In the wake of the recent admissions by Barclays Bank PLC that its traders sought to manipulate the London Interbank Offered Rate ("LIBOR"), corporations and other investors are only now beginning to appreciate the magnitude of the scandal and to consider how it might impact their own investments. To date, governmental investigators and private litigants have accused at least 12 international banks of manipulating, and in some instances colluding to set LIBOR rates. With the nominal value of derivative financial instruments alone estimated at $450 trillion, Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton administration has warned that "the LIBOR mess could be the biggest financial fraud in history."
The Allegations and Governmental Investigations
LIBOR is a series of benchmark interest rates for various currencies including U.S. LIBOR. LIBOR rates are used in financial markets around the world and are the primary benchmark for short-term interest rates. The LIBOR rates for each currency are calculated and published on a daily basis by Thomson Reuters at the request of the British Banking Association based on submissions from banks that participate on a contributor panel for each specific currency. The Contributor Panel Banks are asked to submit the rate at which the bank itself could borrow funds without reference to the rates submitted by any other Contributor Panel Bank.
On June 26, 2012, Barclays entered into immunity agreements with governmental agencies in the United States and United Kingdom in which it admitted misconduct in manipulating certain LIBOR rates for the purpose of benefiting its derivative trading positions. Notably, Barclay's did not admit to conspiring with other Contributor Panel Banks. Instead Barclay's admissions focus on internal efforts by Barclay traders to manipulate the LIBOR submission.
These admissions followed a series of governmental investigations, many of which remain ongoing, in the United States, Switzerland, Canada, Singapore, Japan, the United Kingdom and the European Union. Last week several state attorneys general announced that they were looking into potential causes of action, and other state agencies are exploring whether they lost money in trades tied to LIBOR (e.g., underpayment of bond revenues).
Private Litigation – U.S. LIBOR
Separately, several private investors and municipalities have filed U.S. LIBOR-related class action suits, which have been consolidated in the Southern District of New York in In re: LIBOR-Based Financial Instruments Litigation. Charles Schwab and related entities have filed separate complaints that have also been consolidated. The amended complaints, dated April 30, 2012, each assert that the defendant banks engaged in a price-fixing conspiracy under Section 1 of the Sherman Act (15 U.S.C. § 1). One of the class actions also asserts a claim under the Commodities Exchange Act (7 U.S.C §§ 2, 25). The Schwab complaints add claims for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) (18 U.S.C. § 1961), Interference with Economic Advantage and Breach of the Implied Duty of Good Faith. The defendant banks include Bank of America Corporation, Barclays Bank plc, Citibank N.A., Credit Suisse Group AG, JP Morgan Chase & Co., HSBC Holdings plc, UBS AG and various other international banks each of which were members of the U.S. LIBOR Contributor Panel. According to the plaintiffs, the defendants conspired to suppress U.S. LIBOR rates from August 2007 to May 2010 in order to enhance the return on their own trading instruments and to provide a false or misleading impression of their financial strength to investors and the rest of the market.
The putative classes include persons or entities that (a) purchased financial instruments from defendants that were indexed to the U.S. LIBOR, including but not limited to interest rate swaps; (b) transacted in Eurodollar futures contracts and options on futures contracts traded on the Chicago Mercantile Exchange; or (c) owned a U.S. dollar-denominated debt security on which interest was payable based on the U.S. LIBOR rate and which was designated a unique identification number by the Committee on Uniform Security Identification Procedures system. The Schwab plaintiffs, who are not seeking class action certification, allege that they purchased fixed and floating rate notes tied to the U.S. LIBOR from the defendants and unrelated third parties.
The consolidated complaints are based on a broad array of data obtained from scholarly literature analyzing LIBOR rates, expert analysis, publicly available press releases, Securities and Exchange Commission filings and information from governmental and private proceedings. In response, the defendants filed motions to dismiss each of the consolidated complaints on June 29, 2012. With respect to the antitrust claims, defendants assert that: (1) there has been no evidence of joint, as opposed to independent, action; (2) there is no restraint of trade because the U.S. LIBOR is an index rate, not a price or a product and member banks remained free to negotiate interest rates and other pricing for their financial instruments; (3) plaintiffs lack antitrust standing in part because many of the plaintiffs would benefit equally if not more so from the lower interest rates; and, (4) to the extent that the class includes indirect purchasers, the claims are barred by the Illinois Brick doctrine. Plaintiffs' remaining claims were challenged for lack of particularity, expiration of the applicable statutes of limitation, preemption or other statutory bar and impermissible extraterritorial application of U.S. law. A decision on the motions will likely take several months.
The LIBOR-related litigation and investigations present rapidly evolving issues of potentially significant impact to corporations and investors. The putative classes are limited to claims that are deemed most amenable to class treatment and putative class members may have additional claims that would not be covered by the class complaint. Additionally, the putative classes do not cover certain investors who sold or purchased investment instruments tied to the U.S. LIBOR but are not publicly traded. The assessment of any individual investor's U.S. LIBOR-related investments may be complicated but those with potentially large claims are advised to consult with counsel.
Perkins Coie has created a LIBOR task force to monitor the evolving U.S. LIBOR-related investigations and claims and to advise clients. Investors with question regarding U.S. LIBOR-related claims should contact counsel to ensure their concerns are addressed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.