was the requests from Hayes and other UBS traders. The extent of the wrongdoing was highlighted in a series ofemails released by the FSA. The exchanges may indicate howtraders and brokers conspired to rig the rate while adoptingnicknames such as "Captain Caos," (sic) and calling each other"superman," "hero" or "the three muscateers (sic)." In one email, Trader A (Hayes) wrote to a broker, urging himto keep the six-month yen Libor rate unchanged on the day. Traders paid brokers as much as 15,000 pounds ($24,000) aquarter for their help in rigging the rates. It is the first time that brokers have been accused oftaking bribes to aid the manipulation. ICAP, the world'slargest interdealer broker, and rival RP Martin have suspendedemployees in connection with the probe. Until the rate-rigging scandal broke, Libor had been ignoredby regulators and left to the banks to police. From next year,Britain's FSA will oversee it as part of a major overhaul. The steep fine for UBS comes even as the bank has cooperatedwith law-enforcement agencies. The bank said it receivedconditional immunity from some regulators. The investigation into UBS's trading shows that themanipulation of the benchmark rates and illicit trading tookplace over a much longer time period than previously thoughtwith the improper requests extending into June 2010, accordingto the UBS settlement with the Justice Department. 'UNACCEPTABLE BEHAVIOR' UBS will pay $1.2 billion to the Justice Department and theU.S. Commodity Futures Trading Commission, 160 million pounds tothe FSA, and 59 million Swiss francs from its estimated profitto Swiss regulator Finma. The UK penalty is the largest in the history of the FSA andmore than double the 59 million pounds paid by Barclays. UBS said the fines would widen its fourth-quarter net lossbut that it would not need to raise new capital. UBS shares fell 0.3 percent in trading on Wednesday afterearlier hitting a 17-month high. The reputational impact of the controversy may only emergenext year. "The only thing shareholders can do is keep a very close eyeon the money flows on the wealth management side," said NeilWilkinson, portfolio manager at Royal London Asset Management.