A US federal appeals court has overturned the convictions of two former Deutsche Bank traders charged in connection with an alleged scheme to rig the Libor benchmark, a blow to prosecutors who have struggled to prosecute individuals for actions that have netted billions of dollars in fines from banks.

In an opinion on Thursday from the 2nd US Circuit Court of Appeals in Manhattan, the three-judge panel held that “the government failed to show that any of the trader-influenced submissions were false, fraudulent, or misleading”. It directed the district court to enter orders of acquittal for both men.

The Libor — London Interbank Offered Rate — scandal sent shockwaves through global financial markets more than a decade ago, with multiple banks required to pay fines for rigging the benchmark in their favour, affecting trillions of dollars worth of financial contracts. At issue was the way the interest rate was set, using an aggregate of those submitted by the banks rather than a rate based on actual transactions in markets.

The scandal set in motion an attempt to replace Libor with new benchmarks across the globe based on transactions in markets. That attempt took a big step forward at the end of the year, with Libor rates in most currencies being phased out and banks banned from entering new contracts in US dollar Libor.

US prosecutors brought charges in 2016 against Matthew Connolly, who was the director of Deutsche Bank’s pool trading desk in New York and oversaw traders who handled US dollar Libor-based derivative products, and Gavin Black, director of Deutsche Bank’s money markets and derivatives desk in London. Their indictments followed Deutsche Bank’s $775m Libor settlement the previous year.

Connolly and Black were accused by US prosecutors of conspiring with other traders and inducing co-workers to submit false rates to the British Bankers’ Association, which administered Libor at the time, in order to either profit from moving the rate or reduce losses on derivatives contracts. Neither of the traders was responsible for submitting Deutsche’s Libor fixes to the BBA.

After a month-long jury trial, they were found guilty in October 2018 on charges of wire fraud and conspiracy to commit wire and bank fraud. Connolly was sentenced to two years of supervised release and given a $100,000 fine, and Black was sentenced to three years’ supervised release with a $300,000 fine.

They appealed, arguing the government had not shown their actions violated the law. The appeals court agreed.

Despite testimony from colleagues that Connelly and Black requested Libor submissions that benefited their trading positions, the appeals court found that “the evidence was insufficient to prove that defendants caused DB to make Libor submissions that were false or deceptive”.

The appeals court found that prosecutors did not prove that the submissions fell outside a reasonable range of what the bank could have realistically borrowed at, consistent with what Libor was supposed to show.

“We have long maintained that Gavin Black committed no crime, and we are deeply appreciative that the Court of Appeals carefully reviewed the record and reached the same conclusion, as reflected in its thorough and well-reasoned decision,” said Seth Levine, co-founder of Levine Lee LLP, who represented Black. He added that “Black did his job, as he has lived his life, with honour and honesty”.

Kenneth Breen, a partner at Paul Hastings who represented Connolly, said: “We are elated that Matt Connolly has been fully exonerated in this contrived case that never should have been brought.”

Deutsche Bank declined to comment. The Department of Justice did not immediately respond to a request for comment