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
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.
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'
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
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
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
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
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.
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
"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
"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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