US: US banks fight back over Libor accusations

Author: | Published: 1 Sep 2012
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By Ryan Bolger

Class action lawsuits before the US District Court for the Southern District of New York argue international banks colluded at the expense of investors, community banks, municipalities and investment funds. But the defendant banks are fighting back and have filed motions to dismiss claims on grounds the Sherman Antitrust Act and Commodity Exchange Act do not prohibit the alleged actions.

Plaintiffs will face additional hurdles in the form of US Supreme Court precedent and a potentially difficult calculation of damages involving counterparty payments for over-the-counter (OTC) derivatives, assuming litigation gets out of the gate and arguments are heard.

Felix Chang, a former counsel at Fifth-Third Bank and now professor at the University of Cincinnati College of law, likens the plaintiffs' arguments to proving a negative – a difficult task because everything relies on what the London interbank offered rate (Libor) should have been.

Research on Libor data seems to suggest some collusion, though. Rosa Abrantes-Metz, principal at the Global Economics Group and a professor at the New York University Stern School of Business, analysed data on Libor rates after The Wall Street Journal broke the story on possible manipulation in 2008.

Abrantes-Metz discovered Libor did not respond to changes in market conditions between August 2006 and August 2007, unlike the US federal funds rate. Furthermore, her data showed all of the big banks reported identical interbank lending rates to the third decimal point even after quoting different rates during the previous day.

"The Libor in that period of time showed patterns of rate-rigging and price fixing which are criminal charges under US antitrust laws," Abrantes-Metz says.

Class actions

The first class action suit against banks for collusion in the manipulation of Libor rates was filed over a year ago, but the $453 million settlement reached between Barclays and regulators in the US and UK served as a catalyst for an influx of further litigation. Claimants were collected in ever-increasing numbers as plaintiff firms stepped up to grab a piece of a potentially very high payout.

All cases are to be heard by District Judge Naomi Reice Buchwald following a multidistrict litigation order to have cases consolidated in the US District Court for the Southern District of New York under Libor-Based Financial Instruments Antitrust Litigation. Judge Buchwald has mandated a stay on all new cases until she reaches a decision regarding the defendants' motions to dismiss the plaintiffs' claims.

The initial suit included two types of plaintiffs. The first set was made up of OTC market investors, most notably the City of Baltimore, who had purchased interest rate swaps argued to have been depressed as a result of artificially low Libor rates. OTC claimants argue banks conspired in violation of the Sherman Antitrust Act. The other set of plaintiffs purchased exchange-based securities and futures contracts, both based on Libor, and seek damages resulting from an alleged violation of the Exchange Act.

Judge Buchwald decided to break up the OTC and exchange-based claims as a way to prevent conflicts for counsel who would otherwise be representing both types of investors.

Motions to dismiss

Defendant banks have filed motions to dismiss both types of claims. The OTC claims are being challenged on the ground that Libor is merely reported information, neither bought nor sold, and so cannot be subject to antitrust law.

According to a memorandum filed on June 29 2012 in support of the banks, it is a "mathematical truism" that an interest rate index based on Libor would have been different if higher or lower rates were reported by banks and that might impact financial results; but that does not qualify as a restriction on trade.

The defence also argues there is no evidence of collusion. Plaintiffs might have to show the accused banks did not report false Libor rates exclusively as a way to prevent markets from reacting to borrowing costs higher than those reported.

"The amended complaints are devoid of any direct factual allegations of an actual agreement among defendants to suppress USD Libor throughout the class period," the memorandum continues. "Nor did the amended complaints allege any facts from which such an agreement could be inferred."

Another issue facing antitrust claims is the Illinois Brick doctrine, also mentioned in the memo. In Illinois Brick Co. v Illinois the US Supreme Court decided an indirect purchaser was precluded from bringing antitrust claims made over alleged price fixing.

Kevin LaCroix, lawyer at Oakbridge Financial Services and author of The D & O Diary website, says Illinois Brick makes it difficult for plaintiffs to seek damages from Libor manipulating banks that did not sell the swaps in question. This is relevant because only three of the defendant banks – JP Morgan Chase, Citigroup and Bank of America – served on the Libor reporting panel appointed by the British Bankers Association.

"If someone wasn't buying goods or services from rate-setting banks, they might not be able to have standing [because] they weren't a direct purchaser," says LaCroix.

A number of state legislatures passed laws to allow antitrust claims against indirect purchasers in response to Illinois Brick, meaning plaintiffs, assuming their cases are not dismissed for another reason, could have a right to litigate Libor collusion on a state level.

This is the route Murray Frank partner Brian Murray took when he filed an antitrust suit against banks on behalf of preferred shareholders that would have received higher dividend payments under higher Libor rates.

"The 22 states in our class action have Illinois Brick repealer statutes," Murray says. "Anybody that had a dividend tied to Libor was harmed to the extent the Libor rate was repressed."

The majority of lawsuits before Judge Buchwald are dependent on an interpretation of price fixing and collusion, unlike most claims made by holders of exchange-based securities and futures contracts (because the Exchange Act prohibits the false reporting of information that affects prices of commodities).

Banks have filed for a motion to dismiss the Exchange Act claims on grounds plaintiffs have not alleged a specific intent to manipulate the assets held by investors, even though they have argued intent to manipulate Libor. The motion to dismiss also argues that Libor would have influenced the terms of these types of transactions.

"Raising the level of USD Libor, as plaintiffs claim should have happened, does not answer the question of who would have profited on the transaction," lawyers write in a memo filed in favour of the banks.

Looking forward

Plaintiffs will still face some challenges if Judge Buchwald decides to recognise their right to litigate. Antitrust claimants will have to prove banks colluded to manipulate the rates in a price-setting fashion and Exchange Act claimants will have to prove rates were reported falsely and had a negative impact on their returns.

"There have really only been a handful of class actions brought that have tried to cover such a broad universe of assets," one financial litigation partner tells IFLR.

"The defendants' first response may be to look at the breadth of the class action, [and] file a complaint that [plaintiffs] are trying to group an entire universe into one or two class actions," adds the partner.

Part of the problem could be isolating the impact Libor had for each of the disgruntled investors – first determining what Libor should have been and then determining its effect. Attorneys said calculating damages would be very difficult.

"If the Libor was tainted, it allegedly tainted everything else around it so grasping damages is hard when you look at general indexes," says Abrantes-Metz. "The most appropriate, accurate way to estimate damages in Libor is to access the proprietary data from the banks and figure out what they exactly paid for each borrowing."

The stay on Libor suits will be lifted once the Court decides if it will hear the cases mentioned above. If it does, more litigation will undoubtedly follow.

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