In 1980, Judge Jed S. Rakoff famously wrote in a law review article that for federal white-collar crime prosecutors, the mail fraud statute was their “Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart – and our true love.” In more recent years, federal white-collar crime prosecutors have used the wire fraud statute with similar zeal. On January 27, 2022, the Second Circuit Court of Appeals dealt prosecutors a significant setback in their use of the statute, overturning the wire fraud convictions of two former investment bankers found guilty of rigging the London Interbank Offered Rate (LIBOR), holding that prosecutors failed to prove the two men caused the bank to make false or misleading LIBOR submissions. The Second Circuit’s decision significantly heightens the heavy burden that prosecutors bear when bringing fraud claims for what may be deemed by the government to be unfair or even manipulative business practices. The decision holds that if an intentionally fraudulent statement could be true, then the maker of the statement could not be found to have engaged in fraudulent conduct. More broadly, the decision suggests that the Second Circuit will not find fraud where business people engage in conduct that is not clearly prohibited, even where they admittedly know what they were doing was wrong or unethical.

In 2018, a federal jury in the Southern District of New York convicted derivatives traders Matthew Connolly and Gavin Black on charges of wire fraud and conspiracy to commit wire fraud and bank fraud for their participation in a scheme to manipulate LIBOR. LIBOR was a regularly reported averaged interest rate, calculated based on submissions from lending banks around the world, reflecting the rates that the reporting banks believed they would be charged for interbank borrowing. LIBOR was a closely watched rate because it was used both in connection with interbank loans and as a benchmark for many other loans, including many consumer loans. LIBOR has been phased out in favor of alternative rates. Prosecutors had argued that Connolly and Black directed subordinates to make false LIBOR submissions to the British Bankers’ Association (BBA), the organization that publishes LIBOR rates, to manipulate the LIBOR rate and benefit their derivative trading positions. Connolly and Black appealed their convictions, arguing that the evidence presented at trial was insufficient to prove that the requested LIBOR submissions, among other things, were false or misleading.

On January 27, the Second Circuit reversed the traders’ convictions. The Second Circuit found that the evidence presented at trial was insufficient as a matter of law to show that the LIBOR-related statements that Connolly and Black submitted were false. The Second Circuit looked at the language of the BBA LIBOR Instruction, which directed each panel bank to state “the rate at which it could borrow funds.” (Emphasis added.) The Second Circuit disagreed with the district court’s denial of Connolly’s and Black’s motion for acquittal, holding that the government had no obligation to present evidence showing that the panel bank could not have borrowed funds at the rates it submitted. Further, the Second Circuit disagreed with the district court’s view that evidence that the panel bank could have borrowed funds at a submitted rate would not have rendered the submissions truthful. Specifically, the Second Circuit found that the government had failed to produce any evidence that the bank’s LIBOR submissions that were influenced by the bank’s derivatives traders were not rates at which the bank could request, receive offers, and accept loans in the bank’s typical loan amounts. Thus, the court stated that “the government [had] failed to show that any of the trader-influenced submissions were false, fraudulent, or misleading.”