(Corrects first name of judge to Jonathan from David in paragraph 6)
* ASIC had accused big four banks of manipulating BBSW rate
* Westpac only bank to challenge case in court
* Westpac acted unconscionably but didn't rig BBSW rate-judge
By Paulina Duran and Byron Kaye
SYDNEY, May 24 (Reuters) - Australia's Westpac Banking Corp WBC.AX was cleared by a court of accusations it rigged a key rate to boost profit, but the win on Thursday against a regulator was dampened by an additional finding of unconscionable conduct by the bank.
The mostly favourable ruling for the No. 2 Australian lender was a rare bright spot for an industry facing daily allegations of malfeasance and fraud in a year-long public inquiry that has wiped billions of dollars from companies' market values.
It also puts pressure on the Australian Securities and Investments Commission (ASIC), which brought the case against Westpac, to step up its policing. The regulator has faced criticism in the same inquiry for failing to rein in the country's biggest financial industry participants.
In a series of civil lawsuits, ASIC accused the country's "big four" banks of rigging the Bank Bill Swap Rate (BBSW) - a benchmark interest rate in Australia used to price trillions of dollars of assets - to inflate profit.
Westpac, which was accused of rate rigging from 2010 to 2012, was the only bank to defend the action after the other three - Commonwealth Bank of Australia CBA.AX , National Australia Bank NAB.AX and Australia and New Zealand Banking Group ANZ.AX - settled before hearings began.
"In summary, I have rejected ASIC's case," Federal Court judge Jonathan Beach said. However, he noted that while Westpac did not break the law its actions amounted to "unconscionable conduct and misleading or deceptive conduct".
The bank also contravened its financial services obligations through "inadequate procedures and training", the judge added.
"This is a very significant and positive outcome for the integrity of Australia's financial markets," an ASIC spokesman said.
EXPLETIVE-RIDDEN EXCHANGES
ASIC had argued that communications within the bank and with outside traders that included expletive-ridden exchanges captured in email records and telephone recordings showed them boasting about how much money they had made from BBSW fixes.
But those messages were "open to competing interpretations, particularly when understood in context", the judge said.
"Westpac is committed to working with regulators in a constructive manner including when we have a genuine difference of opinion," the bank said in a statement.
Its shares were down 0.4 percent after the verdict, in line with the broader market .AXJO , but are down 10 percent since the so-called Royal Commission began in February.
"This looks to be a win in that there wasn't much actual impact from their actions but a moral loss in that they did do the wrong thing," said a fund manager referring to Westpac. The investor, who owns Westpac shares, asked not to be identified because of rules in Australia that restrict commentary on court matters.
Spokespeople for CBA, NAB and ANZ declined to comment.
Australia's neighbour New Zealand is also scrutinising its financial industry, which has a significant presence of big Australian banks and its top wealth manager AMP AMP.AX . Clarke, a professor at University of Technology, Sydney's business school, said Thursday's court verdict was unlikely to ease the public pressure on banks and ASIC.
"It's a small win for Westpac and a small win for ASIC in amongst a catastrophic series of revelations for the big four banks and AMP, from which they will not recover very readily," Clarke said. AMP has lost its CEO, chairman and several board members over the inquiry.
"The focus is also on ASIC for seeming to treat the big banks with a velvet glove," added Clarke.